A New Normal for U.S. Manufacturing Growth?
by Cliff Waldman, Chief Economist
No one should be concerned that the Purchasing Managers’ Index (PMI) pulled back from an unrealistic 60.8% in September to a still strong 58.7% in October. The September reading from the Institute for Supply Management (ISM) has to be treated as an outlier and interpreted against the inevitable data distortions created by two devastating hurricanes. Hurricane Harvey, in particular, ravaged a manufacturing epicenter at a time when energy-related output is growing as a share of U.S. industrial output. ISM survey respondents in October noted weak business conditions and raw material shortages due to the hurricanes. The aftermath of these terrible storms is going to linger in the manufacturing picture for a while.
Weather distortions aside, the PMI data look very solid. The new orders and production components of the index, while slipping modestly from September to October, remain above the notably strong 60% level. The backlog of orders also slipped but remains quite positive as well, suggesting growth momentum. Adding to the increasingly buoyant outlook for manufacturing, the third quarter U.S. GDP report revealed a second consecutive quarter of above 8% business equipment spending, which is rare in recent history. Stronger equipment investment, if sustained, will put a lot of American factories into a higher gear.
So with all of this, why is actual manufacturing performance still so muted? Yes, it is certainly better than the virtually stagnant growth seen in the 2013-2016 period. Nonetheless, the ISM and GDP numbers give rise to an expectation of something better than 1.2 - 1.3% manufacturing growth that seems to be shaping up for all of 2017. Either there is a pleasant surprise just around the corner, or we need to consider a rather daunting question: Is there a “new normal” for manufacturing output growth? Over the long-term, we have come to understand the “new normal” paradigm for the economy as a whole. Labor force constraints and sluggish productivity performance mean that the economy just can’t grow much faster than 2% over the long-term, even if it occasionally exceeds that pace.
Much the same could be happening to the manufacturing sector, although with perhaps an even more difficult set of challenges due to its notably rapid pace of innovation-led change and its widening global exposure. The current period of disruption in process technologies certainly holds promise for future manufacturing performance but appears to be overwhelmed by difficult issues. Labor force and human capital constraints have been a growing issue for U.S. manufacturing for years. Sluggish productivity remains a frustrating mystery, which MAPI has addressed with considerable research.
There is no simple, straightforward analysis of manufacturing data and forecasts anymore. Difficult short-term growth challenges have conspired with heightened structural issues to cloud the future. We are going to have to reconsider our understanding and our policies toward the innovation-generating, globally-exposed factory sector.