A Good Day for U.S. Manufacturing and the U.S. Statistical System
by Cliff Waldman, Chief Economist
I anticipated that the historical U.S. GDP revisions, which accompany the initial release of the second quarter GDP report and currently extend back to the first quarter of 2014, would make for some interesting analysis. What’s remarkable, however, is just how small the revisions are on the whole. The revised data in no way change the qualitative narrative of growth for a frustrating period in which U.S. manufacturing was all but stagnant. Score one for the reliability and stability of the U.S. economic data system.
With the past being essentially unrevised, the current picture becomes clearer. As expected, U.S. GDP growth nicely accelerated from a nearly stagnant first quarter of 2017 (1.2% growth on an annual basis) to 2.6% in the second quarter. Overall, the U.S. remains stuck with a 2% economic growth picture. We surpassed that in 2014 and 2015 but it was not sustainable. For a meaningful and durable acceleration in output gain, U.S. policy makers must address sluggish labor productivity performance. Nearly stagnant labor productivity growth is the primary underlying weakness. Population shifts, particularly in the advanced economies, are also slowing long-term performance but that challenge is harder to address with policy change.
The factory sector has some reason to celebrate. Sobering long-term realities aside, today’s GDP release shows that the drivers of U.S. manufacturing output gains are strengthening. Net exports made a positive contribution to GDP growth during the first and second quarters of this year and in four of the last five quarters. This is a persuasive sign that the moderate improvement in global growth is positively impacting overall U.S. economic performance, and will ultimately benefit U.S. manufacturing performance. The slow decline in the dollar since the beginning of 2017 has been helpful. If the dollar depreciation continues, I predict the export numbers to strengthen even further. In a low-inflation world where pricing power is difficult, the competitive posture of the greenback means more than ever to U.S. manufacturing profitability.
As important, equipment spending, an endless laggard, made a positive contribution to GDP growth in the past three consecutive quarters—and it has been an increasingly strong contribution. With the progressive improvement in export demand and capital spending, I continue to expect that U.S. manufacturing growth will strengthen and leave the stagnation of recent years behind.