There has been a bit of chatter going on lately about the divergence of the services sector from the manufacturing sector of the economy. This note from David Rosenberg took note of that divergence. 

“We are seeing questions come up as to whether a manufacturing recession means that the broader economy is destined to follow suit?”

His answer is that such an outcome is likely not the case. His belief is that manufacturing is no longer a good bellwether for the overall economy. Currently, manufacturing makes up just 12% of total economic output, down from about 30% in the 1950s.

However, is this really the case?

There are a couple of problems with discounting the importance of manufacturing from the economic debate.

First, is the impact on jobs. As Sam Ro wrote this morning:

“With the unemployment rate having tumbled to a 7-year low of 5.0%, the employment factor is not the concern.”

While the unemployment rate, as measured by the BLS, has fallen to a 7-year low, there is vast difference between now and when it has previously achieved such levels. In order to sidestep all of the arguments about retiring “baby boomers” and“students,” let’s focus on the 25-54 age groups which are in their prime working years. As shown in the chart below, when the unemployment rate had previously achieved“full employment” levels, more than 80% of the prime working age group was employed. Today, that number is 77%.

The problem is not only the current employment level remaining well below levels normally associated with previous “full employment,” but wages also remain suppressed. While the recent uptick in wages was certainly welcome by those receiving it, the problem is that the long-term trend of wages remains in a downward slide.

The problem, of course, is that service related jobs are primarily lower-skilled and therefore lower wage paying jobs than those found in manufacturing. Secondly, service-related jobs have a very low multiplier effect throughout the economy as opposed to manufacturing jobs which leads to lower rates of employment growth, hence the stubbornly slow rate of job growth witnessed since the end of the last recession.