Today’s Federal Reserve report that manufacturing production edged down 0.2 percent in February, following a very strong increase in January, continues to demonstrate that this will be a long and slow recovery.

New orders for machinery slowed down for a second consecutive month as output was likely pushed forward to late 2009 to take advantage of expiring business investment tax provisions. Second motor vehicle output contracted sharply. Outside of motor vehicles, manufacturing production was essentially flat, with half of the sectors posting modest increases and half posting modest declines. Overall, production edged up 0.1 percent.

Two-thirds of manufacturing production gains in February was in durable goods, which are more export-intensive than nondurable goods sectors. The increase in durable goods production signals that a rebound in the developing economies is continuing to provide support for U.S. manufacturing sectors. At the same time, production declines in manufacturing industries tied more to the domestic economy, such as nonmetallic minerals, furniture and chemicals, signals that the current recovery remains fragile.

Looking ahead, export-related activity is likely to continue to be the most durable part of the manufacturing recovery

The Labor Department reported today that the economy shed a modest 36,000 jobs in February, slightly higher than the 26,000 lost in January. Meanwhile the unemployment rate remained unchanged at 9.7 percent.

The absence of strong employment gains shows that manufacturers remain guarded in their outlook. After rising by 20,000 jobs in January, manufacturing employment remained essentially unchanged last month, with an increase of just 1,000 jobs. Of the 21 manufacturing industries, more than half (13) reported modest gains, totaling 19,300 jobs. These increases were largely offset by declines in seven industries, led by motor vehicle employment. Given the underwhelming report earlier this week on January factory orders, a more robust upturn in manufacturing output and employment in the coming few months is not likely in the cards.

Within the service sector, widespread — though generally modest — employment declines continued in February. Upturns in education and health service employment ( which has largely been immune from the recession) and temporary services more than offset moderate declines in most other service industries, signaling that employers still have a good deal of uncertainty about the underlying strength of the recovery and are hesitant to expand their payrolls.

Today’s Commerce Department report on January factory orders falls short of expectations and indicates that the manufacturing recovery will likely slow down in coming months.

While overall orders increased by 1.7 percent in January, much of this was driven by aircraft orders, which are extremely volatile from month to month. Excluding transportation, orders edged up just 0.1 percent, the slowest gain in six months.

In addition, new orders of core capital equipment orders - a good indicator for business investment - fell 4.1 percent after two months of strong gains. This decline indicates that the surge in capital investment in the fourth quarter of last year was spurred by temporary factors such as expiring business investment tax credits. Looking ahead, continued growth in the first quarter is unlikely, as businesses remain cautious about the underlying strength of the emerging recovery.

The pace of manufacturing growth in February was slower than in the previous month and fell short of expectations according to today’s Report on Business from the Institute for Supply Management (ISM). Severe winter weather likely affected last month’s manufacturing performance. Therefore, next month’s March report will be critically important to determine if a slowdown is truly emerging for manufacturers.

On a positive note, increases in exports continue to help drive production gains, along with slower cutbacks of inventories. While the employment measure has remained above the growth threshold level of 50 for three consecutive months, it will have to remain at this level for at least several months before a widespread upturn in manufacturing employment can be expected. Looking ahead, hiring is likely to remain subdued until the second half of the year when a stronger expansion is expected as consumer and business confidence pick up.

Today’s Commerce Department report falls short of expectations and does not fall into the “glimmers of hope” category that we’ve seen in some other economic reports in recent months.

The 3 percent gain in January orders was driven mainly by volatile civilian aircraft bookings, and as a result does not reflect an overall improvement for manufacturers of durable goods. Despite a 15.6 percent surge in transportation, orders in other sectors actually fell by 0.6 percent in January.

At the tail of end last year, there was a spike in orders, but that was likely due to an expiring pro-investment tax provision for accelerated depreciation of equipment. We saw a reversal in January, led by a 9.7 percent plunge in machinery orders.

The fact that unfilled orders — which are a better determinant of future activity –remained very week in January and actually declined outside of aircraft, signals that demand for durable manufactured products remains tepid.

Going forward, manufacturers will be challenged by weak demand for big-ticket items by businesses and consumers. Still, inventory restocking should be a temporary support for manufacturing output in the near term.

Manufacturing output surged by 1 percent in January the Federal Reserve reported today – the fastest pace in five months — due in large part to temporary boosts from inventory rebuilding and the extension of the homebuyer’s tax credit. Of the 19 major manufacturing industries, 16 posted production gains last month, signaling that the manufacturing recovery is broadening. While recent signs are encouraging, the recovery is unlikely to be sustainable at this rapid pace as much of it was driven by short-term inventory and one-time government spending.

A more durable source for growth has been the global economic recovery which, combined with a competitive dollar, is powering export growth in manufactured products. The current export surge stands in stark contrast to the early stages of the last recovery in 2002, when sluggish growth abroad and an overvalued dollar conspired to depress export growth until the middle of 2003. With global conditions improving, the time is ripe for Congress to pass a number of free trade agreements that would break down more barriers for U.S. exports and create jobs.

Looking ahead, the strength and durability of the manufacturing recovery will depend on the global competitiveness of U.S. companies.

Manufacturers saw the first monthly increase in jobs in three years based on January employment numbers released today. The Labor Department reports 11,000 jobs were gained last month in the manufacturing sector. Outside of temporary employment, the private sector still shed 64,000 jobs in January, where a 75,000 decline in construction employment offset modest gains in other sectors, including manufacturing.

Most of the gain in manufacturing employment was the result of increased production related to inventory restocking after a major drawdown took place in 2009. However, this is a temporary boost and will fade in coming months.

Overall, the unemployment numbers show the economy shed 20,000 jobs last month while the unemployment rate edged down to 9.7 percent from 10 percent in December — signaling the labor market is improving very slowly. Temporary employment as well as federal payrolls, partly due to the hiring of workers to conduct the 2010 Census, are main reasons for smaller job losses last month.

A slow and fragile recovery with no durable gains in employment will likely continue until the second half of the year.

The U.S. economy surged in the fourth quarter to its fastest quarterly pace in six years. GDP numbers released today from the Commerce Department show an annual rate of 5.7 percent in the fourth quarter. Restocking of business inventories provided a major, though temporary, boost to growth in the fourth quarter, accounting for 59 percent of the increase in GDP in the final three months of the year.

While the inventory survey was expected, the big surprise today was on the trade front. Exports, which are mainly manufactured products, increased at an annual rate of 28-percent in the fourth quarter. This export rise in the fourth quarter was both the fastest and largest contribution to GDP growth in 30 years.

Outside the inventory swing and trade, the economy slowed moderately in the fourth quarter. Consumer spending weakened a bit in the wake of the “Cash for Clunkers” driven third quarter while business investment edged up moderately due to spending on information technology. With the labor market still deteriorating, and consumer confidence still down 50 percent from its level in mid 2007, the economy still faces significant headwinds.

Today’s Commerce Department report on durable goods orders edging up 0.3 percent in December after two consecutive monthly declines continues to show that the domestic economic recovery remains fragile and uneven, as gains in machinery and primary metals were nearly offset by declines in transportation, computers and electronics and electrical equipment. For the fourth quarter overall, durable goods orders rose at an annual rate of just 1.6 percent after a 15.8 percent gain in the third quarter.

Based on recent reports of U.S. exports, most of the upturn in capital goods shipments in the fourth quarter, which rose at an annual rate of 6.7 percent, was driven by increasing global demand, rather than an upturn in domestic business investment. In November, capital goods exports had their biggest 3-month gain in four years.

Earlier in the third quarter, capital goods shipments rose at an annual rate of 5.1 percent, with most of this increase fueled by a 10 percent increase in capital goods exports, since domestic equipment investment edged up just 1.5 percent in the third quarter. This scenario is likely repeating itself in the fourth quarter.

While tight financial conditions, heightened uncertainty and excess capacity remain serious domestic challenges, a rebounding global economy is helping the manufacturing sector recover from a very deep downturn. With half of U.S. capital goods shipments destined for global markets, the recent upturn in manufacturing activity clearly shows how important the global economy is to U.S. manufacturers.  

Manufacturing activity was flat in December as improvements are still not hitting the broad range of industrial sectors. December’s solid 0.6 rise in industrial production reported by the Federal Reserve today was driven mainly by unseasonably cold temperatures, which spurred the largest monthly gain in utility output in two decades. Still, manufacturing production in the fourth quarter rose at an annual rate of 6.1 percent due to earlier gains in November.

The past year was definitely one of transition for manufacturers. After declining at an annual rate of 15 percent in the first half of 2009, production rose at a 7.8 percent annual pace in the last six months. Overall, manufacturing production was down 4.4 percent in 2009, cutting in half the 2008 decline of 8.7 percent.

While the overall manufacturing production numbers appear promising, a closer look reveals that improvements in the second half of 2009 have not yet spread throughout America’s industrial base. Production gains in both the third and fourth quarters took place in only nine of the 19 major manufacturing industries, so the bulk of manufacturers are still struggling.

Looking ahead, results of the 4th quarter NAM/IndustryWeek Manufacturing Index — a quarterly survey of NAM member companies –signal a probable slow down in the manufacturing recovery. In fact, roughly half (52 percent) of the respondents to the fourth quarter survey expect that downturns in their company’s production will extend into the second half of 2010. The full results of the 4th Quarter NAM/IndustryWeek Manufacturing Index are posted at: http://www.industryweek.com/Econinsight/