No Recession Here! Manufacturing Signals Growth Ahead

by Dan Burrows | January 16, 2013 12:48 pm

No Recession Here! Manufacturing Signals Growth Ahead

Regional readings on manufacturing have been very much hit-or-miss lately, so it’s something of a relief that on a national level, at least, the much-ballyhooed renaissance in the manufacturing sector continued apace last month.

No, it doesn’t mean economic growth is going on a tear anytime soon, but — more important — manufacturing is hardly flashing an upcoming contraction, either.

Manufacturing production increased 0.8% in December, according to data from the Federal Reserve out Wednesday. That easily eclipsed economists’ average forecast for improvement of 0.5%.

Even better, it wasn’t a one-off positive data point. The trend is always more important than any single reading, so it’s also welcome news that not only did manufacturing expand for two consecutive months, but that the prior month’s reading was revised up to 1.3% from an initial figure of 1.1%.

True, U.S. gross domestic product is comprised mostly of services[1], not manufacturing. As they say, Americans don’t actually make things anymore.

But that’s hyperbole, of course, and misses the bigger-picture point: Recessions usually first show up in the manufacturing sector, which is why these surprise-to-the-positive numbers are so important — especially with what we’ve seen at the regional level.

As the generally bearish David Rosenberg, chief economist and strategist at Gluskin Sheff, writes in a new note to clients:

“It looks like recession risks have faded but there are still some nagging data-points out there that should not be ignored, like the NY Fed Empire Index, which has been negative for six — count them, six — months in a row, which in the past only happened in the 2001 and 2009 economic downturns.”

That is a bit scary: Not only has the important Empire State manufacturing survey been negative for half a year, but the latest reading just hit -7.8, a huge miss from expectations for a reading of zero.

Fortunately, the national manufacturing reading helps quell those nagging negative data points at the regional level. What’s driving the better data also helps soothe economic nerves.

Yes, auto sales have been purring along for a while[2], helping to boost manufacturing readings, but then, we already knew that. More optimism-inspiring is the way the data are getting a lift from orders for capital goods. Big business investment in long-lived items not only helps keep factories humming, but it shows faith in the future direction of sales and profits.

After all, companies wouldn’t sink a lot of money into expensive capital goods unless they expected to earn a return on that investment.

Backward-looking data only tell us where we’ve been, not where we’re going, so you have to take the latest encouraging figures on manufacturing with a grain of salt. But domestic demand is improving, and emerging markets — notably, China — have stabilized. If nothing else, the trend is supportive of further growth in U.S. manufacturing throughout the year.

No, these readings aren’t exciting, blow-out figures. But considering the sensitivity of manufacturing to economic downturns, tepid-but-positive readings are far, far better than the alternative.

Endnotes:
  1. comprised mostly of services: http://investorplace.com/2012/11/ignore-the-services-data-at-your-own-peril/
  2. auto sales have been purring along for a while: http://investorplace.com/2013/01/december-auto-sales-pop-now-a-cautious-eye-toward-2013/

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