Industry Market Trends

Manufacturing Expands at Fastest Pace in Nearly a Year

May 03, 2012

U.S. manufacturing grew at an accelerated pace in April, expanding at the fastest rate in 10 months due to an upswing in new orders and production.

Business activity in the United States manufacturing industry experienced solid growth in April, with the rate of expansion increasing to its fastest pace since June 2011, the Institute for Supply Management (ISM) reports. Strong gains in orders for manufactured goods and higher output across a range of industries drove manufacturing growth last month. However, concerns about overseas demand for U.S. goods remain as the global economy slows.

According to the ISM's latest manufacturing Report on Business, manufacturing expanded for the 33rd consecutive month in April, reflecting overall growth in the U.S. economy, which grew for the 35th straight month.

The ISM purchasing managers' index (PMI), a key monthly gauge for the factory sector, climbed to 54.8 in April, up from 53.4 in March and 52.4 in February. Readings above 50 indicate the sector as a whole is expanding rather than contracting. The April reading was above the 12-month average of 53.2 and exceeded expectations, as economists surveyed by Bloomberg News had forecast the PMI to drop to 53 in April.

"The ISM report suggests very strong growth in manufacturing production last month; over the last 20 years, the index was at or above the 54.8 level only one-third of the time," Daniel Meckstroth, chief economist for the Manufacturers Alliance for Productivity and Innovation, wrote in an analysis. "The conundrum is that manufacturing production is growing rapidly yet overall economic growth is weak."

The ISM production index rose to 61 in April, up from 58.3 in March and marking the 35th consecutive month of rising output. The gains were driven by stronger demand, as the new orders index jumped from 54.5 in March to 58.2 in April, marking the 36th straight month demand growth. Hiring conditions also improved, with the ISM's employment index climbing from 56.1 in March to 57.3 last month - a 10-month high and an indicator that manufacturers are hiring at a solid pace.

"Factories account for only about 9 percent of total payrolls but added 13 percent of the new jobs last year. Manufacturers have added 120,000 jobs in the past three months, about one-fifth of all net gains," the Associated Press explains. "Economists predict manufacturers added 20,000 jobs in April, according to a survey by FactSet. Still, manufacturing represents only about 12 percent of economic activity. Other areas continue to struggle."

Sixteen of the 18 industries tracked by the ISM reported overall expansion last month: furniture and related products; printing and related support activities; machinery; nonmetallic mineral products; miscellaneous manufacturing; primary metals; paper products; transportation equipment; electrical equipment, appliances and components; plastics and rubber products; apparel, leather and allied products; food, beverage and tobacco products; chemical products; fabricated metal products; computer and electronic products; and petroleum and coal products.

The only industry that reported contraction in April was wood products.

Despite the overall positive findings, many manufacturers remain worried about economic conditions, particularly in international markets, and there are lingering anxieties about potential inflation.

"The two areas of concern among executives are the price of raw materials and Europe's deteriorating economy," MarketWatch reports. "ISM's prices index, which measures how much companies spend on materials, remained relatively high at 61 percent - the same as in March. Even though exports are still rising, some executives expressed concern about whether the trend will last."

Moreover, the promising results from the manufacturing sector contradict several other indicators of U.S. economic health, raising questions about whether the industry's growth can be sustained in the longer term given the more stagnant outlook for other key segments of the economy.

"The national ISM report was in contrast to some regional manufacturing reports from the industry group, including Chicago on Monday, that showed the rate of growth slowed last month," Reuters explains. "It also bucked the trend of other recent data that suggested the economy lost some steam as the second quarter got under way, highlighting the bumpy nature of the recovery."