U.S. MANUFACTURING REMAINS A BRIGHT SPOT / BARRON´S MAGAZINE

Wall Street's Best Minds

THURSDAY, NOVEMBER 7, 2013

U.S. Manufacturing Remains a Bright Spot

By GARY THAYER

 

The latest purchasing managers' surveys indicate that manufacturing activity continues to expand broadly. This is an encouraging sign that the United States remains competitively priced in global markets, helping the U.S. economy expand at a modest rate. With consumer and business finances in better shape, we look for continued growth in consumer and business spending to support manufacturing in the years ahead.

During the past few years, many consumers postponed major purchases because they were concerned about job security and their personal financial situation. Similarly, many businesses put off new investments in equipment or facilities because they were uncertain about the strength of the economic recovery.

During this period of weak spending, individuals and companies increased savings and paid off old debts. As a result, consumer and business finances are in better shape, setting the stage for increased spending once confidence recovers sufficiently.

The good news is the U.S. economy is slowly improving and consumer confidence is on an upward trend. That's because companies are adding more workers to payrolls and the unemployment rate is decreasing.

We expect these trends to continue next year. As a result, consumers are likely to increase spending on cars, appliances and other durable goods. Businesses are also likely to increase spending on new capital equipment. Therefore, we expect manufacturing to remain a positive contributor to growth in 2014.

The latest survey on manufacturing activity from the Institute for Supply Management (ISM) shows that its October ISM manufacturing index increased to 56.4 from 56.2 in September. This was the highest reading on this measure in more than two years. A reading at this level indicates that more manufacturers are reporting improving conditions than are reporting deteriorating conditions. Thus, a broad number of firms are seeing better manufacturing conditions.

Looking ahead, the U.S. economy continues to benefit from low inflation, and this allows consumers and businesses to stretch their spending further. We expect inflation to remain low next year because the global economy is growing at only modest rate. Therefore, the demand for resources is likely to be soft, keeping production costs from rising rapidly.

Finally, U.S. manufacturing is also benefiting from the decline in the value of the dollar during the past decade. At this point, U.S. goods and services are competitively priced thanks in part to a favorable exchange rate.

We would be more concerned about U.S. manufacturers if the dollar had been strengthening for many years, making U.S. goods and services expensive to foreign buyers. Fortunately, that is not a problem at this time.

In summary, manufacturing activity continues to expand at a healthy pace as the U.S. economy slowly recovers from the deep 2008-2009 recession. Manufacturing is benefiting from a pent-up demand for durable goods because consumers and businesses postponed purchases on items like cars, appliances and business equipment for several years. The U.S. economy still faces many challenges, but conditions remain favorable for further modest economic growth in 2014. In fact, with household finances in better shape and inflation low, we believe the current economic expansion could continue for several more years, if there are no major negative surprises.

 

Thayer is chief macro strategist with Wells Fargo Advisors.

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