Fri, 19 May 2017
With seven of 10 of the largest categories of manufacturing expanding in April, Bob Johnson thinks the sector can help offset a weaker consumer.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm here with Bob Johnson, our director of economic analysis, to get an update on the state of the manufacturing sector.
Bob, thanks for joining me.
Bob Johnson: It's great to be here today.
Glaser: We got industrial production numbers earlier this week, and it looked pretty strong on a month-to-month basis.
Johnson: They sure did. And again, we always like to focus on the manufacturing part of that, which is about 70%, 80% of the number. And on the manufacturing side, we were up more than 1% month to month, one of the best showings all the way back to 2014. So, very nice headline showing.
Glaser: And this was a pretty broad-based positive reading?
Johnson: It was. The reading includes many different categories in manufacturing and things that are very, very different. But this time around, in the month of April, seven of the 10 largest categories showed pretty dramatic improvement from the previous month. Going back over the data for the last several months, it's typically been more like two to five categories being up and the other five to eight being down. So, it's been a pretty dramatic shift there in terms of the diversity, which is good to see. It's not being driven by just aerospace and automobiles like it was at the very beginning of the recovery. It seems to be a little bit broader-based, which is good news.
Glaser: If this was a big jump from March, what do we look like versus 2016 levels? Is this really just a bounce back from some weak data?
Johnson: Yeah. Well, certainly, the April data, that 1% growth we talked about, follows a decline of almost 0.5% in March. So, there's just a little bit of payback there. You average them together, you're probably a little closer to reality. But nevertheless, the year-over-year data is getting better, too.
First of all, looking at the single month over single month, that is April this year versus April last year, we were up about 1.9%. Keep in mind, the long-term yearly average growth rate is something like 2.5%. So, we're getting back to something that might be categorized as more normal. So, that's certainly good to see. And even on a moving average basis, three-month moving average basis, which is our preferred method, we're now up to 1.3% year-over-year growth versus a low of -0.5% back in that gloomy days of 2015.
Glaser: That's looking better then. What about individual sectors? You mentioned seven out of 10 were up. What were the biggest contributors in the month?
Johnson: Yeah. Let's look at some of the categories. Now, I'm going to switch over to talking about year-over-year data a little bit. But certainly, the strongest was computers--computers and computer-related electronic components. And that's a strong category, it was up 4%. We've had many good months in a row, and I think the particular month of April wasn't all that great. But if you look at on a year-over-year basis, it's been a consistently strong group as some of the semiconductor manufacturing things, a little bit more of it's happening here in some cases and more computer manufacturing and more interest in general in productivity-enhancing tools with the labor shortages that we keep talking about. So, this has been a pretty strong category over the last year. We had a couple of years where it wasn't as strong and now we've really come back. So, it's nice to see that.
The second strongest category on a year-over-year basis was machinery, and a lot of that is oil and gas-related machinery as it turns out. That was certainly a big help as the oil industry kind of goes back to work here. So, also a nice pickup and we've had several months of consistently strong growth there.
Then kind of one surprise I'll toss in there, food at 1.8%. Clearly, as the price of some agriculture commodities--including livestock, including weed and whatever as oil comes down and people are again shopping a little more at grocery stores and less at restaurants--it's helped boost the overall food manufacturing sector which was up 1.8%. Going back over 30, 40 years, I mean, that number was seldom much above 1% and to be up 1.8%, that's clearly something a little different to talk about. And automobiles, motor vehicles, I should say, were up 2.5%. So, that trend continues to slow. It's still in the top categories, but it is continuing to slow and unfortunately, the headline suggests there's more slowing to come there as the automobile manufacturers appear to be a little bit overstocked than a couple of areas and being caught flat-footed with not enough SUVs and too many sedans. So, clearly, some shifts there.
There still are a couple of worrisome categories on the negative side, while you're asking. Aerospace was down about 2.7%. Again, we're still rolling off some of that defense spending being trimmed back a little bit along with Boeing finally catching up on its big backlog. Those two things have aerospace an underperformer after being one of the big drivers of manufacturing early in the recovery.
Glaser: Big picture then, is manufacturing going to be enough of a driver to overcome other slowing areas of the economy? How do you think of this in the broader picture?
Johnson: Yeah. I think this is one that stabilized, and I think that this is one that doesn't look like it's going to hurt as big unless the autos really fall off the table, so to speak. I think that manufacturing is about 8% of employment, 12% of wages. So, it's clearly a sector that's more important than some people give it credit for. And the improvement there has certainly been good, and I think it could be enough to help out some of the other weaker parts of the economy. If you combine that with housing being stable to maybe a little better and manufacturing be a little better, that's why despite some weak consumer data, they were still feeling relatively safe that 2017 won't be a recession year.
Glaser: Bob, thanks for your take on manufacturing today.
Johnson: Thank you.
Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.