More good signs for manufacturing

December 3, 2009
By: Eric Lundin

The mood in manufacturing seemed to shift sometime during the summer. Granted, it couldn't have gotten much worse from the spring, but at least the dark mood didn't last any longer than it did.

The PMI, an index compiled by the Institute for Supply Management, broke through 50 percent in August. It was a huge relief. It had been below 50, indicating decreasing manufacturing activity, for nearly 18 months. Capacity utilization among steelmakers also was on the way up in August (from a ridiculously low 44 percent in May), as was capacity utilization among fabricators, which had hit bottom at 62.1 percent in June.

This isn't to say that all the indicators are going in the same direction. But on balance, it looks like the economy is strengthening and manufacturing is getting healthier by the day.
The economy as a whole is doing better now than it has in more than a year. According to the Bureau of Economic Analysis, gross domestic product (GDP) was shaky in early 2008 and shrinking during the third quarter, when it fell by nearly 3 percent. It continued to contract for three more quarters and finally started growing again in the third quarter of 2009. Data culled from the American Bankruptcy Institute reveals that business bankruptcies peaked during the second quarter of 2009 at 16,014 and fell during the third to 15,177.

The uptick in GDP seems to be driven by two trends. First, consumers are spending a bit more on durable goods. When times are good, consumers spend about $3.5 trillion per year on durables; when the economy was at its worst earlier this year, it was down to the equivalent of $3.2 trillion per year. This doesn't seem like a big difference, but it is a decline of more than 8 percent. Durable goods expenditures are climbing again, although slowly.

Second, although it's a grim situation, more than 88,000 businesses have gone under since the start of 2008; those that managed to survive the downturn are busier than they otherwise would be because many of their competitors are gone.

Back to consumers. What's driving them to spend? First, probably pent-up demand. Many cut back on spending for months, and now they're opening their wallets again. Second, quite a few are purchasing homes. According to the National Association of Realtors® (NAR), existing-home sales increased 10.1 percent in October. This sort of thing trickles through the economy because purchasing a home, even an existing one, leads to further spending on furniture, appliances, and so on.

Will home-buying activity continue? Probably. NAR's Pending Home Sales Index, which is based on contracts to buy homes, increased 3.7 percent in October. Also, the two federal programs to provide a tax credit to homebuyers are likely to help support home sales well into 2010.

The mood among consumers is driven largely by the news, especially the reported unemployment rate. Although the unemployment rate continues to climb, the worst of that seems to be over. According to the Department of Labor, the number of claims for unemployment insurance is still growing, but slowly. It tallied an average of 345,250 claims from 2004 to 2008; during the last week of November it was 457,000 claims, down from a peak of 674,000 eight months earlier.

Downsides? Yes, two big ones remain. Personal bankruptcies continue to rise (373,000 in the third quarter), as do home foreclosures, which hit an all-time high (937,840) in the third quarter of 2009.
Eric Lundin

Eric Lundin

FMA Communications Inc.
2135 Point Blvd
Elgin, IL 60123
Phone: 815-227-8262