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By Jason Stipp and Robert Johnson, CFA | 03-26-2014 11:00 AM

Don't Misread the Manufacturing Data

Despite recent volatility in manufacturing data, the longer-term numbers track consumer data and show steady 3%-3.4% growth--a trend that's likely to continue.

Jason Stipp: I'm Jason Stipp for Morningstar. Manufacturing is about 12% of the U.S. economy, but it often gets a lot more attention than that 12% might imply. Here to talk about what manufacturing data can tell us and are telling us is Bob Johnson, our director of economic analysis. Thanks for joining me, Bob.

Bob Johnson: Great to be here today.

Stipp: You said manufacturing data often gets a lot of attention, maybe more than you might expect for the component that it is of the economy. Why is that?

Johnson: There are a bunch of different reasons. One is it's very easy to count. It's kind of hard to figure out some things, but the manufacturing sector is really easy to count. People love to count things. There are a lot of regional surveys, and the data on manufacturing goes back further than just about any other data set because President Herbert Hoover began collecting some of the data way back in the 1920s. So there's a great availability of data.

Then to top it off, the manufacturing data are exceptionally good at predicting the bottoms of recessions, and probably by looking at manufacturing data was the one way you could have determined the recession was over.

Stipp: We're obviously not in the bottom of a recession right now. The drivers that might be affecting manufacturing then perhaps don't apply right now. What is driving manufacturing now? If you want to get a sense of why the manufacturing numbers are doing something, where do you need to look?

Johnson: You need to look at the consumer because manufacturers will not manufacture something unless the consumer is demanding that. You can actually watch what the consumer is doing and then figure out how the manufacturer's going to have to react. That's why the consumer is always in the forefront in my mind and why I watch retail sales. The weekly shopping center data is probably more important than manufacturing especially at this stage of the recovery. That's what drives it. They don't make things for the fun of it.

Stipp: What about exports and goods that are going overseas?

Johnson: Well, you know, there are probably two holes, and you hit one of them in my theory of watching the consumer. If you ship something overseas, obviously that depends on what the demand in China is, what the demand is in Europe, but doesn't depend so much on what things are doing here in the U.S. So that's one of the leakage points, where you can see the manufacturing numbers actually do a little bit better and actually help drive some of GDP and employment up a little bit without really watching the U.S. consumer. But again, exports aren't a huge percentage of what we ship out, and a lot of that's oil and gas and agricultural products. So, it's not a huge leakage, but it did happen a little bit this fall.

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