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The U.S. and much of the world's manufacturing base has maintained its growth this last month with many growing at a faster rate-- like the U.S. Out of the list, only Greece and Australia are contracting. Last month, Japan changed from contracting to expanding with the index jumping 3.1 to 51.4%. The top two with fastest growing manufacturing sectors was the U.K. and the U.S. with 62 and 60.8% respectively. David Smith noted that the U.K. services sector is also turning around and should signify economic growth continuing, although on a low basis.

Manufacturing

Most of the consensus data seemed to indicate that the indexes would maintain approximately last month's pace. But in fact, it far exceeded it. Both indexes jumped a solid 2.3% with non-manufacturing rising to 59.4% and manufacturing to 60.8%. This was the highest level since May 2004 or nearly seven years. The non-manufacturing consensus from Econoday was 57% with an extremely wide consensus range of 53.4 to 63.5%. From MarketWatch it was 57.3%. In another article, Econoday reported a consensus of 57.5% with a consensus range of 56.5 to 59.5%. The ISM had revised its last month's data (seasonal adjustment according to non-manufacturing report) from 57 to 58.5% which is one reason that MarketWatch took the revised numbers to come up with a consensus of 58.5%.

Either way, it still far exceeded expectations and is the reason why many have given the reports glowing praise. Business activity/Production increased .5 to 63.5% for manufacturing and 1.7 to 64.6% for non-manufacturing. Not only is the heart of the economy in production, but going forward the indexes showed strength in new orders with non-manufacturing growing a solid 3.5 to 64.9% and manufacturing having an outstanding 5.8 increase to 67.8%. Also looking forward were the manufacturing sectors, which showed strength in new export orders with a huge jump of 7.5 to 62%. Most trade is on the manufacturing sectors, so the drop in the services sectors new exports of 2.5 to 53.5% is not as significant. The import index for manufacturing rose 4.5 to 55%.

Imports/exports

As I have stated before, it is important that the export sectors grow, as this provides an autonomous increase in absorption for the economy that increases aggregate income. But the import index and export index are not necessarily correlated to total import and export aggregates. Most importantly, imports are the inputs to the production process and exports are the end process in production. Robert Oak provides a good analysis of the ISM manufacturing report at Manufacturing ISM for January 2011 - 60.8% where he states:

Exports & imports increased, exports up 7.5 percentage points, and imports 4.5. That's always good news when exports exceed imports, especially since the deceleration of imports was the reason we had reasonable Q4 GDP growth.

This portion I disagree with because the increase in percentage points is rate of change, not absolute levels; the indexes ended up at 62% for new export orders and 55 for imports. Thus, even if the difference in rates of growth were different, new export orders would have probably maintained a percentage lead. And secondly, imports and exports for the GDP is merely accounting for the GDP and are not the true strength of the economy.

Because of structural rigidity showing up in higher and rising prices for commodities, this is no time to be worrying about imports to the productive sectors of the economy. It is nice to think that some of the shortages are solved by import substitution. In reality, that is not likely to happen over the short term due to legal and economic structural rigidity. We should instead be embracing these imports as much as we embrace worker productivity.

Employment: More of the old structural rigidity

Most importantly in the so-called Great Recession, we are concerned about employment. The employment index for manufacturing continued its nice ascent to above 60 to 61.7%, with an increase of 2.8%. Econoday notes that this is the first 'plus 60' for employment in 7 years. Although the index did not increase as much for non-manufacturing employment, it did show an acceptable level of increase with a rise of 1.9 to 54.5%. Maybe this will signify a breakout of the stagnant labor market that trended around the break even point of 50. But with employers adding only 36,000 jobs last month the U.S. will need a lot more strength in employment markets to get back to full employment.

The manufacturing price index jumped up a massive 9 percentage points to a rating of 81.5%. That is the highest the reading has been since July 2008. Even more striking is that the percentage of firms reporting higher prices is 64% to just 1% reporting lower prices. While not as dramatic, non-manufacturing price index rose significantly at 2.6 to 72.1%. The December index was reported as 70 but was later seasonally adjusted down to 69.5%.

These data points have again re-emphasized the fact that manufacturing continues to face the higher prices of commodities. Multiple months of rising prices had 16 commodities higher. This was marginally higher than the 15 last month, but total commodities rising in prices rose to 30 from 23. Non-manufacturing also showed increased total number of commodities to 28 from 23 and even more significantly were 14 commodities with multiple months, up from 7 last month. A couple of respondents in the manufacturing report stated the following about rising costs.

* "Continued weakness in the dollar is having a negative effect on the components we purchase overseas and increasing our material costs." (Transportation Equipment)


* "Lead times are increasing significantly, and commodity pricing is starting to increase." (Chemical Products)

Manufacturing continues to roll right along. But surprisingly, many politicians and even some economists think that the U.S. has lost its edge in manufacturing to China. For example, Don Boudreaux made a post entitled On Fletcher and the False Assumption of U.S. Manufacturing Decline, where he takes to task Ian Fletcher's remarks regarding manufacturing output in the U.S. Although, I am not so certain that it is unusual that democratic socialists like Harold Meyerson and Bernie Sanders would be anything other than anti-trade and clinging to the height of industrialization that led to the expansion of unions.

Mark J. Perry states that The Demise of America’s Manufacturing Sector Has Been Greatly Exaggerated and that it was the Increased Worker Productivity {that} Has Destroyed Millions of Jobs and ultimately We Should Take More Pride in Our Manufacturing Dominance. I include two of the most important graphs that he uses to explain the reason not to fear the "post-industrial" economy. The first graph is manufacturing output for the top eight producers. (Click on graphs for clearer images.)


The next graph shows the percentage of workers engaged in farming out of the total number of workers. This happened over many generations, and many groups and individuals resisted this trend. However, for us to become the developed nation we have become, it was necessary for these structural changes to have transpired. Even in the 1980s, there was weeping and gnashing of teeth with the decline in family farms. The regional credit crisis created some of the impetus for the changing economy.


Disclosure: No stocks mentioned

Source: Parsing Out January's ISM Report: What Decline in Manufacturing?