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Viewpoints: Manufacturing Growth Continues, Despite Uncertainty

Chad Moutray








By Chad Moutray
Chief Economist
National Association of Manufacturers

Manufacturers have been eagerly waiting for the economy to gain some traction, and the 2014 forecasts should give them a degree of encouragement. The Federal Reserve Board predicts growth of 2.9–3.1% for 2014, suggesting that things might finally start to pick up next year. Indeed, it could be the first time since 2005 that real GDP averages 3.0% or more.

Nonetheless, these outlooks illustrate a palpable hesitance, much as we have had for the past few years. The fiscal and political environments remain uncertain, especially with ongoing budget negotiations and another forthcoming debt ceiling limit being reached. This serves as yet another reminder that government could once again thwart economic progress. Indeed, US real GDP will probably expand around 2.3% in 2013, a disappointing result given the robust growth in the first couple months.

Government uncertainty and weakened domestic and global demand dampened growth over the past 12 months. Despite that, the manufacturing sector experienced accelerated activity in the second half of 2013, which should bode well for continued growth. The Institute for Supply Management’s Purchasing Managers Index (PMI) has reflected positive growth in manufacturing activity since July, having improved from 49.0 in May to 57.3 in November. Strength of sales played a leading role, with the index of new orders exceeding 60.0 for four straight months.

Overall, manufacturers are mostly positive about sales and output for 2014. In the most recent National Association of Manufacturers/IndustryWeek (NAM/IW) Survey of Manufacturers, 78.1% of the respondents were positive in their company’s outlook in the fourth quarter of 2013. Two-thirds expect their sales to increase over the next 12 months, by an average of 3.0%. This suggests modest gains in new orders over the next year.

Fortunately, the NAM/IW survey also found that manufacturing output should continue to gain momentum throughout the first half of 2014. A regression model estimates that production will grow at a 4.0% annual rate between now and the end of the second quarter—another hopeful sign.

The uptick in manufacturing activity should boost the overall economy. Real GDP rose a surprisingly strong 3.6% in the third quarter of 2013, an improvement from the 2.5% gain in the second quarter. One could easily discount the third quarter data, with 1.7 percentage points of that growth stemming from inventory replenishment. At the same time, we have begun to see relatively decent bright spots from consumer and business spending of late. Drags on growth have come from net exports and government spending, even as both had very small positive contributions in the third quarter.

The key to stronger growth in 2014—and, particularly, our ability to reach annual real GDP growth of 3.0% or higher—will be two things. First, consumers and businesses need to become more confident in the economic landscape, building on recent modest spending gains. In the third quarter data, consumer goods spending rose an annualized 4.1% for the quarter, with larger increases for durable goods purchases. While this marked a decent pace, it could be improved. On the investment side, higher spending on residential and nonresidential structures and industrial equipment showed promise. Here, too, uncertainty in the marketplace and higher borrowing costs have dampened growth.

Secondly, we need to see better numbers on the international front. Year-to-date growth in manufactured goods exports has risen just 2.2% through the first 10 months of 2013 relative to the same timeframe in 2012. This slow pace has served to reduce demand for our products, dampening output growth and sentiment. With a better global economic environment expected for next year, we should see improvements in our export sales, which should help boost economic and manufacturing activity.

Overall, prospects for manufacturing in the new year and beyond are bright. I have not even discussed such topics as the impacts of shale exploration on manufacturing or the trend of the United States becoming more attractive for manufacturing investment, both of which should make one bullish for the sector.

There are definite downside risks to growth, mostly coming from government actions. With that in mind, policymakers would be wise to reduce uncertainties and adopt pro-growth measures that will enable these more positive assessments to come to fruition. ME


This article was first published in the January 2014 edition of Manufacturing Engineering magazine.  Click here for PDF

Published Date : 1/1/2014

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