Continuing Evidence of U.S. Manufacturing Improvement

by: Cliff Waldman, Chief Economist 

The release of the May manufacturing report from the Institute for Supply Management (ISM) extends a string of recent evidence that the U.S. manufacturing sector is finally shaking off its post-financial crisis growth malaise. Encouragingly, May saw the first increase in the Purchasing Managers’ Index (PMI) since February. Even accounting for the modest PMI dip in March and April, the progression of the index, since the recent low of August 2016, has been impressive. It suggests sustainability of moderate improvement in factory sector growth.

The pickup in the new orders subcomponent from 57.5% in April to 59.5 % in May, in combination with the continued improvement in the backlog of orders, suggests that the recent modest demand strengthening has momentum. Improvements in order books will propel a better, but not booming, manufacturing growth dynamic.

Comments from ISM survey respondents paint a clear picture of the real but somewhat shaky nature of the strengthening in the goods production business climate. Several respondents referred to business conditions as “steady.” Some referenced the natural problems that come with a better global growth picture such as pricing pressures on raw materials and the difficulty of finding qualified labor,  the latter being a long-standing problem for the manufacturing sector that will become more evident as economic improvement progresses. Interestingly, several respondents pointed to a range of political problems, both domestically and globally, with concerns on the trade policy front, as business risks.

With the long-awaited strengthening of the global economy, the very internationally invested U.S. manufacturing sector will be seeing better days. However, a range of problems will prevent the full benefits of a better global business climate. The still elevated dollar remains a significant pricing challenge in profit-driving world markets. The still weak capital spending picture is making life difficult for the many domestic U.S. business equipment producers. And the growing uncertainty in the U.S. political and policy climate could very well have a negative impact on an economically healing world.  All told, the MAPI Foundation forecasts modest improvement in U.S. manufacturing growth through 2020 but is cognizant of the economic and non-economic risks to our modestly optimistic outlook.