US manufacturing growth expanded for the 14th straight month in July in a good sign for the overall economy as it too showed growth for the 62nd straight month.
The Institute for Supply Management, a trade group of purchasing managers, reported Friday that its manufacturing index rose to 57.1, highest level since April 2011 and up from 55.3 in June.
US Manufacturing Strength Aligns with Overall Economic Growth
Any ISM PMI reading above 50 signals that manufacturing is growing. Paul Dales, senior U.S. economist at Capital Economics, wrote in a research note that the index showing US manufacturing growth was consistent with overall economic growth of 3.5 per cent.
The U.S. economy already has been showing renewed strength. Economic growth clocked in an impressive 4% annual pace from April through June after getting off to a bad start the first three months of the year. The Labor Department said Friday that employers added more than 200,000 jobs in July for the sixth straight month. Factories created 28,000 jobs in July, most since November. Over the past year, manufacturers have added 178,000, best 12-month stretch of hiring since November 2012.
Dales wrote that the ISM report “suggests that manufacturing payrolls may soon start to rise by close to 50,000 a month rather than July’s 28,000.”
American factories have been busy. The Commerce Department reported last week that orders for durable goods rose 0.7 per cent in June, and a category seen as a proxy for business investment plans rose a healthy 1.4 per cent.
More Details on the July Purchasing Manager’s Index and US Manufacturing Growth
The July PMI® registered 57.1 percent, an increase of 1.8 percentage points from June’s reading of 55.3 percent, indicating expansion in US manufacturing growth for the 14th consecutive month. The New Orders Index registered 63.4 percent, an increase of 4.5 percentage points from the 58.9 percent reading in June, indicating growth in new orders for the 14th consecutive month. The Production Index registered 61.2 percent, 1.2 percentage points above the June reading of 60 percent. Employment grew for the 13th consecutive month, registering 58.2 percent, an increase of 5.4 percentage points over the June reading of 52.8 percent. Inventories of raw materials registered 48.5 percent, a decrease of 4.5 percentage points from the June reading of 53 percent, contracting after five months of consecutive growth. Comments from the panel are generally positive, while some indicate concern over global geopolitical situations.
Seventeen of 18 industries covered by the survey showed growth last month. Only wood products contracted.
US Manufacturing Growth and Expansion Signals Renewed Interest In Manufacturing
The notion of a a renewed interest in manufacturing as we see continued US Manufacturing growth has been fueled partly by the rebound in production since the end of the Great Recession. Some have even called this a “renaissance” or “Revival” (but you may have seen we view it more as a transformation) Skeptics of the renaissance hypothesis note that this recovery was the natural consequence of a very strong cyclical decline during the Great Recession. While it is true that manufacturing output declined sharply during the Great Recession, the decline relative to the decline in total output was in fact smaller than in the recessions during the previous three decades. In addition, the Great Recession is the first US recession since the early 1980s to be followed by a significant recovery in the share of manufacturing in US GDP. These observations suggest greater underlying strength in US manufacturing growth activity in the current episode, beyond what would be expected in a normal cyclical rebound based on past US data.
Drivers of US Manufacturing Growth in the Short Run
Three main conditions have been highlighted as drivers of a US manufacturing growth renaissance:
- The US real effective exchange rate has depreciated (become more competitive) over the last decade. Since the recession, the weak level of demand and high cyclical unemployment have contributed to a weaker US dollar, in particular against emerging-market currencies.
- The price of labor in the US has decreased relative to emerging markets. The significant relocation of production to emerging Asia during the 1990s and the 2000s and high unemployment in the aftermath of the Great Recession have resulted in lower wage pressures and favorable changes in unit labor costs in the US over the last decade.
- There has been a significant reduction in domestic energy prices following technological breakthroughs in the exploitation of shale gas. In particular, recent advancements in drilling technology (including shale gas fracking) resulted in a significant increase in natural gas production in the US and led to a reduction of domestic prices, which are currently about one-fourth of those in Asia and Europe.
Can This Continued US Manufacturing Growth Make a Substantial Contribution to Longer-term US Economic growth?
The manufacturing sector contributed on average less than 0.2 percentage points to US growth during the last decade. Can that contribution become substantially larger in the near future?
It is estimated that US manufacturing exports could provide an outlet for stronger growth in the sector in the coming years. While manufacturing has decreased as a share of US GDP, the GDP share of manufacturing exports has remained roughly constant. If the US keeps its share in G20 manufacturing exports constant through the next decade at the level observed in 2011, manufacturing could add up to 0.4 percentage points to annual US GDP growth – a significant amount.
The contribution of manufacturing exports to US growth would be stronger if the US could diversify its export base toward Asia, where its market share remains relatively low.
Analysts have argued that a further impetus to US manufacturing demand could come from the booming oil and gas production domestically. Calculations based on the baseline output projections of the US Energy Information Agency, and input-output relationships between oil and gas extraction activities and the manufacturing sector, point to modest contributions for the decade ahead. However, the sectors that would benefit include some nondurables sectors such as chemical products, primary metals, and fabricated metal products, which have not been part of the manufacturing revival to date. The new source of demand for these sectors would therefore mark a positive development.
Conclusion on the Continued US Manufacturing Growth Story
While overly optimistic claims of a US manufacturing growth renaissance seem unwarranted, some manufacturing sectors have indeed rebounded strongly following the Great Recession. Available data suggests that there are sectors within the durable goods category that have withstood the recession well or have strongly rebounded thereafter, providing hope for a strong manufacturing presence in the US and the global marketplace.
A number of ongoing factors are likely to positively impact the profitability of the US manufacturing sector in the years ahead. In particular, a combination of declining production costs – falling natural gas prices and unit labor costs, along with modest real depreciation of the US dollar – as well as a diversification of exports toward dynamic emerging-market economies could catalyse new investment in the US manufacturing sector, providing a boost to growth.