ISM Analysis: Another Step Toward Improved Growth

by: Cliff Waldman, Chief Economist 

The February report from the Institute for Supply Management shows that for the sixth consecutive month, the widely followed Purchasing Managers' Index rose, suggesting that U.S. manufacturing growth is beginning to benefit from a more stable and somewhat stronger global economy. While manufacturing output data, which have been quite weak for years, have yet to catch up with the sunny ISM survey results, it seems clear that at least some acceleration in factory sector output growth is at hand for this year and 2018. A big jump in the backlog of orders seen in the February report was particularly striking, as it suggests not only better performance but also positive momentum for manufacturing growth.

A better global picture is becoming apparent. A step away from the deflation precipice that had so many central banks instituting extraordinary monetary stimulus to prevent a growth-killing fall in the average price level is good news for the short-term outlook. Vague hints of a bottoming in China's long slowdown, the apparent end to a number of emerging market crises, and better export data in a range of countries all support the notion of a more business-friendly world environment.

However, U.S. manufacturing still has more than its share of struggles to contend with. No indicators suggest that an elevated dollar is going away anytime soon; this makes competitive pricing of U.S. goods in global markets very difficult. Further, the long period of subpar business equipment investment does not appear poised for any major turn, a persistent difficulty for the many business equipment producers in the domestic U.S. manufacturing sector.

While U.S. manufacturing growth appears on the cusp of improvement after four sluggish years of less than 1% growth, it is unlikely to return to historic norms. Uncertainty over the timing and impact of new federal economic policies as well as the possibility of a faster climb in U.S. and global interest rates than generally expected only adds to the challenges.