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Here’s How Worried We Should Be About the Manufacturing Recession

Operations Inside The Cement Products Manufacturing Co. Facility Ahead Of Construction Spending FiguresOperations Inside The Cement Products Manufacturing Co. Facility Ahead Of Construction Spending Figures
Cement blocks are stacked in the the yard at the Cement Products Manufacturing Co. facility in Redmond, Oregon.Meg Roussos—Bloomberg Bloomberg via Getty Images

The forecast for the U.S. economy calls for mostly clear skies, as analysts see faster economic growth and higher interest rates in 2016. But that doesn’t mean there isn’t a chance of stormy weather, and if it does arrive, its source may very well be the manufacturing sector.

U.S. manufacturers are struggling mightily, according to the latest reading of national manufacturing data by the Institute for Supply Management. The ISM index sees manufacturing activity contracting for the first time since December of 2012, with 13 of the 18 manufacturing industries tracked by the index seen to be contracting.

Michael Montgomery, an economist with IHS Global insight, argues that weakness here in the U.S. is related to economic struggles abroad. “The manufacturing sector is suffering from a bad case of the blahs worldwide,” he writes Tuesday in a note to clients. He attribues this weakness to an “anemic global demand for goods” in combination with the drag of a strong dollar on exporters here at home.

Taking a step back, it shouldn’t surprise us that manufacturing is looking weak right now. China is now reaping the fruits of years of over investment in manufacturing capacity, and the sharp slowdown in growth has severely depressed global commodity prices. At the same time, rising inequality and elevated unemployment in the wealthy world has led to slow wage growth and tepid demand for consumer goods. The global manufacturing sector is where all the flaws of the global economy are most salient.

But Americans—at least those who don’t rely on manufacturing for their income—can take comfort in the fact that the vast majority of U.S. economic activity takes place in the services sector.

As you can see from the above chart, the performances of the services and manufacturing sector have diverged of late. The good news is that the services sector is about five-and-a-half times bigger in the United States that the manufacturing sector. Montgomery expects the weakness in manufacturing to continue well into 2016, but the fact that services are so much more important to the overall health of the U.S. economy means that he and other economists are sticking with an overall sunny economic forecast for the near future.