Wednesday, March 3, 2021

Manufacturing Boosts Economic Recovery

Financial FAQs

Manufacturing activity is roaring back. It joins construction and housing sales as the main drivers of economic growth at the moment. And we need all the drivers of economic growth to keep this economy in the black with what is coming--more climate unpredictability; the Texas deep-freeze being the latest example.

The ISM Manufacturing Index that measures purchasing managers’ sentiments is at 60.8 percent, a two-year high. This means almost 61 percent of manufacturing purchasing managers see increased activity ahead. Reuters lists its strengths:

  • The headline index hit a new post-pandemic high of 60.8, versus 58.7 last month and a forecast of 59.0.
  • The delivery lead-time index was the largest single contributor to the increase (up 3.8 points to 72.0), which is not entirely a positive development, but the orders and production indexes posted solid gains to 64.8 and 63.2 respectively.
  • The customers’ inventory slipped again to another new 11-year low of 32.5, which implies sustained demand in the months ahead.
  • Sentiment remained upbeat in the anecdotal portion of the survey. The survey managers reported that positive comments outnumbered cautious remarks by five to one this month, up from three to one in both December and January.

Fourth Quarter GDP growth was just revised upward to 4.1 percent from 4.0 percent in the second estimate, and economists are predicting even faster growth this year, but that is only if effects of the pandemic subside and there are no more major climate disasters like the Texas, Alabama, Arkansas, and Louisiana deep freeze in which millions lost power and clean drinking water.

The increase in fourth-quarter GDP reflected both the continued economic recovery from the sharp declines earlier in the year and the ongoing impact of the COVID-19 pandemic, including new restrictions and closures that took effect in some areas of the United States. The full economic effects of the COVID-19 pandemic cannot be quantified in the GDP estimate for the fourth quarter of 2020 because the impacts are generally embedded in source data and cannot be separately identified.

What is the main driver of all this activity? Higher Personal Income and Outlays, also per the U.S. Bureau of Economic Analysis (BEA).

Personal income increased 10.0 percent (monthly rate) while consumer spending increased 2.4 percent in January as pro,visions of the Coronavirus Response and Relief Supplemental Appropriations (CRRSA) Act enacted on December 27, 2020, began to take effect.

That is a huge jump in personal incomes, thanks to the $900 billion December pandemic aid package.  Much of it is being saved by consumers as they wait for the pandemic to subside before spending more on leisure services like entertainment and travel.

Consumer sentiment had edged downward in early February and is at a six-month low in the U. of Michigan sentiment survey, with the entire loss concentrated in the Expectation Index and among households with incomes below $75,000 (the income brackets targeted by the government cash payouts), as I said last weekHouseholds with incomes in the bottom third reported significant setbacks in their current finances, with fewer of these households mentioning recent income gains than anytime since 2014 (see the chart), said the U. Michigan survey.

That is the main reason the $1.9 trillion American Rescue Plan will soon pass with only minor changes, with or without Republican votes. It will go to those that need it the most to survive this once-in-a-century pandemic. It is extremely popular with a 76 percent approval rating per the latest Politico survey.

And why not with upcoming climate changes predicted to cause even more natural disasters?

Harlan Green © 2021

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