DC Velocity - December 2010

Manufacturing Report on Business provided timely data that revealed the level of activity in an important and growing sector of the economy.

QWe are conducting this interview in early October, just days after ISM released its September report— the first in nearly 18 months to show an appreciable slowing in manufacturing activity. What does the September report tell you about the balance of the year and the early part of 2011?

ASeptember was the 14th consecutive month of growth for U.S. manufacturing based on the PMI at 54. 4 percent. This represents an 8.8-percent month-over-month improvement and signals that manufacturing continues to grow faster than the rest of the economy. The driver for manufacturing to this point is a somewhat typical business cycle recovery as it has sized employment, inventories, investment, and capacity to levels that meet current demand. But that phase is now behind us, and the manufacturing recovery is slowing and will remain slow unless there is an improvement in consumer spending and business investment that fuels the next stage.

While we will see continuing growth in Q4, it doesn’t appear to be sufficient for significant job creation. The United States has lost 2 million manufacturing jobs; they are difficult to replace, and it can’t be done quickly. Prospects for 2011 may be better, but it will be relative to how strong the recoveries are in autos and housing as they drive manufacturing in a number of other industries, such as plastics and rubber products, primary metals, fabricated metals, and textiles.

QThe National Bureau of Economic Research (NBER) said recently that the current recession ended in June 2009. And yet there are lingering concerns about a so-called “double dip.” Based on what you’re hearing from purchasing and supply managers, how do you come down on these issues? Is the economy in more of a mid-cycle correction than a second trough?

AThe NBER determination is an attempt to place begin- ning and ending dates on the recession. From a macroeconomic standpoint, it is good to have one group that everyone looks to make the determination. The ISM data is more about microeconomics, as we are looking at the 18 manufacturing industries that comprise 12 percent of GDP. A number of industries, including printing, textiles, wood products, and furniture, are still in a recession. Many businesses are still feeling the effects of this downturn. The recovery has been kinder to medium to large businesses than it has been to small ones. The point is that we are not totally out of this, and the employment statistics show it.

At the same time, we have a very resilient economic system, and left to its natural strength, it solves most of its problems on its own. The current trend toward slower growth in new orders and production may continue into next year. As I stated previously, we need a significant improvement in consumer and business confidence to drive the overall economy. That would be 3. 5 percent or higher growth in GDP. Will there be a double dip? There is nothing in the current data that would lead to that conclusion.

QWe began hearing from transportation folks several months back that while shipping remained robust, activity at the front end of the supply chain—new orders— had begun to tail off. Does the September report bear witness to that, and will this softening trend be with us for a while?

AYes, the rate of growth in new orders began slowing in June, and the August–September month-over-month improvement was only 2. 2 percent, compared with 30 percent back in June. But that is not atypical of a business cycle recovery. The transportation sector is a good indicator because it is one of the first to see improved activity. ISM measures customers’ inventory levels, and they appear to be too low at this time. So we may see some improvement if customer confidence improves.

QISM peppers the report with anecdotes from man- agers across multiple industries. How relevant are the anecdotes, relative to the actual data, in shaping your analysis of trends?