The Slow March Forward

by Cliff Waldman, Chief Economist

In spite of the tumult of a reawakening global economy whose U.S. benefits were constrained by escalating political uncertainty, two destructive hurricanes, and an alarming confrontation with North Korea, U.S. manufacturing managed a rather bland but steady growth performance during 2017. The Federal Reserve reported that after two difficult years of essentially zero output gains, growth in the factory sector logged 1.3% during 2017. 

So what do the 2017 data tell us about the short-term prospects for the struggling factory sector? U.S. manufacturing does appear to be healing from tough times. Given that world economic winds are finally blowing in a favorable direction, the still subdued growth of 2017 certainly seems disappointing until the larger context of post-2000 history is considered. Trade and currency challenges, technological disruptions, and cultural attitudes toward manufacturing that often manifest themselves in political infighting over the appropriate public posture toward the sector have conspired to challenge goods producers as never before.

Basic economics is insufficient for analyzing and forecasting U.S. factory sector activity. Manufacturing is always on the cutting-edge of either winning or losing the battle to fully adopt new technologies and processes into its production structure to remain competitive in an ever more complex global business environment. Nowhere is that more evident than in the thorny and complex subject of jobs.

In spite of the subdued growth, the factory sector added an impressive 198,000 jobs between December 2016 and December 2017, after losing 27,000 between December 2015 and December 2016. This is partially reflective of the ongoing malaise in labor productivity growth, an issue that must be addressed for the sake of future factory sector jobs. Historically abnormal productivity performance needs to be considered in predicting the sector’s short-term growth prospects, a challenge for the forecasting community.

A recovering global economy is the best news that manufacturing enterprises have had in a decade. As long as world economic improvement stays on track, U.S. manufacturing growth should at least be moderate. While the world economic environment currently has its share of political and geopolitical risks, it is unlikely that the global recovery will be derailed in a significant way in the near future. However,  a return to the growth rates of the pre-financial crisis years seems out of reach, at least for now. And in these times of economic disruption and global political tumult, surprises are always just around the corner.