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Manufacturing Boom Continues Despite Trade War Fears

Manufacturing Boom Continues Despite Trade War Fears
(Dollar Photo Club)

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Tuesday, 04 September 2018 01:30 PM Current | Bio | Archive

INDICATOR: August Manufacturing Activity and July Construction Spending

KEY DATA: ISM (Manufacturing): +3.2 points; Orders: +4.9 points: Employment: +2.0 points: Construction: +0.1%; Private: -0.1%

IN A NUTSHELL: “The manufacturing boom goes on.”

WHAT IT MEANS: Manufacturing is on a tear, at least if you believe the Institute for Supply Management. The ISM index of manufacturing activity jumped in August to its highest level in over fourteen years. The rise was drive by a surge in new orders. Only one of the eighteen industries reported demand falling. As a consequence, firms hired more people and expanded production. They are trying to rebuild inventories, but don’t think they are high enough as order backlogs are building. That should lead to further increases in output. If there is a concern, it is on the cost side. The prices paid index, while easing a touch, is extremely high and only one industry reported costs easing. The trade skirmishes don’t seem to be hitting home just yet (except maybe on the cost side) as both imports and exports remain solid.

Construction activity went nowhere in July. The suddenly spendthrift government sector is spending money on just about everything, but the private sector is not. Private residential construction did rise decently, but the nonresidential component was off sharply. Given the merger and activity that has been hyped by the tax cuts, it seems that firms have adapted the philosophy that is better to buy than build.

MARKETS AND FED POLICY IMPLICATIONS: There is one component that is unambiguously strong: Manufacturing. Maybe. I say maybe because other surveys, such as the Markit Manufacturing Index, seem to indicate that growth may have peaked. The Markit index hit a nine-month low in August. Manufacturing may be in great shape but it is not clear if activity will accelerate further. One indicator may be the August vehicle sales. They have been soft and another mediocre month of demand could lead to cut backs in vehicle assemblies and in output in the industries that feed into vehicle production. Still, it is hard to argue that conditions will weaken anytime soon. On the other hand, it would be nice if firms actually did some building. Nonresidential construction has added solidly to growth but that may be ending, or may have already ended. With consumer spending likely slowing from the second quarter surge, businesses need to pick up the slack if growth is to remain robust. That said, the strong ISM number is another reason to assume the FOMC will raise rates again at its next meeting on September 25-26.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.

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JoelNaroff
There is one component that is unambiguously strong: Manufacturing. Maybe. I say maybe because other surveys, such as the Markit Manufacturing Index, seem to indicate that growth may have peaked.
manufacturing, boom, trade, war, fears
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2018-30-04
Tuesday, 04 September 2018 01:30 PM
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