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Accelerating Manufacturing Shows Economy’s Resiliency

Accelerating Manufacturing Shows Economy’s Resiliency

September 02, 2021
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The Institute for Supply Management’s reading on U.S. manufacturing surprisingly accelerated in August, coming in at 59.9 versus July’s 59.5 and economists’ consensus expectation of 58.5. The solid reading does show the resiliency of the U.S. economy despite several challenges, but there are still several forces in play that are likely to weigh on manufacturing in the coming months, including the impact of the Delta variant, weakening manufacturing data from China, on-going (but slowly improving) supply chain disruptions, and the aftereffects of Hurricane Ida. Even if the rate of growth does slow down, we do still expect U.S. manufacturing activity to continue to expand overall.

“The manufacturing numbers indicate the U.S. economy is still well on the mend despite several challenges,” said LPL Financial Chief Market Strategist Ryan Detrick. “Economic data has started to disappoint relative to expectations, but we need to differentiate a slower but still solid recovery from a stall—the absolute numbers have still looked pretty good overall.”

As shown in the LPL Chart of the Day, the sub-index of new orders, an important leading economic indicator, help push the broad index higher, rising 1.8 points and approaching its best reading of the recovery. A reading on customer inventories remain low and could be a source of on-going demand as supply chains continue to improve.

View enlarged chart.

A sharp decline in the reading on employment was the report’s main disappointment. The employment index fell 3.9 points to 49.0, entering contraction territory and its lowest reading since November 2020. Supply chain disruptions are also still readily apparent, although they are no longer intensifying. Nevertheless, they continue to weigh on growth. Delivery times and prices paid both dipped and order backlogs rose slightly, but all measures remain uncomfortably high.

The attention paid to the report will quickly fade after tomorrow’s job numbers come out, but it will still be an important part of the overall economic picture. Growth forecasts are coming down but the outlook is still robust. The Bloomberg-surveyed economists’ consensus forecast for 2021 real economic growth has been declining and now sits at 6.2% after peaking at 6.6% earlier in the year. That’s been partially offset by a small uptick in 2022 expectations to 4.3%. The decline in 2021 growth expectations is a certainly a modest negative for markets, but the U.S. hasn’t seen two year of growth totaling over 10% since the mid-80s.There’s still plenty of fuel for economic growth as COVID-19 continues to come under control and supply chains slowly correct, and that remains a supportive overall economic backdrop for markets.

 

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