Silver linings around the manufacturing sector?
The Southeast manufacturing Purchasing Managers Index (PMI) for August signaled that counting out the region's manufacturing sector might just be premature. The index jumped 4.1 points over the month to reach 57.8 points, a much higher level than the national Institute for Supply Management (ISM) manufacturing survey for August, which has been hovering right at the 50-point benchmark for the last two months. (A level higher than 50 points indicates growth.) The very next day, the Atlanta Journal-Constitution ran a cautiously optimistic piece that said conditions had improved notably for some Southeast manufacturers over the month of August:
" 'Manufacturing seems to be headed in the right direction,' said Don Sabbarese, professor of economics and director of the Econometric Center [at Kennesaw State University], 'but it will take time to discern whether manufacturing will return to its higher second quarter trend or remain at its current slower pace.'
"He added that, 'Gains in the last month may signal that the big declines in June and July may not have been a trend, but a soft spot for manufacturing.' "
While data from the Southeast and national PMI surveys may disagree for the month of August, the Southeast PMI data may have been a bellwether of other manufacturing data that are now showing some silver linings for the sector. For example, take a look at the Federal Reserve Board's index of industrial production and capacity utilization released September 15: for the months of April through June, capacity utilization remained absolutely flat, possibly reflecting the temporary slump Sabbarese hinted at in the Journal-Constitution. (Remember, the tsunami struck Japan in March, but most economic data began reflecting its full effects in April.) However, for the months of July and August, capacity utilization edged up 0.3 percentage points both months, more consistent with a "slow growth" narrative than one of the sector losing steam entirely. Likewise, industrial production for manufacturers was stagnant for May and June but has increased 0.6 and 0.5 percentage points for July and August, respectively. Also just released, the New York Fed's regional Empire State Manufacturing Survey suggested improved future general business conditions for September.
What was behind this temporary summer slump, if indeed it is not a longer-term trend? Most analysts would agree the effects from the tsunami in Japan earlier this year are almost entirely phased out throughout the supply chain now, but its waning took a few months. While the data were already sagging, fiscal policy uncertainty grew and stock market volatility increased, weighing on broad economic activity that was likely reflected in manufacturing measures. Perhaps as temperatures across the South begin to cool this fall, the manufacturing sector will start heating back up.
By Mark Carter, an analyst in the Atlanta Fed's research department
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