Earlier this year, there was a surge in business confidence in the manufacturing sector of the economy. There were forecasts and predictions of robust growth. However, at mid-year, there is limited evidence of a manufacturing revival and most economists are not factoring a big change into their Q3 and Q4 GDP forecasts. So, what is happening, or more importantly, what is going to happen in the manufacturing sector?
View from The Trucking Industry
Big data collected from Truckstop.com indicates spot market (bid freight) is smoking hot. This indicates freight demand is better than the industry expected. The FTR freight forecast shows sturdy freight growth the second half of the year. Orders for Class 8 trucks are up 38% YTD over last year, and the commercial trailer market continues to exceed expectations. These factors would point to improved manufacturing activity which could begin to accelerate soon.
The June manufacturing PMI (Institute for Supply Management) rose 2.9 percentage points from May to 57.8%. This is the highest reading since August 2014, which, coincidently, just preceded the huge Class 8 truck build in 2015.
The New Orders and Production indexes are upbeat and increasing. Backlogs and Exports are also growing. Inventories are at normal levels and would appear to be a non-factor. The PMI has averaged 56.4 (readings above 50 indicate growth) in 2017.
This index would indicate vigorous manufacturing activity. However, this is a survey and maybe some of the high business optimism is creating a small halo effect here. Also, FTR has identified a lag time of a few months between the index readings and the actual results. This could indicate the manufacturing sector has spent the first six months of the year recovering and retooling for bigger and better results in the second half of the year.
The May numbers show only 50 basis points of increase versus a year ago. Manufacturing employment has been flat for the last 2.5 years, that’s why it was an election issue. It appears there was enough slack in the system to absorb an increase in output so far this year. Workers are either being more productive or it’s the impact of automation. If manufacturing is accelerating, it is not showing up in the employment numbers yet.
Manufacturing Production Data
This measurement increased 1.4% in May, the seventh straight increase. The trend is positive; the pace is moderate. Capacity Utilization is 76.6, slightly down from April. April’s reading was the best since late 2015. This would indicate growth is sturdy.
Exports are up 7.5% YTD. The Commerce Department just reported exports at a two-year-high. A solid performance, and before any trade deals have been renegotiated.
The Fed Manufacturing Indexes
Philly Index – Down 11 points from May, but still positive.
N.Y. Index – Up 21 points to the highest level in more than two years
Dallas Index – Down 11 points from May, but still positive
Richmond Index – Up 6 points in June, but had been much higher earlier in the year.
The indexes are not consistent in direction, but they are all in positive territory. As a group, they are not as strong as a few months ago.
Durable Goods Orders (ex-transportation) up 0.1%. Factory Orders down 0.8%, the second straight decrease in orders. Does this mean manufacturing is losing momentum, or could the big orders have been placed in prior months and ordering activity is taking a respite?
Inventories are down slightly in the latest report, but are at reasonable levels. The inventory/sales ratio is at 1.37 and looks to be in balance. This shouldn’t have a drag on manufacturing activity
The Wall Street Journal Economic Forecasting Survey has GDP at 2.6% in Q3 and 2.5% in Q4, slightly better than the 2.2% standard of recent years. So, most economists do not expect a manufacturing surge the second half of the year. The highest estimate in the survey is 4.1% in Q3 and 4.2% in Q4, no doubt this economist has been talking to some manufacturing people.
It isn’t surprising that the numbers in manufacturing are not consistent and do not point to firm direction. The economic indicators in general have been very hazy the past year. This is an economy of fits and starts, of mild acceleration followed by the tapping of the brakes.
It is clear manufacturing is growing, so we have a direction. The numbers continue to point to stronger, faster growth. The table has been set. The orders have been placed, the machines have been oiled, some regulations have been lifted, and the factories have started to hum. Manufacturing people continue to be upbeat and optimistic, but are they too optimistic? When does confidence turn into currency? When will we see the boost in manufacturing activity show up in the general economic data?
How much manufacturing growth will there be in the next 12 months? Will it continue the uneven path of the past six months, or will it bust out into a sharper upward track? When I don’t know the answer, I like to split the difference. Let’s expect manufacturing to strengthen, but not accelerate. We can use GDP for Q3 and Q4 as a guidepost. At 3% growth = moderate manufacturing growth. Greater than 3% = robust manufacturing growth. At 2.6% or under = not much change in manufacturing output.