The biggest problem for the U.S. manufacturing economy remains a lack of strong growth, but question marks surrounding policy changes stemming from a new administration in Washington are giving many hope for improvement as 2016 comes to a close. Although most economists say they expect modest growth in U.S. manufacturing next year, they also point to the potential for political changes to affect the manufacturing supply channel—and they note that the waiting game continues for a return to pre-recession manufacturing levels.
“The potential for [policy changes] to affect manufacturing growth is considerable,” says economist Cliff Waldman, referring to what’s ahead for the manufacturing economy in a Donald Trump administration, following the Republican’s victory in November.
Waldman is director of economic studies for the MAPI Foundation, the research arm of the Manufacturers’ Alliance for Productivity and Innovation. He points to a weak global economic picture, elevated dollar, weakness in the energy sector, “bottoming” commodity prices, and longstanding weakness in capital spending as some of the biggest hurdles still facing the manufacturing supply channel.
“[Those issues] have conspired to keep manufacturing around the zero line,” he says. “What’s really remarkable is that we still haven’t reached the [manufacturing] peak of 2007.”
But better times may be on the way. The potential for policy change is leaving many industry-watchers hopeful for accelerating growth in the United States over the next two years in particular, due largely to an expected easing of fiscal policy and to campaign promises of increased infrastructure spending. In a late November global economic outlook, the Organization for Economic Co-operation and Development (OECD) said it expects the U.S. economy to grow by 2.3% in 2017 and 3% in 2018—outpacing other major advanced economies, including the euro zone and Japan, where it predicts growth will remain below 2% and hover around the 1% mark, respectively, over the next two years.
The OECD also called for well-targeted public spending programs that may boost economic activity in the private sector and “help get the global economy out of the low-growth trap.” The OECD predicts global economic growth of 3.3% in 2017 and 3.6% in 2018.
The group underscored its call for “well-targeted” public spending.
“This is not a blank cheque for governments,” said OECD Secretary-General Angel Gurría, announcing the November global outlook report. “The OECD is calling for fiscal policy to be used more wisely, with spending targeted at areas that boost growth, like high-quality infrastructure investment, innovation, education and skills, which also make growth more inclusive.”
Buyers Also Upbeat
Economists from the National Association of Manufacturers expressed optimism in late November as well, pointing to several recent signs of progress on the industry horizon.
“For instance, the J.P. Morgan Global Manufacturing PMI increased from 51.0 in September to 52.0 in October, its highest level since October 2014, with strong accelerations in both new orders and output,” NAM Chief Economist Chad Moutray wrote in the group’s November Global Manufacturing Economic Update. “In addition, 11 of the top 15 markets for U.S.-manufactured goods had growing manufacturing sectors in October, up from seven in August and nine in September. As such, trends are moving in the right direction.”
The Institute for Supply Management’s November Report on Business echoed those results, showing growth in the manufacturing economy for the third straight month. The November Purchasing Managers Index (PMI) registered 53.2, a 1.3% increase compared with the October reading. The PMI has remained above the 50-point mark indicting expansion for eight of the last 12 months.
The new orders, production, and employment indices all grew in November as well, while the inventories and backlog of orders indices contracted during the month. Purchasing and supply managers surveyed during the month expressed plans to reduce inventories by the end of the year, reflecting an inventory correction economists have cited for the past few months. Many managers also said demand is increasing and cited tightness in the labor market as another key factor heading into 2017.
“Really, the issue with manufacturing is growth,” adds Waldman, emphasizing that much of the growth potential hinges on what changes are made in the early days of the new administration. “That’s the 10 trillion dollar question.”