Will Economic Headwinds Kill the Manufacturing Recovery?
The U.S. manufacturing sector continued to expand in August, according to reports published by Markit and the Institute for Supply Management on Tuesday. Although the two disagree about the speed of the recovery, both reports show that manufacturing business activity increased at least modestly, which is consistent with overall growth in industrial production that just narrowly missed economist expectations.
The industrial production index is compiled by the Federal Reserve using data from the Bureau of Labor Statistics and various trade organizations. In August, the IPI advanced 0.4 percentage points to 99.4, its highest level since at least March but still below the long-run average indexed to 100. Growth in industrial output has struggled to remain positive over the past 12 months on the back of a fickle recovery in overall economic conditions, but small victories have come more often than not.
How to interpret these victories — the modest or fairly consistent reports of growth — is up for debate. The data signal that the manufacturing industry is hobbling along and is threatened with contraction at every turn, but it’s unclear whether this is a sign that the sector itself is still weak or that the economic climate is still too weak to support anything more.
Markit chief economist Chris Williamson framed the Markit Purchasing Manufacturers’ Report for August this way:
“The final PMI data confirm the message from the earlier flash reading, namely that the U.S. manufacturing sector is barely growing. Although output growth picked up in September, a weakening in growth of new orders suggests that the upturn could prove temporary and that growth could slow again in the fourth quarter. Of particular concern is a renewed decline in new export orders, which highlights how global demand remains frustratingly subdued.”
Markit’s PMI read 52.8 in September, a three-month low and down from 53.1 in August, signaling expansion but at a slower rate than before. The output index did increase, from 52.5 to 55.3, but a deceleration in new orders (from 55.7 to 53.2) and a change in direction into contraction for new export orders (from 52 to 49) is discouraging. The data suggest that demand is slowing, which could lead to declines in output in the coming months. Williamson continued:
“Manufacturers themselves are battening down the hatches, cutting back on employment wherever possible to boost productivity. Job creation could well stall altogether unless demand picks up again. Policymakers at the Fed will surely want to see the economy faring far better than these data are suggesting before countenancing any cuts to the stimulus.”
In September, 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; it also 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.
Markit’s report is the more pessimistic of the pair released on Tuesday morning, though. The ISM PMI — a similar though slightly different gauge of manufacturing activity — actually increased from 55.7 to 56.2 in August, signaling expansion at a faster rate than before. The index for new orders increased from 60.5 to 63.2, although the production index and the employment index both edged down a fraction.
Several respondents to the ISM survey reported that their business outlook remains positive and that overall demand is picking up. This is somewhat comforting, but it’s important to keep in mind that the increasingly dubious status of fiscal policy in the U.S. could slam the brakes on this recovery. Government operations shut down as of midnight Tuesday, and it’s still unclear what effect this will have on the manufacturing sector.