A Fragile Manufacturing Recovery

Scott Anderson
Chief Economist

With the onset of the pandemic, the manufacturing and service sectors were both hit incredibly hard.

According to the Federal Reserve, U.S. manufacturing production declined at a 47% annualized rate in the second quarter, while the latest GDP report revealed an unprecedented 43.1% annualized decline in real consumer spending on consumer services in the second quarter.

But a look at the ISM Manufacturing and Non-manufacturing indexes quickly reveals that the manufacturing sector expansion was already struggling last year with the index falling into contraction in August and staying there through December as the U.S.-China trade dispute raged.

While the headline ISM Manufacturing index has moved firmly back into expansion territory this summer, the ISM Manufacturing Employment index remains firmly in contraction territory, indicating a lack of confidence in the sustainability of the reopening rebound in demand, and continuing supply chain and production cost issues from virus outbreaks around the globe. The fate of the U.S. manufacturing sector recovery is just as dependent on the course of the virus as it is for the many services businesses that rely on the U.S. consumer for their sales.

But, of course, not all manufacturers are created equal. Industry leaders can do well compared to their peers even in the most adverse economic conditions. Just as not all consumer driven businesses have suffered from the pandemic there have been pockets of production resilience and vulnerability across manufacturing sectors as well.

The largest declines in production since February have occurred in the primary metals (-19.5%), printing (-17.4%), petroleum and coal products (-14.1%) and textiles (-12.4%) sectors, while the smallest production declines have been in chemicals (-2.8%), food and beverage (-3.1%) and wood products (-4.4%) industries.

The one industry that has managed to increase its manufacturing production above its February level is computers and electronic products (+1.1%). Working from home and widespread distance learning has created at least a temporary bump in demand for computers and electronics as households and office utilizing businesses need to purchase new equipment or upgrade existing equipment for the home and for their students this fall.

The Industrial Production Outlook

There is little doubt we will see a strong rebound in U.S. manufacturing and industrial production growth in the third quarter. Our current forecast is that industrial production will increase at 34.0% annualized in the third quarter. But we also expect a sharp moderation of industrial production growth starting in the fourth quarter to just 2.5% annualized.

Durable goods orders jumped 15.0% in May as manufacturing restarted, but by August, durable goods orders growth had already slipped to 0.4%. This is unfortunate, since even with the manufacturing restart this summer, durable goods orders remain 4.6% below year ago levels. A pause in the growth cycle now, could kill the expansion entirely.

The lack of a new fiscal rescue package from Congress before the election, or possibly this year, is a real threat to the manufacturing recovery too. Capacity utilization in most manufacturing sectors remains very depressed by historical averages, threatening future manufacturing profits and increasing the vulnerability for more downsizing and cost cutting ahead. In other words, a lot more economic healing still needs to happen to get U.S. production back on a firmer and sustainable expansion path.

To learn more, check out this week’s U.S. Outlook Report.

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California Economic Outlook – September 2020

Scott Anderson
Chief Economist

Economic growth has resumed and net job loss has ended in California after a sharp and unprecedented decline in March and April. But despite three consecutive months of solid increases in economic activity and jobs, the state has regained less than one-third (31.1%) of the over 2.6 million jobs lost in March and April.

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The Significant Other: Why Overlooking Women’s Economic Impact is Bad Business

Scott Anderson
Chief Economist

In August, the Business Roundtable said it was redefining the purpose of U.S. companies. The manifesto signed by 181 CEOs declared that corporations should do more than line shareholders’ pockets: they should also invest in their employees and protect the environment.
The statement was admirable and lofty, and as part of a company with best-in-class environmental policies, I was pleased with that news. That said, there’s a critical piece of sustainability missing from that charter.

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Risk & Reward: 5 California Industries Being Reshaped by Climate Change

Scott Anderson
Chief Economist

Californians are feeling the effects of climate change: wildfires, record heat waves, and even atmospheric rivers have begun to wreaked havoc on the Golden State.

It’s increasingly clear that certain sectors of the world’s fifth largest economy are emerging as ground zero for the costs of climate change – and the potential costs are staggering.

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Small business and fast financing options: Pros and cons

Newsroom
Posted by Newsroom
Corporate News

What’s the hardest part about growing a business? Ask a roomful of small business owners and you’ll get a variety of answers, most likely including: recruiting and retaining employees, building company culture, outmaneuvering competitors. But you’ll also probably hear about financing.

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