A Happy Independence Day for America’s Manufacturing Sector
by: Cliff Waldman, Chief Economist
I’m not sure I would call it fireworks, but the June manufacturing report from the Institute for Supply Management (ISM) certainly contains some buoyant signs for the U.S. factory sector. The overall Purchasing Mangers’ Index rose by nearly three percentage points to 57.8%, its highest level of what has been an impressive post-August 2016 run. The May to June jump was broad-based, with significant increases in such key subcomponents as new orders, production, and the backlog of orders.
While the ISM report has been overly optimistic relative to actual manufacturing output gains, the path of moderate growth improvement has been clear, and there are reasons to believe that it could even accelerate a bit. Recent numbers out of Europe and China suggest that global economic strengthening remains very much on track.
In another positive global development, the shifting monetary policy balance could further weaken a dollar that has fallen by about 4.2% since December 2016. The Federal Reserve has expressed concern about recent U.S. data, quelling expectations of aggressive monetary tightening, while other key central banks, most notably the European Central Bank and the Bank of Canada, have suggested that they are at the beginning of the end of post-financial crisis monetary accommodation. While the greenback will certainly remain elevated relative to 2014 levels, a further fall will reinforce, rather than negate, the positive impact of improving global growth.
In a somewhat strange turn, the U.S. economy is the risk in this picture. Even accounting for the well-accepted slowing of potential growth, recent data have been a bit too sluggish for comfort, particularly consumer price inflation, which not only seems to be avoiding the Fed’s 2% target but has been measurably decelerating.
Two risks dot the U.S. landscape. The massive dislocation in the retail sector could have broad impacts on low-wage jobs with a negative spillover to consumer spending. Secondly, if the Trump Administration’s promised economic growth agenda stalls under the weight of political challenges, there could be a dampening effect on short-term U.S. economic performance, if it’s not happening already.
For now, accumulating evidence shows that the U.S. manufacturing sector is getting past years of virtually stagnant growth. That’s more than enough reason for celebration and fireworks.