Today, the Institute for Supply Management reported that the closely-watched PMI index rose back above 50 (the line of demarcation between in expansion and contraction) — to 51.4 — from 49.5 in November. This indicates that the manufacturing sector, which many thought was in danger of going into recession, since the PMI index and other indicators had been softening during the prior few months, is more likely in a deceleration mode.
While I’d rather see the manufacturing sector continue to outpace the overall economy (as it had done each of the past 4 quarters), a deceleration at some point to growth that is more in line with the overall economy is inevitable. Why is this? Well, unlike other sectors of the economy, which may rely chiefly on consumer spending, or government purchases, for instance, manufacturing relies on all components of the economy (consumer spending, business investment, housing, foreign demand, and government spending) due to the diversity of the products that American manufacturers produce.
As the overall economy moderates in 2007 (see the NAM economic outlook) look for the manufacturing sector to simmer down as well in the new year.
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