Is Manufacturing Heading Toward A Summer Slowdown?

The manufacturing sector has been blowing hot and cold in the current economic cycle. From the depths of recession, the sector sees resurgence, only to sink back into the red and then start all over again.

Manufacturing, the transformation of raw materials into finished goods to meet customers' specifications and needs, is significantly huge for the United States. Statistically speaking, the U.S. manufacturing sector is the biggest globally, producing 18.2 percent of global goods. This compares to 17.6 percent for China. That said, manufacturing's share of the total U.S. GDP is 8 percent.

Significance Of Manufacturing To U.S. Economy

The latest survey by the Labor Department shows the manufacturing sector employed 12.4 million people in April 2017, accounting for roughly 8.5 percent of the people employed in the non-farm sector.

Manufacturing Trend Post Great Recession

After a sharp plunge during the 2007–2008 recession and bottoming in the second quarter of 2009, the manufacturing sector staged a steady recovery until the fourth quarter of 2014.

Subsequently, manufacturing output flat lined till the third quarter of 2016. Since then, there has been a steady recovery.

Source: Bureau of Labor Statistics

However, the strong offtake seen since the third quarter of 2016 faces the risk of losing steam, if one is to go by the results of a recent regional manufacturing survey for May.

New York Manufacturing Survey — Regional But Leading Indicator

Though the New York Federal Reserve's manufacturing survey is regional in nature, it is considered to offer the first glimpse into the state of the manufacturing sector in a month. It precedes a few market-moving regional manufacturing surveys and the Institute for Supply Management's national manufacturing survey.

The survey, also dubbed as the Empire State Manufacturing survey, showed manufacturing conditions deteriorated in May. The general business conditions index for May fell to -1 from 5.2 in April, suggesting the sector has moved into contraction territory. The index was previously in contraction territory in October 2016, when it was at -6.8, precisely before the U.S. presidential elections.

The index reflects the overall business conditions based on a survey of 200 top manufacturing executives.

Business activity for New York manufacturers flattened out after a 6-month run; May index fell 6 points to -1.0 → https://t.co/bg44TB8sw9 pic.twitter.com/Fe2Jj78eed

— New York Fed (@NewYorkFed) May 15, 2017

Among the sub-indexes of the survey, new orders, unfilled orders and inventories were in contraction territory, although all of the sub-indexes deteriorated from the month-ago levels.

Trump Lift For Manufacturing

President Donald Trump's election-infused optimism into the sector, partly due to the belief that the president's protectionist policies would give a new lease of life for the manufacturing sector. In a bid to "make America great again," Trump threatened of punitive measures aimed at firms shifting jobs out of the U.S., lured by cheap overseas labor. Additionally, hopes of increased investment in the sector also augured well.

General Business Conditions Index (New York Fed)

Oct. 2016: (-6.8) Nov. 2016: 1.5 Dec. 2016: 7.6 Jan. 2017: 6.5 Feb. 2017: 18.6 March 2017: 16.4 April 2017: 5.2 May 2017: (-1)

Source: New York Federal Reserve

However, the actual manufacturing output has not reflected the same optimism.

Industrial Output Growth (month over month)

Oct. 2016: 0.2 percent Nov. 2016: 0.2 percent Dec. 2016: 0.2 percent Jan. 2017: 0.4 percent Feb. 2017: 0.3 percent March 2017: (-0.4 percent) April 2017: 1 percent

Source: Federal Reserve

Additionally, the Philadelphia Fed's manufacturing survey, which is another regional survey, showed business conditions improving in May.

Since The Presidential Election

Notwithstanding Trump's promise of bringing manufacturing jobs back to the U.S. and threat to slap fine/tariffs on companies spending on offshore production, there has not been much of follow up actions. Additionally, moving jobs back to the U.S. would not necessarily create additional jobs, as companies are actively pursuing the option of automating jobs, wherever it makes sense.

The policy paralysis on this front is attributed to the fact that Congress, rather than the president, has the power to enact tariffs. The business-friendly Republicans are proponents of free trade and may not prefer tariffs.

The proposed tax reforms and huge infrastructure investment the president promised are yet to materialize.

May Be, May Be Not

Early indications of softening of manufacturing activity levels may not really signal a marked slowdown into the summer months, although activity, typically, see a small downtick amid summer maintenance-related shutdowns. On top of this, business conditions surveys were mixed, rather than all flashing red signals. Even if a slowdown occurs, it is only right to separate the seasonality factor and delve deep to find whether the slowdown is due to any fundamental reasons.

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