Friday, August 5th, 2011

Manufacturing ≠ Jobs, and its Status is Unclear

A recovery in U.S. manufacturing is of course a good thing, but the way it often is linked with the U.S. lack-of-jobs problem can create unrealistic expectations. We in manufacturing know that the biggest share of our recent efficiency and productivity gains comes from using advanced technology, not from hiring more people.

Fortunately, others outside manufacturing are beginning to see the light. The subject was in play at the recent Rocky Mountain Economic Summit in Jackson Hole, WY, whose speakers included the presidents of the Federal Reserve Banks of St. Louis and Atlanta, among many others. Dow Jones reported this from the conference:

“The outlook for manufacturing is bright, but don’t look for the sector to help with employment much because computer-driven productivity factors are steadily reducing the role people play in increasing output. That’s the word from economic advisers to the Chicago and St. Louis Fed banks …”

While it’s great that the facts are getting out, that part about a bright outlook for manufacturing should be taken with a grain or two of salt. On August 1, 2011 the Institute for Supply Management said its index of manufacturing activity fell to 50.9% in July, down from 55.3% percent in June and the lowest level since July 2009, the month after the recession officially ended. ISM’s New Orders Index, a component of its manufacturing activity index, dropped to 49.2%, the first time it has been below 50% since June 2009.

A level of 50% or more indicates growth, so although ISM said manufacturing was still positive, its report quickly depressed stock markets that had been trading higher on the expectation of Congress raising the nation’s borrowing limit, thus defusing the default crisis. Of course that was nothing compared to the financial markets’ really bad day that would come on August 4th.

For perspective, the ISM index stayed above 60% for the first four months of 2011. Its 57.9% average from January through June corresponds to a 5.3% increase in real domestic GDP, according to ISM calculations. July’s 50.9% equates to a 2.9% increase, a substantial difference but still better than the first half of 2011

So here we stand, in one ear hearing the voices that say manufacturing’s future is bright, while in the other ear hearing the flapping of caution flags. What’s a manufacturer to do? Stay focused like a laser, as usual.

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