ISM Report Positive On Manufacturing, Negative On Services

Today, the Institute for Supply Management (ISM) reported on business expectations for 2010. The good news is that manufacturers think relatively good times lie ahead in 2010, projecting a 5.7% increase in revenue. The bad news is that service-driven businesses don't believe they will fare so well, expecting only a 1.3% increase in revenue. While this disparity is disappointing, it shouldn't be unexpected.

First, it might be helpful to understand which industries fall within each of these categories. Here are the lists from the ISM report for manufacturing:

Transportation Equipment; Nonmetallic Mineral Products; Printing & Related Support Activities; Computer & Electronic Products; Paper Products; Electrical Equipment, Appliances & Components; Apparel, Leather & Allied Products; Food, Beverage & Tobacco Products; Chemical Products; Machinery; Miscellaneous Manufacturing*; Textile Mills; and Fabricated Metal Products.

and services:

Real Estate, Rental & Leasing; Professional, Scientific & Technical Services; Finance & Insurance; Wholesale Trade; Retail Trade; Other Services; Information; and Agriculture, Forestry, Fishing & Hunting.

I can see several reasons why manufacturing should rebound first.

The Stimulus

First, the stimulus package helped manufacturing more than services and will continue to do so. A lot of infrastructure improvement spending results product creation. It created demand for new equipment, machinery, computers, etc. Services, however, got a much tinier piece of the pie, with only some indirect spending.

The Dollar

As the U.S. dollar continues to struggle, that's good for U.S. business. But it's much better for manufacturing than services. Manufacturers export their goods, but services don't bring their expertise overseas to nearly as great an extent. The weak dollar will increase the demand for American-made products, but probably do little for services, since they mostly compete domestically.

Business Spending

Consumer spending isn't really beginning to tick up yet. But I've noted in the past that business spending appears to be picking up. As the industries above should make clear, business spending will benefit manufacturers a lot more than service providers. Businesses will invest in goods. Services, however, will have trouble thriving again without a rebound in consumer spending.

Unfortunately, the service sector won't likely improve much for some time. Since such a large portion of the U.S. economy depends on services, this is particularly bad news for the unemployed. Some hiring might begin ramping up with manufacturing firms looking to replenish their dwindling inventories. But with a meager 1.3% expected increase in revenue for services, I doubt we'll see much hiring from those companies in the near-term.