Photo: Luke Sharrett/Bloomberg
The U.S. Economy’s Secret Weapon
Improving manufacturing activity could help the sputtering economy more than many expect
By Steven Russolillo
In this lackluster economy, an unlikely catalyst could provide a much-needed boost.
The moribund U.S. manufacturing sector has struggled with low oil prices, the strong dollar and a soft global economy. But it finally showed signs of life in March. Further evidence that manufacturing is regaining its footing is expected in a report due Monday. And improving activity could help the sputtering economy far more than many expect.
Economists polled by The Wall Street Journal estimate that the Institute for Supply Management’s manufacturing index hit 51.2 in April. That would be the second consecutive month above 50, implying customers’ orders and factory production are expanding. It was in contraction, or below 50, from late summer of last year through March.
Yes, manufacturing doesn’t pack as much punch to the U.S. economy as it once did. Less than 10% of U.S. employment is in the manufacturing sector, down from about 25% in the 1970s and nearly 40% in the 1940s. Yet those figures also don’t account for people like truck drivers.
They aren’t necessarily employed in manufacturing, but still depend on it for their livelihood.
To get a sense of how much that matters, consider last week’s report on U.S. gross domestic product. The economy expanded by only 0.5% in the first quarter, hurt by tumultuous financial markets and weak global demand.
Contributing to the pain, fixed nonresidential investment, a measure of business spending, fell 5.9%, its biggest drop since 2009. This metric, which included sharp declines in spending on equipment and structures, subtracted 0.76 percentage point from GDP’s overall growth rate. A pickup in manufacturing activity would help ease the pain in the current quarter.
With oil prices bouncing off a low hit in February and the dollar’s strength waning in recent months, manufacturers have gotten a bit of a reprieve. Should this continue, the U.S. economy’s tough start to 2016 might again be nothing more than a blip.
At the beginning of 2014, the economy contracted. In early 2015, it barely expanded. But in both instances, GDP recovered and ultimately advanced by 2.4% each year.
The economy has dug itself another hole—one that it should again be able to manufacture itself out of.