Manufacturing on the Mend

by: Cliff Waldman, Chief Economist

This morning’s release of the April manufacturing report from the Institute for Supply Management (ISM) adds to rapidly accumulating evidence that U.S. manufacturing is accelerating modestly from the 1% growth rut that it has been stuck in since 2012. Along with the ISM data, an encouraging 2.7% growth for actual first quarter manufacturing output round out a clear picture of a sector on the mend.

Nonetheless, the path from weakness to strength is going to be bumpy. The Purchasing Managers’ Index, while still solid and still signaling growth, has backpedaled from a recent peak of 57.7% in February to 54.8% in April. The new orders subcomponent softened markedly in April, albeit to a still unequivocal growth level and from an unsustainable high. And importantly, the backlog of orders continues to grow after a long period of contraction, suggesting a sustainable momentum for better manufacturing performance.

After many years of a post financial crisis malaise, the global economy is finally showing signs of widespread coordinated improvement. China’s slowdown has clearly reached a bottom. The export-led improvement in both Japan and Mexico suggest improved demand strength in North America and Asia. Clearly, a modestly stronger world is giving much needed aid to the U.S. factory sector. 

Difficult challenges, however, are preventing U.S. manufacturing from realizing the full benefits of a better world economy. While the dollar has fallen somewhat lately, the spike in the greenback since the latter months of 2014 has had a major adverse impact on the capacity of U.S. manufacturers to compete in global markets. The new normal of softer capital spending growth is a major challenge for the many business equipment producers in the domestic U.S. manufacturing base.  Also, a year filled with policy and global political uncertainties adds to the difficulties.

In conclusion, there is certainly cause for celebration as U.S. manufacturing begins to grow a bit faster, begins to add jobs, and slowly begins to see a world that is friendly to a profitable future.