Tuesday, September 23, 2014
Inquirer Daily News

Manufacturing still strong, fueling hope of growth

Economics in a nutshell: Manufacturing activity continues to be strong and raising expectations that growth could accelerate.

Manufacturing still strong, fueling hope of growth

FILE - In this Thursday, Oct. 10, 2013, file photo, employees at Sheffield Platers Inc. work on the factory floor in San Diego. The Institute for Supply Management issues its U.S. manufacturing index for December on Thursday, Jan. 2, 2014 (AP Photo/Lenny Ignelzi, File)
FILE - In this Thursday, Oct. 10, 2013, file photo, employees at Sheffield Platers Inc. work on the factory floor in San Diego. The Institute for Supply Management issues its U.S. manufacturing index for December on Thursday, Jan. 2, 2014 (AP Photo/Lenny Ignelzi, File)

INDICATOR: December Supply Managers' Index and Weekly Jobless Claims

KEY DATA: ISM (Manufacturing): down 0.3 point; Orders: up 0.6 point; Employment: up 0.4 point/Jobless Claims: 339,000 (down 2,000)

IN A NUTSHELL: "Manufacturing activity continues to be strong and raising expectations that growth could accelerate."

WHAT IT MEANS: I hope everyone had a Happy New Year. It appears manufacturers had a good one. The Institute for Supply Management weighed in with the first key number of the year and it was pretty decent. Yes, manufacturing activity did moderate a touch, but that came on top of a surge in November. The sector consolidated its gains as new orders rose. Export demand was off sharply, but it is unclear why. The rest of the world doesn't seem to be falling apart. Output eased just a touch but firms still needed more workers to get the goods produced. Backlogs built more slowly, but order books still continued to fill up. All this occurred with cost pressures rising just a touch faster. Inflation doesn't look to be an issue at all. A similar report, produced by Markit, indicated that manufacturing output and employment picked up steam even faster in December, adding to the belief that whatever soft spots the manufacturing sector had hit are in the past.

The weekly jobless claims numbers showed a slight decline. When it comes to the unemployment data, down is always good, but the level is still too high. It needs to be in the 300,000 to 325,000 range if we are to see consistently solid job gains. Still, these data are always volatile and when it comes to the end of the year, you have to take them with a all the salt that is being put down to keep the roads from icing in the winter storm.

MARKETS AND FED POLICY IMPLICATIONS: So far, so good. Of course, so far is just one day and a few numbers, but it really is looking like the turn is here. While an unwinding of the huge summer inventory build could cause fourth quarter growth to be less than hoped for, the underlying trends are pointing to the economy accelerating as we move through the year. The ending of extended unemployment benefits, if sustained, will likely restrain growth somewhat. But the negative impacts will not be nearly as large as the tax increases implemented at the beginning of 2013. It also looks like government spending restraints will be much less. So, conditions seem to be coming together for a very good year, but only when wage gains accelerate. Since that may not happen until mid-year or later, don't expect growth to be robust right away. But on this first workday of 2014, it's nice to feel good about the prospects. What that means for the markets, of course, is anyone's guess. After such an outsized rise in equities last year, you have to be cautious about the potential for this year, even if the economy turns out to be better than most currently expect. If growth is as good as I think it will be, we will be talking about rate hikes, not tapering, by the end of the year. That would make everyone at the Fed really happy since the sooner we get back to a normal Fed policy, the better.

About this blog
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm in Bucks County. He advises companies across the country on the risks and opportunities that economic developments may have on the organization’s operating environment. An accomplished public speaker, Joel’s humor and unique ability to make economics understandable have brought him a wide following. Reach Joel at joel@naroffeconomics.com .

Joel Naroff
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