Industry Market Trends

U.S. Manufacturing Finally Turns Around

Sep 02, 2009

New reports indicate the manufacturing recession is winding down, having shown growth in August for the first time in 18 months. The road to full recovery will be a long one, though.

Although several segments of the economy appear to have bottomed out and begun to stabilize in recent months, the manufacturing sector has struggled to overcome tightened credit access, limited availability of capital, high unemployment and sluggish consumer demand. However, new reports indicate that manufacturing is finally on an upward swing, even exceeding expectations for a return to growth.

The latest manufacturing Report on Business from the Institute for Supply Management (ISM) shows strong gains in August across a wide range of industries. Its index of the factory sector rose from 48.9 percent in July to 52.9 percent last month, the highest reading since June 2007. Index readings above 50 percent indicate overall growth in firms.

The August increase in the index surpassed the 50.5 percent predicted by economists polled by MarketWatch, and far exceeded the 28-year low of 32.9 percent reached last December.

These rebounding numbers are also positive for the United States economy as a whole, as they may drive the gross domestic product (GDP) above earlier projections, especially if the August rate of expansion persists. "[I]f the PMI for August (52.9 percent) is annualized, it corresponds to a 3.7 percent increase in real GDP annually," Norbert J. Ore, chair of the ISM, said in an announcement of the new findings.

According to the findings, 11 out of 18 manufacturing industries reported growth in August, including the following: textiles; apparel and leather products; paper products; miscellaneous manufacturing; printing and related activities; computer and electronic products; transportation equipment; nonmetallic mineral products; electrical equipment; appliances and components; fabricated metal; and chemicals.

Prices rose by 10 index percentage points, new orders by 9.6 points, supplier deliveries by 5.1 points, exports by 5 points and production by 4 points. Interestingly, inventories continued to decline by 3.5 points on the index despite the rise in new orders, indicating that manufacturers are meeting demand by relying on existing stockpiles for the time being.

"While some of the rise in today's headline number was probably related to the auto sector, the improvement was much more broad than that," Michael Feroli, an economist at J.P. Morgan Chase, told the Washington Post. Overall, the ISM report represents "a strong signal that industrial output will contribute significantly to overall economic growth in the second half of the year," according to Feroli.

The Obama administration also has an optimistic outlook on the latest manufacturing sector statistics. "This means greater production of transportation equipment like cars, and electronic equipment like computers and appliances, and it means these companies are starting to invest more and produce more, and it is a sign that we're on the path to economic recovery," the president said in a briefing yesterday.

The latest quarterly economic forecast from the Manufacturers Alliance/MAPI points to further improvement, albeit at a slower pace. The report claims the U.S. economy will experience 1.9 percent growth at an annual rate in the third quarter of 2009 and 2.5 percent growth in the fourth quarter, followed by improvement in overall consumer spending through 2010.

However, MAPI also forecasts manufacturing production will decline by 11.9 percent in the remainder of this year before swinging around to 3.2 percent growth in 2010 and 5.1 percent growth in 2011. Non-high-tech industries are also expected to decline by 11.8 percent before rebounding to 1.9 percent growth in 2010, while high-tech industrial production is expected to grow 8.9 percent next year and eventually reach 15.4 percent growth in 2011.

Industrial equipment expenditures are anticipated to decline by 22.7 percent in 2009 and to continue declining by 0.7 percent through 2010, before making a major turnaround to 20.5 percent growth in 2011. Transportation equipment spending is expected to experience even wider fluctuations, with a 42.9 percent decrease in 2009 and 52.1 percent increase in 2010.

On the whole, the forecast tends to share the positive but cautious results of the ISM report. "The [ISM] report concurs with our view that the long, severe manufacturing recession has bottomed out," Daniel J. Meckstroth, chief economist for the Manufacturers Alliance/MAPI, wrote in an analysis of the report.

Despite these positive signs, concern over long-term purchasing for manufacturing-sector products remains.

Although most analysts believe that manufacturing has achieved a turnaround, the need to restock depleted inventories and continued weak demand due to high levels of unemployment will be persistent problems, Reuters reports.

"While the August improvement in the indicator is welcome," Meckstroth and MAPI "caution against over optimism about the pace of the recovery," as "previous industrial recoveries were accelerated by a pace of consumer indebtedness that seems unlikely in this cycle."

Resources

August 2009 Manufacturing ISM Report on Business

Institute for Supply Management, Sept. 1, 2009

August ISM Factory Index Moves Above 50 Percent

by Greg Robb

MarketWatch, Sept. 1, 2009

Manufacturing, Housing Data Signal a Return to Growth

by Neil Irwin

The Washington Post, Sept. 2, 2009

Remarks by the President...

The White House, Sept. 1, 2009

MAPI Quarterly Economic Forecast: Recession End in Sight

Manufacturers Alliance/MAPI, Aug. 27, 2009

MAPI Analysis on ISM Index: Manufacturing Recession Bottoms Out

by Daniel J. Meckstroth

Manufacturers Alliance/MAPI, Sept. 1, 2009

U.S. Manufacturing in Recovery Mode, Demand a Worry

by Lucia Mutikani

Reuters, Sept. 1, 2009