Positive News for Manufacturing Growth, With a Caveat
by Cliff Waldman, Chief Economist
There is good news for manufacturers from the Purchasing Managers’ Index. It rose by 1.5 points in the last month to 56%, continuing its five-month upward trend and indicating a likelihood of U.S. manufacturing growth. However, we should be cautious in the interpretation of this indicator because as history has shown, in uncertain times, we need a fuller set of indicators to forecast growth.
While this is a sign of a strengthening economic recovery, actual output growth numbers for the factory sector remain virtually flat, manufacturing growth was a meager 0.1% during 2016, and average manufacturing growth for the past four years has been below 1%. Most likely, the recent stabilization of troubled parts of the world economy, and the apparent end to a sizable dollar appreciation are giving rise to modestly improved demand for the U.S. factory sector. Unfortunately, the fact that the backlog of orders remains in contraction mode suggests that there is little pressure on the production schedule. Slowing supplier deliveries could suggest a turn, however, as the need for production to meet demand appears to be happily increasing.
All told, a slightly friendlier global business picture is likely catalyzing slightly faster growth in the U.S. manufacturing sector after years of disturbingly slow performance. Nevertheless, the longstanding challenges of constrained demand and risk aversion combined with heightened policy uncertainty remain formidable headwinds.