WASHINGTON, DC-Continued improved performance by the nation's industrial sector in August have boosted confidence in a general economic turnaround. Reports from the Federal Reserve, Manufacturers Alliance/MAPI and Institute for Supply Management all point to renewed industrial and manufacturing strength.
The most recent industrial production report from the Federal Reserve provides the clearest evidence yet that the US economy has bottomed and is beginning to turn positive. Fed statistics reveal industrial production rose 0.8% in August, showing an increase for the second month in a row. A 1% rise in production in July was the first increase since October.
According to the Institute for Supply Management in Tempe, AZ, the August PMI index rose four points from July to 52.9%, the highest reading since June 2007. It says the increase was driven by significant strength in the New Orders Index, which rose 9.6 points to 64.9%, its highest reading since December 2004.
The Fed says the industrial sector operated at 69.6% percent of capacity in August, up from 69% in July. The modest boost indicates that more idle factories were put back into play. The improved performance likely reflects the resumption of production at several General Motors and Chrysler plants after months of inactivity. In addition, business inventories have fallen so low that factories have ramped up production to meet demand.
"A general inventory swing and the Federal auto incentive program have kick-started the industrial recovery," observes MAPI chief economist Daniel J. Meckstroth. "The automotive 'Cash for Clunkers' program boosted sales at the time when automakers had already pared inventories, causing auto plants to reopen and quickly scale up production." According to MAPI statistics, motor vehicle assemblies increased 43% in July and another 12% in August.
"Fortunately, the manufacturing rebound is relatively broad and not limited to autos as 12 of the 20 major manufacturing industries posted growth in August," Meckstroth continues. "Excluding motor vehicles and parts, manufacturing production increased 0.6% in July and 0.4% in August. We expect the improvement in manufacturing activity to continue as inventories are rebalanced and the current positive momentum builds on itself."
Nonetheless, he adds, we can expect only a modest pace of recovery in the general economy because of the "headwinds of deleveraging." The current fast pace of growth in manufacturing is likely to slow in coming months, he points out. Norbert J. Ore, CPSM, chair of ISM's manufacturing business survey committee concurs. "[W]e have to keep in mind that it is the beginning of a new cycle and that all industries are not yet participating in the growth," he notes. At the same time, he says, "The growth appears sustainable in the short term, as inventories have been reduced for 40 consecutive months and supply chains will have to re-stock to meet this new demand."
According to Industrial Info Resources of Sugar Land, TX, the nation's industrial manufacturing sector is projected to create 8,000 new jobs during Q4. In regards to the general economy, MAPI projects a 1.9% increase at an annualized rate in Q3 and 2.5% in Q4. The forecast for next year calls for a slight rebound in overall consumer spending based on slow personal income growth. It also forecasts continued improvement in 2011.