US manufacturing gained in July, but future growth depends on new orders
Monday, August 22, 2016
Manufacturing continues to expand, but a lack of business spending may be a cause for concern going forward, some economists say.
Manufacturing expanded for the fifth month in a row in July, while the economy as a whole grew for the 86th consecutive month. That's according to the Institute for Supply Management's July 2016 Manufacturing Report on Business.
Most of the indicators in the report showed little month-over-month growth or decline. Of note is the Prices Index at 55 percent, which showed the cost of raw materials is continuing to increase. Additionally, nine of 19 industries reported an increase in production in July, after 12 industries reported production increases in June. The employment index also decreased for the seventh time in eight months to 49.4.
"We're pretty much where we were last month, and we're on a pretty positive trend over the last five to seven months," said Bradley Holcomb, chairman of the ISM's factory survey.
In a Bloomberg survey of economists, estimates for the manufacturing index ranged from 51.1 to 54. Textiles, wood products, chemical products, furniture and seven other sectors reported overall growth in July.
"Over the near term, I think it's just going to be plodding along, slow growth," Josh Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York told Bloomberg. "It's not like we’ve been getting wonderful economic news from around the world."
Even though the overall news is good for manufacturing, some economists say businesses must increase orders for manufacturing to remain strong and see any additional growth.
"Much of manufacturing's recent improvement has come from new orders, which have risen for six straight months. Yet it will be tough for this to continue if U.S. corporations remain so hesitant to spend heavily on equipment, new technology and facilities," writes Steven Russolillo in The Wall Street Journal.
In fact, the U.S. economy as a whole has essentially hit the pause button. While consumer spending continues to be strong, businesses aren't spending on capital investments, and that could mean trouble for the manufacturing sector.
"The decline in equipment spending is particularly troubling as in comes in the wake of a 9.5 percent contraction in the first quarter and represents the fourth pullback over the last five quarters," Gregory Daco, the head of U.S. macroeconomics at Oxford Economics, told The Wall Street Journal.
Daco said the ongoing "headwinds" that have a pervasive effect on business's spending decisions won't let up any time soon. "The outlook for business investment is rather grim," he said.
Daco's sentiment was echoed by Stephen Stanley, the chief economist at Amherst Pierpont Securities.
"Given the likelihood of a cautious stance by businesses in advance of the election, I look for equipment outlays to continue to fall in the second half of the year," he said.
Business spending on equipment and capital investments represents a vital cog in the economic wheel. Many economists say business spending creates demand for new products, which in turn promotes spending followed by corporate profit. More profits usually means more wages, which increases consumer spending.
Historically, when business spending flat lines or drops below zero, a recession usually follows, according to The Wall Street Journal.
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