By Ken Christensen
In response to improvements in overall job growth and consumer spending, factories continued to recover last month from their severe hit during the recession.
The U.S. manufacturing sector reported faster expansion in March than in February, according to a monthly survey by the Institute for Supply Management. Any reading above 50 indicates expansion, and the most recent index number jumped to 53.4 from 52.4, which reflects increased demand throughout the economy.
Manufacturers’ most significant gains were in production, which rose to 58.3 from 55.3, and factory employment, which also bumped up three points, to 56.1. That rate of hiring was manufacturing’s best showing since June.
“It’s heartening that the employment component was so high,” said Bill Cheney, chief economist for John Hancock Financial. “Job growth feeds on itself.”
Factories benefitted from increases in consumer spending in January and February. Auto sales reached a four-year high in February and are expected to post strong numbers in March. As U.S. consumers traded their old vehicles for new and fuel-efficient ones, the auto industry had positive effects on steel, rubber, and plastics-producing factories.
“Its tentacles ripple through a lot of other sectors,” Cheney said.
February’s increase in orders for core durable goods—anything from major machinery and equipment to computers and furniture—also reflected well on the manufacturing sector and economy as a whole. Purchases of these long-lasting goods are seen as investments.
Factories bought more supplies in March as they anticipated rising demand for such goods in the near future. The expansion rate for new orders only slowed negligibly.
“That would signal increased production in the months ahead,” said Jay Bryson, global economist for Wells Fargo.
Demand from Europe has been weak and China’s economy may be stagnating. As a result, export orders experienced the biggest slowdown in rate of growth. Still, they expanded significantly, so the notable drop was a “footnote,” Cheney said.
The value of the U.S. dollar is relatively low, and the exchange rate has made U.S. manufacturers competitive internationally. Also, exports to Europe make up a small proportion of U.S. economic activity. And while China is the third largest buyer of U.S. goods, its disputed slowdown would mean less demand for certain exports but lower pressure on global commodity prices, including oil.
“It’s probably kind of a toss-up,” he said. “Unless they collapse in flames.”
Manufacturers continued to pay high prices for energy and raw materials last month. If anything, the input costs will affect profit margins before inflating consumer prices, Bryson said.
Passing along those prices to customers could be detrimental to the demand that is responsible for increased production and hiring. If gas prices continue to rise, consumer spending may dampen a bit, too, which would also hurt factories.
“A lot of it is still just the general recovery from the recession,” said Scott Brown, chief economist for Raymond James Financial.
As the nation climbs back to its pre-recession levels, gains in manufacturing will be expected to slow.
“Manufacturing’s not going to be the driver if you’re expecting to get all three million jobs back,” Bryson said.