Here’s Why It’s Time for Manufacturing to Look Up

Manufacturing

Source: http://www.flickr.com/photos/usnationalarchives/

Overall industrial production increased 0.4 percent on the month in August, according to the U.S. Federal Reserve. The data narrowly missed expectations for a 0.5 percent increase and are slightly underwhelming after the zero percent growth experienced in July. Industrial production growth has struggled to remain positive over the past 12 months on the back of a fickle recovery in manufacturing and ongoing economic headwinds. The overall production index edged up 0.4 points to 99.4.

The Federal Reserve’s industrial production index is broken down into three major industry groups: manufacturing, mining, and utilities. The index and its components are pegged to a 2007 level of 100. The most-watched segment is manufacturing, which increased 0.7 percent on the month to 96. The increase in the manufacturing component came in ahead of expectations but follows a minor contraction in July. The manufacturing index is up 2.6 points on the year, compared to a 2.7 point annual increase in the overall index.

The production of durable goods increased 2.5 percent on the month, while the index for consumer nondurable goods declined 0.3 percent, its fifth consecutive month without positive growth. The rebound in durable goods production was led in part by strong gains in the production of automotive products.

In general, the goods producing sector acts as a bellwether for the broader economy, helping inform investors about the economic backdrop against which they are making decisions. With this in mind, recent overall manufacturing conditions have been improving modestly.

Markit’s final U.S. Manufacturing Purchasing Managers’ Index for August declined from 53.7 in July to 53.1 in August, still indicating growth but at a slower rate than before. The decline was led by accelerating contraction in the stocks of purchases and stocks of finished goods components as firms reduced inventories. The backlogs of work component also fell into contraction between July and August.

Declines were also registered in major components like output and new export orders, which both expanded for the month but at a slower rate than before. Input prices also continued to climb, with increases in the price of raw materials like oil and steel, but overall inflation was below a recent peak seen in July. Responding to these price pressures, output prices increased more quickly, but, overall, movement was relatively slow. Importantly, the new orders component increased, signaling expansion at a faster rate than before.

Separately, the Manufacturing Report on Business, compiled by the Institute for Supply Management, showed a modest improvement in manufacturing conditions in the United States in August.

The production component of the ISM index slowed from 65 in July to 62.4 in August but still showed expansion and, next to new orders, was the highest reading of any index for the month. Consistent with Markit’s findings, the ISM report showed a contraction in inventories. Data from the report suggest that there may be an increase in production in the coming months to replace inventory and satisfy the incoming demand.

The highly watched employment component declined by 1.1 points to 53.3 in August, still indicating growth but at a slower rate than before.

August’s industrial production data was broadly consistent with the manufacturing data.

Industrial Production

Source: Data from the U.S. Federal Reserve

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