The economic data released over the past month implies further strengthening of the U.S. economy in 2014. The Conference Board’s Leading Economic Index suggests solid growth on the horizon, and manufacturing is still expected to be a key component of the economic recovery, despite the drop of 1,000 net jobs in March. We see many reasons to remain optimistic about the U.S. manufacturing outlook.
Industrial production rebounded nicely at a 7.8 percent annualized rate in February, after a disappointing performance at the beginning of the year, largely due to unfavorable weather conditions in the Northeast and Midwest that forced some factories to close temporarily and kept consumers away from the stores.
The ISM manufacturing index, released earlier this week, has risen for two consecutive months and reached 53.7 in March, the highest reading so far in 2014. This suggests that manufacturers are becoming more optimistic about the future and may be ready to shift into higher gear. Amplified demand for commercial and industrial loans in February 2014 paired with upward revisions in Q4 2013 corporate profits support this argument.
Strong gains were also revealed in the ISM production and new orders subcomponents, implying that the overall improvement in recent manufacturing sentiment is here to stay for a while and will translate into increased manufacturing production.
A revival of manufacturing would be hard to imagine without interconnected improvements in the labor markets. An upwardly revised increase of 19,000 workers in the manufacturing sector in February also beat the expectations of surveyed economists, and manufacturing employment increased for seven consecutive months through February. Moreover, U.S. manufacturing is becoming more globally competitive. Productivity in the manufacturing sector, defined as the real output per hour of all workers, has almost doubled over the last 20 years while it increased only one and a half times for the total nonfarm sector.
Given the positive and strong correlation between manufacturing activity and GDP growth, we are optimistic that revitalization of the manufacturing sector is more than a temporary phenomenon and will eventually spill over into other sectors to embrace the whole economy through inter-industry linkages. Increased specialization in high value and capital-intensive manufacturing is one of the cornerstones of U.S. competitiveness.