Recent turbulence in the stock market is a wake-up call to manufacturers, and to all businesses. The measurable rise in the yield on the 10-year Treasury note, now at the highest level in four years, has arguably been the primary catalyst for the equity market rout. This rise spurred to some extent by credible hints that long-dormant inflation might be on the cusp of increasing, has been a signal that financial conditions will eventually, and perhaps quickly, tighten to more normal levels.
In spite of the tumult of a reawakening global economy whose U.S. benefits were constrained by escalating political uncertainty, two destructive hurricanes, and an alarming confrontation with North Korea, U.S. manufacturing managed a rather bland but steady growth performance during 2017. The Federal Reserve reported that after two difficult years of essentially zero output gains, growth in the factory sector logged 1.3% during 2017.
No one should be concerned that the Purchasing Managers’ Index (PMI) pulled back from an unrealistic 60.8% in September to a still strong 58.7% in October. The September reading from the Institute for Supply Management (ISM) has to be treated as an outlier and interpreted against the inevitable data distortions created by two devastating hurricanes. Hurricane Harvey, in particular, ravaged a manufacturing epicenter at a time when energy-related output is growing as a share of U.S. industrial output. ISM survey respondents in October noted weak business conditions and raw material shortages due to the hurricanes. The aftermath of these terrible storms is going to linger in the manufacturing picture for a while.
As the flood waters recede and the long rebuilding process begins, it is important to assess the impact on the U.S. economy and the U.S. manufacturing sector. Policymakers need to minimize the downstream negative impacts from an already destructive event. Manufacturing executives need to readjust their business plans to account for a significant disruption.
Employment remains a star in an otherwise lackluster economic expansion. U.S. employer payrolls swelled by a strong 209,000 in July, and the unemployment rate fell a tick to 4.3 percent, remaining at a 16-year low. Even with the sluggish GDP growth of recent quarters, it is clear that the U.S. economy is growing above its long-term, non-inflationary potential, creating a strong demand for labor even after eight years of economic recovery and expansion.
In spite of the modest drop in the Institute for Supply Management’s (ISM) widely-followed Purchasing Managers’ (PMI) Index, U.S. manufacturing growth remains on a path of considerable improvement. After reaching 57.8% in June, more than 3 percentage points above the current 12-month average, the PMI index slipped by 1.5 percentage points in July to a still strong 56.3%. Key survey indices such as new orders, production, and the backlog of orders remain in solid growth territory although they all fell modestly last month.
I anticipated that the historical U.S. GDP revisions, which accompany the initial release of the second quarter GDP report and currently extend back to the first quarter of 2014, would make for some interesting analysis. What’s remarkable, however, is just how small the revisions are on the whole. The revised data in no way change the qualitative narrative of growth for a frustrating period in which U.S. manufacturing was all but stagnant. Score one for the reliability and stability of the U.S. economic data system.
The FOMC punted on another move and released a statement that smacks of trepidation on the sustainable strength of the U.S. economy. They acknowledge that job gains have been solid and that consumer spending and business fixed investment have continued to expand. The troubling point remains inflation, and they are quite concerned.
As has often been the case in recent years, the monthly U.S. employment report provides a glimmer of light in a gray picture. A net gain of 222,000 payroll jobs in June markedly exceeded the expectations of analysts who projected that slow economic growth would have some impact on employment gains.