Crucial Insight into the Latest Data on Manufacturing
One of the most frustrating things for economists around the world has been the lack of economic growth and job creation. The real estate bust in America has had a cascading effect on the economy. The real estate crash and many market sectors were interrelated, causing economic growth to not only stall, but also decline significantly, leading to massive layoffs.
While there have been some positive signs that the housing and automotive sectors are starting to rebound, job creation has only been moderate. Economic growth needs to accelerate for a substantial amount of job creation to develop.
Some of the latest data regarding manufacturing certainly are not a positive step toward economic growth or job creation.
The Federal Reserve Bank of New York recently issued its general economic index, which fell to -7.8 in January, down from a revised -7.3 in December. This is the sixth month of contraction in the New York area. Not only was this number set lower than the previous month, but it also missed expectations substantially. Fifty-four economists surveyed by Bloomberg had a median estimate of zero. (Source: Woellert, W., “Manufacturing in New York Region Contracts for Sixth Month,” Bloomberg, January 15, 2013.)
While manufacturing accounts for only 12% of the U.S. economy, it is still a substantial component of economic growth and job creation.
These data were followed by the Federal Reserve Bank of Philadelphia’s January 2013 Business Outlook Survey. The survey of manufacturing conditions declined to -5.8 in January from 4.6 in December. New orders declined to -4.3 from a December reading of 4.9. Labor conditions further deteriorated to an index of -5.2 in January from -0.2 in December. (Source: Business Outlook Survey, Federal Reserve Bank of Philadelphia, January 2013, last accessed January 21, 2013.)
One positive note is that the survey for future conditions improved, as the general activity index for six months in the future increased to 29.2 from 23.7. This represents the second monthly increase in a row. Of the respondents surveyed, 43% expect increasing business activity over the next six months to improve; this far exceeds the 14% that expect a decrease in business activity.
It appears that there are no clear signs that economic growth will be strong over the short term in the manufacturing sector. Job creation will remain sluggish in manufacturing. The question is: can the improving business conditions in housing and the automotive sector make up for the lack of economic activity in other areas of the economy?
Because there are mixed signals regarding economic growth, this leads to a very difficult analysis for 2013. Clearly some sectors are improving while others are still languishing.
Part of the difficulty in analyzing future economic growth is the possibility of political turbulence. Because the survey was taken during the fiscal cliff talks, this perhaps weighed on the minds of business executives.
Both economic growth and job creation are certainly running below optimal levels. On the other hand, they’re definitely not declining. This type of middle-of-the-path trajectory for economic growth is not enough for a massive upswing in job creation.
Having said that, positive moves in asset prices, such as housing stocks, and strong automotive sales could be enough to tip economic growth, moving it substantially above where we currently stand; this would then lead to higher levels of job creation in the second half of 2013. But, we will need to see several months of improving conditions before such a conclusion can be made.