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By Jason Stipp | 11-09-2011 12:00 AM

Some Winds Shifting in the Economy

Morningstar's Bob Johnson outlines what changes in services versus manufacturing, high-end versus low-end retailing, commodity prices, and business spending could mean for the economy in 2012.

Jason Stipp: I am Jason Stipp for Morningstar.

Although all eyes have been on the eurozone recently, we've noticed some interesting trends here at home in the economic data. Here with me to dig into those trends and what they might mean for GDP and inflation in 2012 is Morningstar's Bob Johnson; he is director of economic analysis.

Thanks for joining me, Bob.

Bob Johnson: Great to be here.

Stipp: So there are several trends that you track, and we have seen some shifts--I wouldn't say major shifts--but some shifts in some of these. And I'd like to start with the big division that we look at in the economy, which is the manufacturing versus the services sectors. We'd seen strength in the former for quite a while, but we are starting to see a little change there. What is that?

Johnson: Absolutely. We've gone two years through the recovery, where manufacturing and durable goods have been the very strongest part of the economy and have literally trounced the services side of the house. The growth rates have been roughly double in the goods-producing side of the house versus the services side of the house, which is okay, but the bad news is that services is two-thirds of the economy, and that's been a real laggard.

Well, in the last quarterly GDP, we finally had quite a bit higher growth rate in the service sector, and it actually beat out the goods side of the house. And so we started a trend where the services part of the economy is doing better: a) that's bigger; and b) those jobs that are generated by the services sector tend to be in the United States.

We called the earlier times, the "iPad recovery," because a lot of people were taking their special money out and buying iPads with it, or other electronics, phones, etc., that came from overseas. And so that was kind of a subtraction from GDP because those things came from overseas. Services jobs almost by definition are here in the United States.

Stipp: So, if we are seeing services do a little bit better, does that mean that we are seeing some bad weakness on the manufacturing side?

Johnson: I think certainly manufacturing has kind of come off its boom times a little bit. It always booms when you come out of recovery, and we're two years in here, and we got initial inventory restocking--they take inventories down too far and then they build them up too fast. And that tends to usually burn itself out in about a year, which was about the same trend this year.

This time around, some overseas demands for exports also helped pull along the manufacturing sector, so we actually had the manufacturing sector having, really, what I call very strong growth for two years running.

But this summer we really did have a bit of a pause. Some of that pause was related to the Japanese tsunami, which really did affect auto production and all the supply base--some of which is in China, some in the United States--and caused problems around the world, frankly, that I don't think people fully recognize. So that certainly caused a pause in manufacturing.

But the inventory restocking is done, and so that's over. And the exports maybe have slowed just a little bit, and those two things have really slowed manufacturing, and we're kind of along the flat line right now, about a 50% level on the PMI.

Stipp: But not like we have gotten off a cliff.

Johnson: But we aren't going off a cliff.

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