Tag: recovery

Manufacturing is Key to Economic Revival

Yesterday, I participated in a panel in Chicago co-sponsored by the Chicago Council on Global Affairs and the NAM titled, “Made in America: A Revival in Manufacturing?” Diane Swonk, the Senior Managing Director and Chief Economist at Mesirow Financial, did an excellent job  moderating our discussion, reminding the audience that “American manufacturing is the most productive in the world” (which she repeated on Twitter). She spoke about growing up in Detroit, the daughter of an autoworker, and is someone who truly cherishes the fact that manufacturers are helping to lead the economy out of the recession.

Despite much of the gloom-and-doom discussions about the economy that permeated the airwaves last week, the overall tone of our discussion  was one of optimism. Panelist David Beebe, the Vice President of Manufacturing Operations for Navistar,  questioned whether we even needed to have the question mark in the title for the panel, hoping that everyone recognized that there is a revival in manufacturing. 

While there has been some weakness in the sector of late — mainly from transitory factors, as Diane Swonk noted — manufacturers seem poised to take advantage of a growing global economy moving forward. It helped, of course, that much of the news this week has been positive. On Monday, the NAM/IndustryWeek survey showed manufacturers optimistic about their future sales, employment, capital spending, and exports. This was followed by an upbeat assessment on the economic future in the Federal Reserve’s Beige Book and yesterday’s strong export statistics for April. (continue reading…)

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ISM: Manufacturing Growth Continues

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 22nd consecutive month of growth.   

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Slow Growth, But Manufacturing Sector Moving Forward

Chad Moutray, chief economist of the National Association of Manufacturers, gives a video report on the first quarter GDP, which is growing at an annualized rate of 1.8 percent according to advance estimates of real gross domestic product (GDP) released this morning.

For more of Moutray’s discussion of the data, see his earlier post, “GDP Slows to 1.8% Growth, Manufacturing Continues to Lead Recovery.”

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GDP Slows to 1.8% Growth, Manufacturing Continues to Lead Recovery

The U.S. economy slowed somewhat in the first quarter of this year, growing at an annualized rate of 1.8 percent, according to advance estimates of real gross domestic product (GDP) released this morning.  Real GDP grew 3.1 percent in the fourth quarter of 2010. One reason for slowed growth is higher energy costs, which have been a drag on the economy. With that said, this was the seventh consecutive quarter of positive growth in output, and the overall figure was in line with economists’ estimates. 

For the manufacturing sector, the story continues to be the strong growth in durable goods, which were up 10.6 percent in the first quarter.  Nondurables rose 2.1 percent, and services grew 1.7 percent.  (See the accompanying figure.)  While each of these numbers was below the faster growth rates experienced in the last quarter of 2010, they do reflect pent-up demand for products coming out of the recession domestically, with positive increases for each since late 2009 or early 2010.  Durable goods alone, for instance, added 0.78 percentage points to real GDP in the first quarter of 2011.

Inventory growth was another strong contributor to growth, with nonfarm inventory accumulation adding 1 percentage point to real GDP.  Inventories, which had fallen significantly in the fourth quarter, grew in the first quarter as firms rebuilt their stocks and overall demand strengthened.

Overall growth was led by healthy increases in consumer spending, nonresidential fixed investment in equipment and software, and exports.  The rise in exports, though, was offset by strong growth in imports in the first quarter.  Residential and nonresidential structure investment fell dramatically, and decreased government spending at the federal, state, and local levels remained a drag on economic output. 

Chad Moutray is chief economist at the National Association of Manufacturers.

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Durable Goods Continue Moderate Recovery Pace

Durable goods new orders fell 0.9 percent in February from January, according to data released by the Commerce Department today; but not too much emphasis should be put on this one-month fluctuation. Even though February seasonally-adjusted durable goods new orders were down from January, they were 2.7 percent larger than in December 2010 – an annual rate of growth of 17 percent.  Durable goods include a lot of big-ticket items ordered long in advance, and are subject to significant month-to-month fluctuation.

Illustrating some of the large fluctuations, the year-to-date (January-February, compared to January-February 2010) new orders data showed primary metals up 23 percent, machinery up 20 percent, communications equipment down 17 percent, and defense aircraft down 19 percent.  

In general, though, both new orders and factory shipments over the past few months are consistent with the moderate manufacturing recovery that has been taking place since mid-2009, as is visible in the graph below.  The recovery currently implies a 6 to 8 percent annual rate of growth, and the February data doesn’t indicate a change in that pattern.  Indeed, January-February durable goods new orders are 7.6 percent larger than January-February 2010. 

Frank Vargo is vice president of international economic affairs at the National Association of Manufacturers.

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August Durable Goods Orders Point to Slowing Trend

New orders for durable goods dropped in August (-1.3 percent) for the third time since April, adding to mounting evidence that manufacturing growth is slowing.  While the August decline was due mainly to a 40 percent plunge in new orders for the volatile nondefense aircraft category – and we saw gains in most other industries – a closer look shows that new orders are trending downward as manufacturing struggles to continue to lead the recovery.

In the three months ending in August, new orders for most manufactured durable goods (such as computers, machinery, primary metals, electrical equipment and motor vehicles) fell off significantly compared to the previous three months.  Even more troubling, the pace of growth for new orders for core nondefense capital goods – a bellwether for business investment – has also slowed sharply (by 77 percent) since May.

While the manufacturing slowdown in recent months stems in part from the expiration of tax credits earlier in the year, heightened uncertainty about the overall health of the recovery and the legislative and regulatory outlook is also holding back business investment.  Looking ahead, the new data point to continued bleak news on the jobs front.

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Job Market Disappoints in July

Today’s Labor Department report on employment shows the job market continues to weaken as does our economic recovery. While manufacturing continues to lead the recovery with employment rising for the seventh consecutive month in July, with 36,000 jobs added, signs still show overall the industry is decelerating. The added jobs in July were largely due to seasonal factors in the auto sector. But changes in most other manufacturing industries were negligible which shows the manufacturing recovery is slowing down. While manufacturing has added 26,000 jobs per-month so far this year, this is still just a small fraction of the 91,000 jobs lost per-month during the prior two years. If this pace is maintained, U.S. manufacturing employment will not return to its pre-recession level for another six years.

Today’s news shows little evidence that the labor market will significantly improve in the next couple of months. After starting to increase last October, temporary employment — a good indicator of future permanent jobs — slowed in recent months and actually declined in July.   

The labor market over the past few months has clearly worsened, with private sector job growth falling 67 percent in the May-July period compared to the three months ending in April. This is a worrisome sign that employer’s confidence in the underlying strength of the recovery is tepid. At the same time, the unemployment rate remained stuck at an uncomfortably high 9.5 percent in July. This will likely weigh on consumer confidence and spending in the near term.

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Recovery Slows: Only 2.4 Percent GDP Growth in Quarter

Today’s advanced report of second quarter GDP came in close to expectations, with growth decelerating to a 2.4 percent annualized rate in the second quarter, which is a slowdown from 3.7 percent growth in the first quarter and 5 percent growth in the fourth quarter of last year. While today’s report is the first estimate of overall economic growth in the second quarter and will be revised as additional data arrive, it appears that the recovery is slowing — concerning news to manufacturers. 

One sector important to manufacturing is residential investment and housing. Temporarily spurred by the end of the homebuyer tax credit, this sector rose at an annual rate of 28 percent, accounting for a quarter of overall economic growth in the second quarter. Since this temporary measure likely brought forward activity that would have taken place later in the year, housing activity will likely be a drag on growth in the third quarter. Manufacturers produce the majority of the products used in home construction; as the housing the housing market slows down from the temporary growth in the second quarter manufacturers will likely see demand for housing related products slow as well. 

Manufacturers could find some good news in today’s report. First was that exports, most of which are manufactured products, rose by 10.3 percent in the second quarter. This represents the fourth consecutive quarter of double-digit export growth, a feat that has not been accomplished in more than two decades! Exports are leading the way in this recovery and are one of the main reasons why manufacturing has been outpacing the overall economy over the past year.

The other good news in today’s report was that business investment rose a solid 17 percent in the second quarter, mainly driven by increases in equipment and software which rose at an annual rate of 22 percent. The increase is an important sign that while a slowdown may continue during the next several quarters, businesses are making some capital purchases, many of which are produced by U.S. manufacturers. It is important to note that some of these purchases of business equipment were likely due to pent-up demand that was put on the backburner during the recession. With that demand now met, I would expect a slowdown in business investment to take place in coming quarters.

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