Continued Expansion Of U.S. Manufacturing Sector Faces Headwinds
The U.S. economy has been leaning largely on manufacturing as it crawls away from the recession. U.S. production activity in Feb. expanded for the 19th consecutive month at probably the most brisk pace in seven years. Continued manufacturing growth is in the forecast because orders are outstripping inventories, however the sector must overcome looming inflationary pressures.
Looking at February through ISM
As factories increase production to meet increasing demand, United States production in February increased at the highest rate since May of 2004, according to the Institute for Supply Management. A monthly production index is published by the ISM which is a nonprofit industry association that can be found in Tempe, AZ and is an economic indicator many look to. The ISM manufacturing index, also known as the factory index, increased from 60.8 in Jan to 61.4 in February. Anything over 50 percent is good. It means growth is happening. Economists had predicted more modest growth in the February production index to 60.9.
United States production gains momentum
Production stimulated by exports and new orders drive the manufacturing index up. There was growth from 62 to 62.5 in the ISM export index. This was from January to Feb. too. Then there was a change from 67.8 to 68 in the new orders index. That is the strongest rate since January 2004 that has occurred. The ISM production index climbed from 63.5 to 66.3. There was a decrease from 52.4 to 48.8 in the inventories index. The production sector could be expanding with these numbers that show the supply chain needs more replenishment. Manufacturers could get an additional boost in 2011 from a government program that speeds up tax depreciation for equipment purchases, an incentive integrated in an $858 billion tax cut bill passed in December.
Issues that might arise
As production activity accelerated in Feb., hiring in the sector did also. The highest rate for the ISM employment index was hit since January 1973 with the index going from 61.7 to 64.5. However, inflationary pressures loom as a threat. When a rise in the ISM index from 81.5 to 82, several are concerned that customers already having trouble with higher gas prices will have to start dealing with rising prices on commodity and energy. Continued gains in manufacturing may face a headwind because of weakening customer spending, which rose 0.2 percent in January, the slowest rate since June and only half the growth economists were expecting.
Articles cited
Bloomberg
bloomberg.com/news/2011-03-01/ism-index-of-manufacturing-in-u-s-rose-to-61-4-in-february.html
Wall Street Journal
online.wsj.com/article/SB10001424052748704506004576174273942074528.html?mod=googlenews_wsj
CNN Money
money.cnn.com/2011/03/01/news/economy/ism/index.htm