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

Posted by IndustryNet on Wednesday, February 19, 2020

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Between the Phase One trade deal, coronavirus supply chain concerns, and a flurry of new, seemingly contradictory economic reports, U.S. manufacturing has dominated the headlines this month.

Today we’re digging into the latest reports and headlines to bring you the big picture look at the latest U.S. manufacturing conditions this month.

We started out the month of February with the welcome news that U.S. manufacturing activity bounced back into expansion territory at the start of the year.

Shortly thereafter, a report out from the U.S. Labor Department February 5th found that U.S. manufacturing employment dipped by 12,000 jobs in January.

Meanwhile, the U.S. Federal Reserve piped in on Valentine’s Day to let us know that manufacturing output decreased 0.1% in January. And then, just as we were beginning to think things were not as rosy as we thought, the Fed’s closely-watched Empire State Manufacturing Index hit its highest level in nine months.

All sound like contradictory news? At first glance, yes. But a closer look at the numbers reveals a more coherent picture.

Manufacturing Activity Rockets out of Contraction

First off, U.S. manufacturing activity surged in January, rocketing 3.1% from 47.8% to its current level of 50.9%, according to the Institute for Supply Management.

The overall index was helped by a nearly 10% gain in manufacturing production and a 4.4% increase in new orders. This helped break a five-month slump in which U.S. manufacturing activity hovered below the 50% mark.

Manufacturing employment, however, continued to lag in January, with hiring still in contraction at 45.2%.

Manufacturing Labor Slumps

The ISM’s employment index agrees with the U.S. Labor Department’s reported 12,000-job loss in manufacturing for January.

The nation’s manufacturing sector, in fact, was the only industry to report a notable loss in jobs.

However, it should be noted that the overwhelming majority of jobs (roughly 11,000) were lost in one sector: motor vehicles and parts.

Additional losses were seen in mostly the non-durable goods categories like food manufacturing, chemicals and textiles, but were minor.

A number of other industries added in fact added jobs, including plastics, petroleum and coal products; computer equipment; and even fabricated metal products.

Further, it is difficult to know whether the lag in hiring has to do with weakened demand or a persistent skills gap.

Another survey released in November by the DOL finds there are nearly 500,000 open positions in manufacturing, suggesting the problem may be a scarcity of skilled labor.

Manufacturing Output Slides

As we said earlier, the ISM’s production index led the rebound in manufacturing activity for January. Yet the Federal Reserve came out with a report stating that manufacturing output edged down at the start of the year.

As puzzling as this is, it helps to note that the Fed’s Industrial Output report followed much the same pattern as the Labor Report, with one industry accounting for the majority of losses.

Let’s take a look. Manufacturing output edged down 0.1% in January (0.8% lower than it was a year ago) Yet, most of the decrease was accounted for by one sector: aircraft and parts.

And production in that sector was dragged largely by one company: Boeing, which suspended production of its beleaguered 737 MAX plane.

In fact, the Fed says, excluding the production of aircraft and parts, manufacturing production would have actually increased 0.3%.

Aerospace and miscellaneous transportation equipment production dove 7.4%, while many other industries saw modest output gains, including motor vehicles & parts; plastics & rubber products; chemicals; petroleum & coal products; computer equipment and printing.

Empire Index Soars

The Empire State Manufacturing Index is among the most closely-watched U.S. manufacturing reports, representing one of the Fed’s largest regional surveys of manufacturers.

That index, released just yesterday, rocketed to 12.9 in February—the highest it’s been since May of 2019. New orders rose to their highest level in a year, while the index for future business conditions was unchanged at 22.9.

This, combined with the ISM’s manufacturing activity rebound suggests the U.S. industrial sector may be at a turning point following the lukewarm growth of the past several months.

Is Phase One Working? China Tariff Exemptions

The trade war between China and the U.S. continues to show signs of cooling off, with China announcing just yesterday that it would be granting its third round of tariff exemptions on 696 U.S. goods as a part of the Phase One trade deal with the U.S.

The new deal was put into place on February 14th.

Among the products to be struck from the list included metal products, crude oil and liquefied natural gas as well as numerous types of medical equipment – the latter of which is crucial for the fight against coronavirus.

Coronavirus Concerns

Meanwhile, coronavirus has started to hit supply chains in China. The rapidly-developing epidemic has caused reverberations across the manufacturing world.

One manufacturer in Texas has seen demand for its surgical masks skyrocket, while Apple canceled its most recent financial forecast as the virus has necessitated it shutter many of its facilities there.

Meanwhile, Jaguar Land Rover says it might run out of auto parts normally procured from China, and experiments are currently under way to test and produce coronavirus vaccines using tobacco plants similar to the Ebola vaccine experiments that were conducted in 2014 using tobacco leaves.

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