U.S. Manufacturing Sector Is the Little Engine That Could


Source: U.S. National Archives

Manufacturing conditions in the United States continued to improve in December, according to indexes maintained by the Institute for Supply Management and Markit Economics. Both indexes, which measure the health of the manufacturing industry in similar ways, closed 2013 near 12-month highs.

Each purchasing managers’ index is determined by conducting a survey of industry executives; a reading above 50 indicates growth. The ISM Manufacturing Report on Business showed a 0.3 percentage point decline in its headline PMU, from 57.3 to 57, indicating slightly slower growth in December than in November. The index was weighed down by inventories, which actually contracted in December, and exports, which slowed down but still showed growth. Importantly, though, new orders increased, indicating ongoing healthy demand for manufacturing goods.

A purchasing and supply executive said in the ISM report, “Amazingly enough, we are seeing meaningful increases in our sales in nearly all segments and regions.” Another added that markets are sound: “We typically see a seasonal 4th quarter slowdown. However, this year … not so.” Another comment indicates that reduced government spending has been a headwind for the transportation industry, but overall, executives appear to agree that conditions are both good and improving.

Markit’s U.S. Manufacturing PMI climbed 0.3 percentage points to 55, an 11-month high, indicating accelerating growth in manufacturing. The highly watched output component of the index climbed 0.1 percentage point to 57.5. The new orders component fell 0.1 percentage point to 56.1.

“The upturn in the PMI in December rounds off one of the strongest quarters for manufacturing since the economy pulled out of recession. The goods producing sector is therefore on course to provide a firm boost to the economy in the fourth quarter, which we expect to see growing at an annualised pace of at least 3%,” said Chris Williamson, chief economist at Markit.

Williamson once again suggested the recovering economy and strong manufacturing conditions could help boost employment in the sector. Total manufacturing employment fell from about 14 million before the crisis to lows around 11.5 million and has since recovered to around 12 million.

This type of weak labor market growth has appeared in several industries where business activity is improving but employment has been slow to catch up. Firms have instead driven growth more by increasing output per person instead of increasing headcount. This can be indicative of economic uncertainty, which is still below its pre-October shutdown level, according to Gallup.