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Manufacturers Upbeat About Second Half, Still Wary of Commodity Prices

July 4, 2011
This week in manufacturing: July 4-8

Appropriate for Independence Day, the U.S. manufacturing sector closed the first half of 2011 with a bang.

At least that's what the data concluded.

In the days leading up to the Fourth of July weekend, we saw positive manufacturing numbers issued by the national Institute of Supply Management and ISM Chicago, as well as by the Federal Reserve banks of Dallas, Kansas City and Richmond.

"I think they all really show that there's been a little bit of a rebound in manufacturing," Chad Moutray, chief economist for the National Association of Manufacturers, tells IndustryWeek.

Moutray: Recent data points to a "rebound in manufacturing." Include the U.S. Census Bureau's May data on durable-goods orders (released June 24), and Moutray believes "that clearly we have started to turn around."

The capstone of an upbeat week came Friday, when the national ISM reported that its June purchasing managers index climbed 1.8% to 55.3.

On June 27, the Federal Reserve Bank of Dallas's latest Texas Manufacturing Outlook Survey indicated that factory activity picked up in June.

The Federal Reserve Bank of Kansas City's June Manufacturing Survey, issued June 30, showed that manufacturing in Kansas, Oklahoma and other Plains states "rebounded solidly after a brief slowdown" in May.

"Producers remained generally optimistic about future activity," Chad Wilkerson, vice president and economist for the reserve bank, said in a news release.

Karen Kurek believes that the recent manufacturing numbers show that the slowdown earlier in the year was merely a symptom of the supply chain disruptions caused by the crisis in Japan.

"I think this is really good news," says Kurek, who is the national manufacturing practice leader for the business consulting firm McGladrey.

'A More Fundamental Slowdown Underway'

Cliff Waldman, economist for the Manufacturers Alliance/MAPI, is far less sanguine about the recent manufacturing data.

Waldman asserts that ISM's June purchasing managers index "provides further evidence that U.S. manufacturing growth is slowing amidst a struggling U.S. expansion and clear signs of moderation in the global economy."

"The overall index rebounded only modestly from a sharp fall in May, indicating that while the supply chain disruptions from the Japanese disaster have impacted manufacturing growth in recent months, a more fundamental slowdown is underway," Waldman says.

Waldman is particularly disheartened by the backlog of orders index -- one of 11 indices in ISM's monthly manufacturing report -- which slipped from 50.5 in May to 49.0 in June.

Waldman asserts that the drop points to "what will likely be moderate factory-sector activity in the months ahead."

Indeed, there's plenty of reason for manufacturers to be cautiously optimistic -- emphasis on "cautiously."

The biggest reason is the specter of rising commodity prices.

In McGladrey's spring survey of manufacturing executives, 90% of respondents said they expected their raw-materials costs to go up, Kurek notes.

With consumer confidence still wobbly, manufacturers are grappling with the difficult decision of whether or not to pass those price increases onto their customers, Kurek says.

Durable-Goods Sector Getting Stronger

Manufacturers, Moutray agrees, will be keeping a close eye on commodity and energy prices, "and inflation in general."

They'll also be watching what happens in Washington, D.C. -- where the debt crisis has taken center stage -- "with a little bit of wonder."

Still, Moutray is encouraged by what he's seeing, particularly in the comeback of the auto industry and others in the durable-goods manufacturing sector.

In May, new orders for durable goods increased 1.9% to $195.6 billion, after a 2.7% decline in April, according to the latest data from the U.S. Census Bureau.

"The growth in durable goods really is what has helped lead the recovery so far since December 2009," Moutray says. "And if that sector can recover, then obviously that's a good sign for the second half of the year."

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