U.S. manufacturers have enjoyed a bit of a renaissance in recent months. But it would be a mistake to think the sector, once the unquestioned lifeblood of the U.S. economy, is staging a return to its post World War II glory days.
Manufacturing expanded faster than anticipated in October, according to data from the Institute for Supply Management, whose bellwether factory index rose to 55.7, the highest since 2006. Meanwhile, the Purchasing Managers Index, a demand indicator, hit 57.7%, also the highest in three years.
It was the third consecutive month that manufacturing activity expanded, a lift driven by escalating demand for new orders.
The revival in manufacturing is naturally seen as good news for the broader U.S. economy as it struggles to recover from the worst recession in decades.No one expects long-shuttered textile factories in New England to start humming again any time soon, however.
Manufacturers have been producing more goods in recent months in order to pick up the slack from earlier this year and late 2008, when demand for goods abruptly disappeared as the global economy teetered on the brink of collapse.
When demand dried up after September 2008, manufacturers found themselves sitting on huge inventories that needed to be reduced. To help cut back on those inventories, companies simply directed their factories to stop making things.
Now, slowly, demand is picking up, and manufacturers need to start building up their inventories again.
The positive numbers are all part of the normal recovery from a recession, said Cliff Waldman, an economist for the Manufacturers Alliance/MAPI, a public policy and economics research organization in Arlington, Va.
“We’re getting a kick from a turn in the inventory cycle,” Waldman explained.
In September 2008, the world economy, already reeling from the collapse of the U.S. housing market, was blind-sided when investment bank Lehman Brothers disappeared into bankruptcy.
That caused “the near failure of the industrialized-country financial network,” said Waldman. “In terms of demand, it was as if somebody turned the lights out,” he said.
Companies were soon sitting on huge stockpiles of inventory. They liquidated those stockpiles by cutting back on production, but now “the pendulum is swinging back the other way,” said Waldman.
Also contributing to the recent ramp up in production has been demand generated by billions of dollars in government stimulus dollars flowing into the economy, and specifically targeted programs such as Cash for Clunkers, which caused a near panic for new cars late last summer.
“All that is normal for a deep recession,” said Waldman.
The question on everyone’s mind, however, is whether the manufacturing growth is "sustainable," which is also the operative word in any discussion on economic recovery.
Robert Dye, senior economist with PNC Financial Services Group, said he’s concerned that manufacturers are “producing into low inventories rather than strong sales.” In other words, factories are “replenishing inventories rather than fulfilling demand.”
Any recovery will lack stamina unless there is strong consumer demand driven by job creation and higher wages. A good sign would be a return of strong auto sales. Ford (F) offered some hope earlier this week, reporting rising sales and an actual third-quarter profit of nearly $1 billion.
Economists will likely remain skeptical of a full-on recovery until there is proof that growth is not being generated primarily by government backed stimulus programs.
“We’re some months away from seeing that. But we’ll take everything good we can get, given where we were a year ago,” said Dye.
As for those New England textile mills, they’re gone for good. So are the rest of the low-skill, low-wage jobs that have moved overseas to developing countries with an abundance of low-skilled workers willing and able to work for low wages.
Waldman suggested that’s not such a bad thing. The U.S. manufacturing landscape has changed in recent decades, he said, not disappeared, altered by advances in technology. “The death of American manufacturing has been greatly exaggerated,” he said.
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