Is Manufacturing a Drag on Economic Growth?



Manufacturing growth continued to decelerate in September, according to the flash reading of Markit’s U.S. Manufacturing Purchasing Managers’ Index. The PMI decreased for the second consecutive month, from 53.1 in August to 52.8 in September, its slowest rate since April. The component indexes for Output and New Orders both shrank, still indicating expansion but at a slower rate than before. The index for Employment fell from 53.1 to 51.4, its slowest growth rate in three months.

With monetary stimulus and the issue of price stability front and center in the economic conversation right now, it’s interesting to note that output price growth accelerated in September while input price growth decelerated. That said, the index for input prices fell just 0.4 points to 55.8, the highest reading for any component, and the index for output prices climbed 0.3 points to 51.4. This indicates that in input prices are still climbing faster than output prices, but the gap between the growth rates narrowed slightly.

“The flash PMI indicates that manufacturers enjoyed a further improvement in business conditions in September, suggesting the third quarter has on the whole seen stronger growth than the lacklustre performance seen in the second quarter,” Markit chief economist Chris Williamson said in the report.

“However, as far as policymakers are concerned there are some worrying signals in relation to the sector’s growth momentum, which vindicate the Fed’s decision to hold off on tapering its asset purchases,” Williamson continued.

Last week, the U.S. Federal Reserve surprised markets by announcing that it was not tapering asset purchases, and would continue buying agency mortgage-backed securities and longer-term securities at a combined rate of $85 billion per month. The news undermined months of speculation and a consensus among economists and investors that the Fed would announce some degree of tapering and suggests that the economic recovery is not yet as healthy as the Fed would like. Part of this weakness is evidenced by the soft recovery seen in manufacturing so far.

“Whereas output growth accelerated to a six-month high in September,” Williamson said, “order inflows grew at a much reduced pace, in fact the weakest for five months. In particular, export orders were down for the first time in three months. Production growth is therefore likely to weaken in the fourth quarter unless demand picks up again in October.”

The highly watched employment component of the index fell from 53.1 to 51.4, still indicating expansion but at a slower rate than before.

But despite the soft manufacturing outlook, economic growth came in above trend in August, according to the Chicago Fed National Activity Index. The CFNAI climbed from -0.43 in July to +0.14 in August. However, July’s level was dramatically revised lower from -0.24, and as a result, the three-month moving average for the index increased only marginally to -0.18 from a revised -0.24.

The CFNAI is a weighted average of 85 economic indications ranging from production, income, employment, consumption, housing, and inventories, and offers a broad perspective on whether the economy is performing up to its potential. There is a close relationship between this index and gross domestic product.


Source: Federal Reserve Bank of Chicago

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