Buckle Up: Manufacturing Could Carry the Economy in Q2

Source: Thinkstock

Source: Thinkstock

After a disappointing first-quarter for the economy, it looks like manufacturing might carry us through a more positive second-quarter. According to the latest reading of the manufacturing purchasing managers’ index (PMI), the headline index is up at 57.3 in June from 56.4 in May, the highest since May 2010. This is marginally lower than estimated by the flash PMI survey, which clocked in at 57.5, but it is still a strong finish to a good quarter. The headline PMI averaged 56.4 in the second-quarter, the strongest quarter in four years.

The manufacturing PMI survey is conducted by Markit, an industry research firm. A reading above 50 marks expansion in the sector, while a reading below 50 marks contraction. Second-quarter growth was driven by a pickup in new orders and a neat increase in output. Manufacturing output expanded the fastest since April 2010, climbing to 61 in June from 59.6 in May. We can also see signs of demand picking up as inventories of raw materials and finished goods decline. Stocks of purchases fell to 49.7 in June from 52 in May and stocks of finished goods fell to 45.2 from 47.9 in May.

There is consensus among other manufacturing surveys as well about the growth in manufacturing. A manufacturing survey carried out by Institute for Supply Management (ISM) stood at 55.3 in June, about 0.1 point lower than in May, supporting the broad manufacturing growth narrative but disagreeing on its acceleration. Some of the industries that reported growth in June, according to the ISM survey, were furniture and related products, nonmetallic mineral products, food, beverage, and tobacco products, machinery, fabricated metal products, computer and electronic products, transportation equipment, apparel, leather and allied products, printing, petroleum, and coal products, which shows the growth has been fairly secular across industries.

This robust manufacturing activity comes after a very weak first-quarter, when the economy contracted 2.9 percent because of weather-related reasons that affected domestic demand and production. Manufacturing constitutes about 13 percent of the gross domestic product and contributed about 21 percent of economic growth in 2013, which may be no match to the contribution of the services sector, but the performance of the sector has a telling impact on the overall health of the economy. According to National Association of Manufacturers, the sector supports an estimated 17.4 million jobs in the United States — that is about one in six private-sector jobs. More than 12 million Americans (or 9 percent of the workforce) are employed directly in manufacturing.

The only pocket of disappointment in manufacturing has been a decline in the growth of new export orders, which could have been due to cost inefficiencies and low price competition from the emerging markets that has flooded the global markets with cheaper substitutes. New export orders were down to 50.6 in June from 52.2 in May this year, the Markit PMI survey shows. Lukewarm demand for American goods and services abroad and a widening trade deficit could pose a major risk to economic growth in this quarter.

The imbalance between U.S imports and exports has hit an 18-month high. The U.S. current account deficit — the net earnings from the import and exports of goods, services, and foreign investments — rose 2.6 percent to $111.2 billion from $87.3 billion in the fourth-quarter of 2013, the highest rise in about a year and half, quarterly data released by Bureau of Economic Analysis of the U.S. Department of Commerce showed earlier this month.

“Export performance … remains a real disappointment and trade will likely act as a drag on the economy again in the second-quarter,” said Chris Williamson, chief economist at Markit, in the PMI report.

Williamson worries that if the Federal Reserve starts giving indications of tightening its monetary policy to avoid the perils of a very late exit from accommodation, domestic demand may again get hampered. With exporters still struggling, growth could slow again in the second half of the year. However, such fears may be unwarranted in the near future, since the Fed has made it amply clear it will not exit its accommodative policy until unemployment rate is within its range of 5.5 percent and inflation stabilizes around 2 percent.

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