American Manufacturing Is Alive and Well

Posted at: Dec 3


In October, the Institute for Supply Management’s index of manufacturing activity rose to match its three-year high. Work at a Tesla Motor Inc. plant in California.

For the U.S. economy, manufacturing still matters. That is something that can be lost amid the influx of imports on store shelves and steady erosion of factory jobs. With only 10% of private-sector workers employed by manufacturers, versus 25% in 1980, it seems like the sector wouldn’t provide much oomph. Yet that ignores other workers, from truck drivers to forklift operators, who aren’t employed in manufacturing but still depend on it.

One measure that gives a sense of manufacturing’s salience: The final sales of U.S.-made goods—what things produced in the country ultimately fetch—account for about one-third of gross domestic product. Moreover, it is the goods sectors (which also includes areas like mining) that tend to provide most of the fuel to changes in GDP, driving it up in good times and down in bad. 

So it is good news U.S. manufacturers appear to be doing well. In October, the Institute for Supply Management’s index of manufacturing activity rose to 59 from 56.6 in September. That matched its three-year high, and put it well above 50, the dividing line between expansion and contraction.

That is a rarefied level for the index. So when the ISM releases November figures Monday, it wouldn’t be surprising to see the index slip. But it may not slip by much. While a preliminary reading from financial-information provider Markit showed the pace of manufacturing gains easing last month, regional measures from the Federal Reserve Banks of New York and Philadelphia showed activity picking up. Economists polled by Dow Jones Newswires estimate the index at 58 in November.

Indeed, the backdrop for manufacturing looks like it will be good for a while. Although the stronger dollar hurts, making products less competitive globally, costs will come down thanks to oil’s sharp decline. And while the advantage conferred by inexpensive natural gas may narrow due to oil’s fall, it will still bolster the economics of producing goods in the U.S.

More important, the pickup in factory activity may reflect an economy that has entered a healthier stage, with increased hiring encouraging consumers to spend more, better spending encouraging companies to step up production and stronger production necessitating yet more hiring. The U.S. economy may be on its way to manufacturing a very nice 2015.