The government reported that the U.S. economy grew by 2.8 percent in the fourth quarter of 2011, with manufacturers playing an integral role. Consumers and businesses replenishing their inventories were the largest contributors of real GDP for the quarter. In many ways, this number was not a surprise: other indicators also suggested an uptick in manufacturing activity in the months of November and December. Manufacturers are cautiously optimistic about future production, and the rebound is welcome news.

Yet, the GDP numbers also bring to mind challenges that might dampen growth in the coming months. It is unlikely, for instance, that we will see the same lift from inventories in the first quarter, and consumers have dipped into their savings to increase their purchases. At some point, this level of spending might ease so that consumers might pay off some of these debts. In addition, it is clear that the government sector will be a drag on growth for the foreseeable future – of which we were reminded when the Department of Defense announced budget cuts last week. Most pressing, though, is the constant reminder of Europe’s ills and the challenges that slowing global growth might have on our exports. Fitch Ratings downgraded several European nations’ credit ratings on Friday, following the lead of Standard & Poor’s from a few weeks ago.

These worries aside, most of the recent domestic economic indicators have been positive. Durable goods orders, for example, rose 3 percent in December, with strength in nondefense capital goods. This mirrors much-improved production, employment and investment data from the Kansas City and Richmond Federal Reserve Banks (and for that matter, in most of the recent regional) surveys. The National Association of Business Economics (NABE), in its latest Industry Survey, observes these improvements, with more economists upgrading their assessments for growth this year. Sixty-five percent of respondents to the NABE survey expect for real GDP to grow at least by 2 percent in 2012. Similarly, the Chicago Federal Reserve Bank’s National Activity Index indicates that the risk of a recession seems to be lessening.

These growth estimates are in line with those from the Federal Reserve Board, which estimates real GDP growing between 2.2 and 2.7 percent this year. The Fed also expects the unemployment rate to remain elevated, improving slowly to a range of 8.2 to 8.5 percent in 2012 and to 6.7 to 7.6 percent by 2014. The Federal Open Market Committee, even as it cites improvements in the domestic economy, remains worried about high unemployment, a still-weak housing market and uncertainties related to European sovereign debt. It stated last week that it now plans to keep interest rates at “exceptionally low” levels through late 2014 – an extension from its earlier intentions of doing so through mid-2013. With these moves, the Fed hopes that lower long-term rates spur more borrowing, both by homeowners and businesses.

This week, we will receive more data about production and employment, which will hopefully show continued growth in manufacturing in January. The Institute for Supply Management’s well-cited index of manufacturing activity will come out on Wednesday, and it is expected to be somewhat higher. On Thursday, new productivity data will be released, with manufacturing output per worker expected to continue to show strong growth. Finally, the Bureau of Labor Statistics will unveil new employment data on Friday, which should show increased hiring among manufacturers in conjunction with recently increased production.

Chad Moutray is chief economist, National Association of Manufacturers.

The Institute for Supply Management (ISM) Purchasing Managers Index (PMI) rose from 52.7 in November to 53.9 in December, its highest point since June. After experiencing some weaknesses in July and August, the PMI has risen gradually the remaining months of the year. Still, the index has been over 50 – its threshold for expansion – every month since August 2009.

Overall, these figures suggest that manufacturing activity has started to pick up some steam – a good sign as we move into 2012. The index for new orders rose from 56.7 to 57.6 for the month, suggesting growth in future activity. In addition, indicators for production, employment, exports and imports were also higher in December. Inventories, which fell from 48.3 to 47.1, were one of the few areas to contract.

Many of the sample comments from respondents to the survey reflected this positivity. One manufacturer said, “Our business is stable with a very good outlook for 2012.” Yet, others noted some unease moving forward. A computer and electronic products manufacturer, for instance, wrote, “Continued conservative hiring, with tight discretionary spending controls due to slower growth expectations for 2012, driven by Euro sovereign debt concerns and lack of viable U.S. legislative process through the 2012 election.”

These anxieties will continue over the coming months, especially as European and U.S. policymakers struggle with solutions to their respective fiscal challenges. But, it is notable that most of the respondents were more positive than negative, and the fact that the employment variable moved higher is a welcome sign for the industry. It suggests that increased activity will hopefully lead to higher manufacturing employment in the coming months. (The Bureau of Labor Statistics will release new data on Friday for December employment.)

In the end, today’s ISM figures are a sign that manufacturers have become more optimistic about activity. We have seen this in other surveys, as well, including the regional surveys that were released last week.

Chad Moutray is chief economist, National Association of Manufacturers.

The Institute for Supply Management (ISM) Purchasing Managers Index (PMI) indicated that the pace of growth slowed somewhat, with the index falling from 51.6 in September to 50.8 in October. Valuew over 50 indicate an expanding manufacturing sector. On the one hand, this is the 27^th consecutive month that the PMI has been over 50, and yet, it is clear that the expansion is just barely positive.

Among the negatives in this month’s report, production fell from 51.2 to 50.1. Therefore, overall production activity did not change from the previous survey. The same was true for export growth, which declined from 53.5 to 50.0. Of course, manufacturers are doing a good job of preserving their inventory-to-sales ratio, and so, it should not be a surprise (in light of weakers sales and production) that inventories contracted, with its index standing at 46.7.

There were some definite good signs in the numbers, as well. The index for new orders rose from 49.6 to 52.4, suggesting that there has been a pickup in orders for the sector in the past month. Likewise, the measure for employment, while marginally lower, continued to indicate net hiring among manufacturers.

Many of the comments tended to mirror these numbers. A plastics and rubber products respondent said, “Business is slowing – not crashing – but uncertainty and caution is the order of the day.” Likewise, a machinery manufacturer noted weaker international demand. Of course, not all of those taking the survey had negative things to say. A few of them – with the examples being respondents in the fabricated metals and transportation sectors – cited strong demand for their products, and chemical products manfuacturing concern noting lower prices for raw materials.

Indeed, the measure for the price of raw materials did indicate some deflation taking place, with the index falling from 56.0 to 41.0. This is obviously a positive, but it is important to note that manufacturers have complained for a long time about elevated prices, with many of them also predicting that trend to continue moving ahead. Nonetheless, an easing in raw material prices is welcome.

Overall, today’s PMI numbers show how the tenuousness of the current economic environment. Weaknesses in the economy – particularly in Europe, but also through increased anxieties here domestically – continue to hamstring growth efforts. The positive news is that there was an expansion of new orders; this has been mirrored in other recent surveys. And yet, growth in the sector remains anemic.

It is clear that policymakers need to adopt pro-growth policies that will enable manufacturers and the overall economy to expand. With the Republican Presidential Forum on Manufacturing taking place today, we will get a glimpse of how several of the Presidential candidates would seek to do just that.

The Institute for Supply Management (ISM) Purchasing Managers Index (PMI) edged slightly higher in September, up from 50.6 in August to 51.6 in September. Values over 50 indicate an expanding manufacturing sector, and yet, it is clear that manufacturers are just barely growing. 

The various components to this index were mixed. Most troublesome, the measure for new orders was unchanged at 49.6 – the third consecutive month of contraction. That is not a good sign moving forward. Yet, many of the other indicators saw modest improvements. Production, for instance, shifted from contraction to expansion (up from 48.6 to 51.2) for the month. Likewise, employment, supplier deliveries and exports also increased somewhat. Pricing pressures were virtually unchanged from August but continue to grow overall.

Many of the survey responses noted the weak economic environment and continued anxieties regarding global demand.  Several of the comments noted how the economy was “a drag on our economic outlook” and how there was a high degree of caution in the marketplace.  Some areas continue to grow (e.g., motor vehicles, metals, paper), and yet, even where sales are “steady,” there remain concerns about the larger global economy.

This report provides some comfort for those of us who are forecasting slow growth in the remainder in this year. I am predicting 1.4 percent growth in real GDP for 2011. But, it also shows that the numerous headwinds facing manufacturers continue to have an impact on our growth. While modest improvements in production and employment are a positive for the industry, sliding new orders will pose a challenge to this in the coming months.

Chad Moutray is chief economist, National Association of Manufacturers.

Given all of the poor regional studies of late, many economists had expected the Institute for Supply Management (ISM) Purchasing Managers Index (PMI) to contract in August, falling below the threshold of 50 for the first time in two years.  While the PMI did slow down, moving from 50.9 in July to 50.6 in August, overall manufacturing activity continues to grow, albeit barely.  Just four months ago, PMI was over 60, indicating strong growth and illustrating how much the sector has weakened in such a short period of time.

Many of the measures of activity were mixed. Respondents stated that new orders and production contracted in August, while employment, inventories and trade volume grew. Note that even the measures indicating growth were doing so at a slower rate. This would include the indices for employment and exports, for instance.  Pricing pressures also slowed down, with the index for prices down from 59.0 in July to 55.5 in August.  Yet, this still suggests higher raw material prices – a serious challenge for many manufacturers.

Some of the sample responses are instructive ranging from talk of softening economic conditions domestically to stronger product demand overseas. An individual from the transportation and equipment sector wrote, “Current headwinds in the national and international economic environment have increased uncertainty, and are affecting our customers’ willingness to commit to high-dollar equipment purchases.” Indeed, another respondent noted that, while their company is doing well, “the situation seems tenuous.”

At the end of the day, it is important to keep in mind that the ISM survey – like many of the other regional studies that have come out in recent weeks – are measures of sentiment on the part of businesses. The comments in the preceding paragraph seem to bear this out.

While official statistics on production from the Federal Reserve and others seem to show slow growth in overall manufacturing activity, the surveys have tended to reflect a degree of pessimism not unlike their counterparts exploring the mood of consumers. This has provoked a lot of attention of late, particularly on how reliable a measure these surveys are for predicting industrial production.

While it is true that there seems to be some disconnect, the reality is that manufacturing activity has slowed considerably since the spring. The differences between the indicators are really over the scale of this slowdown (e.g., whether we are contracting or simply slowing down our growth).

What is troubling in all of these measures is the weakness of new orders, which does not bode well for future production. Again, this is simply the current sentiment, which could change, but it will be important for the health of the overall economy for us to have a more robust increase in new orders and production, which will in turn lift manufacturing employment.

Many of the regional surveys suggest higher optimism for the coming year, and we can hope that this comes to fruition.

Chad Moutray is chief economist, National Association of Manufacturers.

Manufacturing activity shifted into neutral in July, with the Institute for Supply Management (ISM) Purchasing Managers’ Index (PMI) falling from 55.3 in June to 50.9 in July. This mirrors many of the regional surveys, which saw a mild rebound in June reversed. For the first four months of this year, the PMI was above 60, indicating strong growth, but manufacturing activity since then has slowed down considerably.

The silver lining in these numbers — if there is one — is that the PMI remained above 50, its threshold for expansion, but only barely. The indices for production, supplier deliveries, and employment fell, but also remained over 50. New orders and inventories contracted, with their measures for July coming in at 49.2 and 49.3, respectively.

New export orders edged slightly higher, but remain below the growth rates of early spring. The respondent comments tended to echo this, with individuals citing strong growth overseas (particularly in Asia) helping to offset weaker sales domestically.

Pricing pressures eased, but continue to grow. This is welcome news, especially since the dramatic increases in raw material prices have been such a challenge to so many manufacturers over the past year.

Overall, this report shows that manufacturing output is off to a slow start in the third quarter. Weaknesses in the spring centered around supply disruptions, rising energy and commodity prices, a weak labor market, and rising consumer and business anxiety. The fact that we continue to experience flat growth in output shows that many of these headwinds persist. The stalemate over the budget deficit situation has not helped, only adding new levels of uncertainty to the equation.

Manufacturers have tended to be more optimistic about the next six months than when asked about the current environment, and there have been some positive signs of recovery in the sector which can hopefully bear some fruit. If we are going to see the economy move out of neutral we will need to see a stronger manufacturing sector, and we can hope that August and September start to revive production activity for a better second half of 2011.

Chad Moutray is chief economist, National Association of Manufacturers.

The Institute for Supply Management (ISM) released its Purchasing Managers Index (PMI) for manufacturing this morning, with the sector continuing to expand rapidly, despite a slight decrease.  The PMI fell from 61.2 in March to 60.4 in April, beating expectations.  As the chart below shows, the sector has improved substantially since bottoming out in late 2008. In addition, a PMI over 42.5 indicates expansion in the sector, and the PMI for manufacturing has now exceeded that figure for 21 consecutive months.

With that said, manufacturing production has cooled somewhat in the past couple months, mainly due to rising material costs, supply chain disruptions, and higher energy prices. The rate of growth of production, new orders, and employment fell slightly, with inventories up. The gap between new orders and inventories – which are a proxy for future production – narrowed, but still indicates positive growth in the months ahead. 

In addition, exports remain a source of strength for manufacturing.  New export orders rose from 56 to 62 in April, the 22^nd consecutive month of growth.   

The widely watched Purchasing Managers Index (PMI) released today by the Institute for Supply Management shows manufacturing output is expected to continue to increase, but probably at the relatively moderate rate of the last few months.

The March PMI index stood at 61.2, slightly lower than the February index value of 61.4. Any value over 50 indicates that more manufacturers are expecting an increase than a decrease, and the March index figure is consistent with the generally 6-8 percent annual rate of manufacturing increase, in current dollars, implied by a variety of statistical indicators.

While still portending an increase, the fact that the index declined slightly from February and stood only 0.4 points higher than January does not suggest an accelerating rate of manufacturing growth in the near term. This observation is consistent with the manufacturing employment data released today by Department of Labor, which show that manufacturing employment increased in March, but by a smaller amount than in January or February.

The new export orders data from the Institute for Supply Management bear watching, for that index slipped sharply to 56.0 from February’s figure of 62.5. The export index appears generally more volatile than the overall PMI index and has been subject to rather wide month-month swings, so one month is not necessarily indicative. If the index continues to show softness, however, this could indicate a slowdown is coming in exports. As exports have been the fastest-growing part of U.S. factory shipments, this would be a worrisome development.

This report from Fox Business, “The Economy’s Lone Strength: Manufacturing?,” capably describes manufacturing’s vitality and importance in the current economic recovery.

“Manufacturing has a bum rap,” said Frank Vargo, vice president for international economic affairs with the National Association of Manufacturers. “Manufacturing is not on its last legs. It’s not at its peak, but it’s growing faster than the rest of the economy and it’s leading the economy.”

Consider some numbers from the U.S. Department of Commerce: 2010 factory shipments totaled $5 trillion, up 9% from $4.6 trillion in 2009; the value of pesticides, fertilizers and other agricultural chemicals shipped from U.S. factories rose 44% in 2010 from 2009; the value of iron and steel mill products rose 42% from a year earlier; and the value of construction machinery increased 35% year over year.

What’s more, Vargo noted that in 2010 the average U.S. factory worker could produce 40% more than the same worker did a decade ago. “I mean, that’s productive,” he said.

The story’s not a rebuttal of Stephen Moore’s analysis below, but it fills out the picture. Employment numbers are not the only measure of economic strengths or weaknesses.

Also….

ThomasNetNews.com, “Manufacturers Optimistic About Business Outlook and Hiring“:

Manufacturers have grown noticeably more positive about near-term business activity, with major improvements in the outlook for employment conditions, according to new findings.

Business prospects for the year ahead have strongly improved among manufacturers worldwide, with United States manufacturing executives forecasting particularly promising near-term results, new survey findings suggest. As revenues and profits are expected to rise over the next 12 months, manufacturers also anticipate that hiring will follow.

In KPMG International’s latest Global Business Outlook survey, released this week, 68 percent of U.S. manufacturing executives said they expect improved business activity over the next 12-month period, up from 57 percent who said the same in the previous survey in October. Sixty-five percent forecast higher revenues, compared with 52 percent in October, while 62 percent believe profits will increase, up from 47 percent in October.

Also, Financial Times, “Survey finds global business optimism.”

Wall Street Journal, “U.S. Manufacturing Posts Strong Expansion“:

Manufacturing activity in the U.S. turned in its best performance since May 2004 last month, as factory operators faced a big jump in raw materials prices, raising fears about rising inflation in the U.S….

On Tuesday, the Institute for Supply Management’s manufacturing index moved to a very strong 61.4 from 60.8 in January. The overall index had been expected to come in at 60.9. Readings over 50 indicate growth.

According to the February 2011 Manufacturing ISM Report On Business, “Economic activity in the manufacturing sector expanded in February for the 19th consecutive month, and the overall economy grew for the 21st consecutive month.”

Sectorally…

Of the 18 manufacturing industries, 14 are reporting growth in February, in the following order: Apparel, Leather & Allied Products; Petroleum & Coal Products; Transportation Equipment; Electrical Equipment, Appliances & Components; Machinery; Chemical Products; Fabricated Metal Products; Computer & Electronic Products; Textile Mills; Food, Beverage & Tobacco Products; Printing & Related Support Activities; Paper Products; Wood Products; and Miscellaneous Manufacturing. The four industries reporting contraction in February are: Plastics & Rubber Products; Primary Metals; Nonmetallic Mineral Products; and Furniture & Related Products.

See also AP, “Manufacturing grew at fast pace.”

Then again…

• Wall Street Journal, “Oil’s Rise Threatens Economic Growth“
• Globe and Mail, “Only a recession stands in the way of $200 oil“
• Milwaukee Journal Sentinel, “Oil prices near a dangerous point for economy“