The Big Picture Report on U.S. Manufacturing Conditions (August 2020)

U.S. manufacturing business conditions continued to improve in July, with key reports out this month pointing toward a slow but steady recovery.

Although U.S. industrial production and employment are still below pre-pandemic levels, the sector appears to be on the mend.

At MNI, our search and intent data shows increased search volume over last year for U.S. parts, products and services on our industrial marketplace IndustryNet, suggesting more domestic manufacturers are looking to source or dual source stateside following the pandemic’s disruption to supply chains.

Today, we’re going to dive into some of these key economic reports as they relate to manufacturing to bring you the big picture overview of business conditions at present.

Manufacturing Output Continues to Trend Up

During the height of the pandemic, industrial production hit its lowest level ever recorded by the Federal Reserve. This lasted until May 2020, when industrial production began its slow ascent back.

July’s industrial production report, out in mid-August, found total industrial production edged up another 3% after increasing 5.4% in June.

Before breaking out the champagne, keep in mind that that output is 8.4 percent below pre-pandemic levels.

The Fed’s Industrial Production and Capacity Utilization report is a composite index that includes manufacturing, mining and utilities. Taken alone, manufacturing output increased 3.4% in July after surging 7.2% in June.

Auto Sector Winner in Pandemic Output Recovery, but Year-Over-Year Tells a Different Story

Taking a closer look at the Fed’s industrial data by subsector, manufacturing output gains were once again led by motor vehicles and parts production, which have led gains since the beginning of the recovery.

Output in that sector rose 28% over the past month. Despite this robust month-over-month increase, however, output in the motor vehicle and parts sector actually decreased 1.4% compared to this time last year.

With few exceptions, all other industrial subsector posted an increase month-over-month in production. Notable industries reporting increases included aerospace and miscellaneous transportation equipment (+7.5%); petroleum and coal products (+5%) and textile and product mills (+3.4%).

Again, a look at the year-over-year scenario tells us a different story, with half of these industries reporting double-digit decreases over the last twelve months.

Losses here were led by primary metals, down 25% over this time last year, followed by aerospace (-20.5%); printing & support activities (-16.3%); apparel and leather (-14.9%); and petroleum/coal products (-14.2%).

And did any sector actually post a gain year-over-year?

The answer is yes. One sector, namely the computer and electronic products sector actually posted a gain of 2.4% over July of 2019.

Remarkably, all other sectors posted losses.

This comes as little surprise as the U.S manufacturing sector was already beginning to show signs of a slowdown back in the summer of 2019.

Manufacturing Hiring Stuck in Neutral

Hiring in the U.S. industrial sector slowed significantly in July. In June we saw the sector add 356,000 manufacturing jobs, after increasing by 225,000 in May.

In July, the sector appeared to take a pause, adding just 26,000 jobs and overshadowed by the economy overall, which added 1.8 million jobs.

The U.S. manufacturing sector has a long road back in terms of jobs, 700,000 in fact, in order to return to pre-pandemic levels.

Like output, gains in hiring were led by the auto sector. Motor vehicles and parts added 39,000 jobs, while transportation equipment added 33,000 jobs. Food processing also added jobs, with 7,300 hires made.

Fabricated metal products fared the worse in July’s manufacturing job report, shedding 11,400 positions. Machinery lost 4,500 and textile mills lost 3,100.

July’s Labor report was in keeping with some of the comments provided in the ISM’s manufacturing activity report, with many companies planning layoffs and the employment index itself mired in contraction.

We’ll take a look at that next.

Manufacturing Activity Expands for a Second Month

After a historic expansion reported in June, the ISM’s report on U.S manufacturing activity showed continued expansion in the sector for July.

The ISM reported that the sector has expanded for a second straight month, with new orders and production leading the increase in activity.

Most notably, new orders climbed 5.1% to a level of 61.5% and production rose 4.8% to a level of 62.1%.

Employment, however, remained at a contractionary level of 44.3% in July (anything less than 50% represents contraction).

The ISM reported continued optimism amongst executives responding to the survey, though employment did seem to be one area of challenge.

“Overall business remains down almost 70%,” said one respondent in the transportation equipment sector. “We are hanging on to as many employees as possible, but we will have to lay off 30% or more for at least two or three months until September or October.”

New York Fed Survey Inches Up

The must-watched Empire State Manufacturing Survey, released by the Federal Reserve, found that conditions for manufacturers expanded in August, but at a slower rate than last month.

The Fed’s manufacturing index slid 14 points to a reading of 3.7. A reading under zero indicates contraction in the sector. The reading shot into expansion territory just last month after hovering below zero for several months.

In July, optimism among manufacturing executives increased for the first time in many months, with the Fed’s optimism index rising to 38.4.

In August, that index fell four points, with executives still optimistic about future business conditions, but slightly less so than in July.

Industrial Solutions for Changing Times

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