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.
Manufacturing
PMI
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.
Manufacturing
Employment
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 being more productive - 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
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.
Orders
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
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.
 |
| These gears need to move! |
GDP
Forecasts
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.
Conclusions
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.
This post first appeared on the FTR website with minor changes here.. FTR is the leader in analyzing and forecasting the commercial transportation industry. For more information on FTR reports and services, please click here.)
