Don’t look now, but manufacturing is hot.
No, not reality TV show hot. Or Myspace.com hot. A different kind of hot, one measured in less glamorous things like production growth and new orders, not hyped-up media tales of how a bunch of bored teenagers are going to change the world by emailing their make-believe friends.
In the manufacturing community (different than the “manufactured” community) we have to be a bit more realistic, and the backdrop by most accounts looks favorable. While the bugaboo of higher energy prices continues to pressure the industry, manufacturers have been the beneficiary of some pretty solid news of late.
This week’s calendar of economic data is fairly light, so it’s as good a time as any to review some of the recently released numbers. On the data front, there aren’t too many stats more telling than the Institute for Supply Management’s new orders index. That reading in July was above the 50 percent mark for the 39th-straight month, at a level that bodes well for a strong third quarter.
Orders for durable goods were up a much-better-than-expected 3.1 percent in June, and though this particular barometer can be more volatile than most other measures of the economy’s health, the size of the upside versus what economists had been expecting shouldn’t be discounted. (We'll get July's reading later this week.)
Meanwhile, new orders for manufactured goods rose by the largest amount in three months in June, to their highest level since 1992, and industrial production increased by 0.4 percent in July. Even the stock market has been behaving well.
Last week, the Manufacturers Alliance/MAPI unveiled its quarterly economic forecast, saying manufacturing production will “significantly” outpace the general economy in 2006, and keep pace with it in 2007. The group sees manufacturing industrial production surging five percent this year, then falling off to a more modest, but by no means lethargic, 2.5 percent next year.
“The hurricanes and commodity supply disruptions in 2005 set off a scramble for manufacturing inventory in 2006,” said Daniel Meckstroth, the Manufacturers Alliance chief economist. “The manufacturing sector has also benefited from its high concentration in capital goods industries and electronics, which have outperformed other sectors of the economy this year.”
Earlier this month, the government said the country’s trade deficit showed modest improvement, with U.S. exports at all-time highs. Shipments of farm goods, capital goods, and industrial supplies all ht records, and better economic growth in some of our largest trading partners offers hope they’ll be buying more of our stuff.
Even the albatross of higher oil prices has receded of late, albeit modestly. True, oil prices remain at levels that make most manufactures squirm, but looking back to where we were just over two weeks ago things look more optimistic. The frantic calls of $80, $90, even $100 oil immediately following word of British Petroleum’s mess in Alaska have given way to the more familiar $70 range, and production out of Prudhoe won’t be cut back as much as first feared.
Making a bet on crude prices is a dangerous game; some companies get it right by hedging their exposure (Southwest Air comes to mind) and some don’t (most other airlines come to mind). For the energy-dependent manufacturing industry, the difficulty comes in not being able to pass the higher cost of doing business on to customers. When that day comes, things will be looking up for sure.
Now, all of this isn’t to say that things can’t get better for manufacturers - not by a long shot. There is, and will continue to be for some time, the issue of finding enough skilled workers that today’s manufacturer requires. Global unrest threatens not only any fragile stabilization there may be in energy prices, but could also start crimping demand. And try as they may, the Chinese are finding it difficult to cool their exploding economy, with the failure to do so in a timely manner having potentially dangerous repercussions for the rest of the world’s economies.
So, no, all is not perfect in manufacturing. It never is in any business. But sometimes it seems the manufacturing industry, even when it is the beneficiary of good news, doesn’t get the attention it deserves, or worse yet, is reluctant to embrace it.
Face it, manufacturing: you're hot. To comment on this story, email us at: [email protected]