Manufacturing Has Come Back And More Gains To Come
September 2, 2015 Leave a comment
The U.S. manufacturing sector is coming back, we learn from the Federal Reserve’s industrial production report. Last month’s gain was 0.9 percent, more than making up all the ground lost in the early months of this year. Looking forward, production will continue to expand, but don’t expect a lot more factory jobs.
Manufacturing is the largest component of industrial production. The overall industrial numbers are pushed around by utility production, which rises or fall as weather is unusually warm or cold. Manufacturing is thus a better gauge of underlying economic activity than industrial production.
We’ve known that the harsh winter of 2015 trashed manufacturing as well as the service sector. Now they are both coming back. As noted in my Capital Spending Forecast 2015-2016 article, companies have been doing a lot of construction work on manufacturing plants. I kept saying, if they are building factories, they are going to use them. Now we see signs of that happening, but there’s more room for growth.
The rising dollar is a headwind for American manufacturing. Imports look cheaper every day, and our goods are more expensive to foreign buyers. However, most manufacturing production is for the domestic market, and there we see growth. The retail sales report showed a nice gain. Car sales are as good as they have been since 2006. Business investment spending is still sluggish, and exports have declined in the past year. Still, consumers trump business when it comes to the economic outlook.
On the cost side, manufacturers have plenty of good news. Labor costs are rising by less than two percent annually, even with benefits thrown in. Falling prices for oil and natural gas help keep production costs down as well.
Manufacturing is often thought to be a dying sector. That assessment comes from looking at manufacturing jobs, which peaked in 1979. Production, though hits its all-time peak in 2007, and were about one year away from exceeding that benchmark.
It’s not going to be easy sailing for factories. The world is a very competitive place. But look for further gains by American manufacturers in the year to come.