US manufacturing data look good, even inventories

The April 2010 Manufacturing ISM Report On Business® showed across the board strength in US manufacturing. The index hit 60.5 percent, a 6 year high and well above the 50 percent demarcation line between recession and recovery. The manufacturing sector has been expanding for nine months now.

  • "Finances continue to be tight, and we are decreasing safety stock levels to reduce inventory." (Electrical Equipment, Appliances & Components)
  • "Business conditions continue to improve. Actual sales exceeded budget for the third straight month." (Food, Beverage & Tobacco Products)
  • "Demand from automotive manufacturers has continued to improve month over month." (Fabricated Metal Products)
  • "We are finally seeing a turnaround." (Primary Metals)
  • "Upward price pressure still evident." (Chemical Products)


What is more encouraging about the manufacturing data is the inventories situation. Neither businesses from the survey nor their customers have yet to ramp up inventories in a big way. This leaves potential upside for the recovery if job and income growth catch up to the already large upsurge in consumption growth.

Apparently, American consumers have enough residual income to buy one million iPads, especially the most expensive 3G version. Who said that consumers were destined to save more?  Nevertheless, unless the economy adds a lot more jobs or income growth ramps up, the recovery will fade.

So, my read of the data is that the manufacturing sector is in full recovery mode with room to expand production even more given the relatively low level of inventories.  The missing link is personal income and job growth. The government is supporting the economy right now, as consumer income ex. government transfers is flat. If we see job and personal income growth ex. transfers picking up, maybe the cyclical recovery can move into self-sustaining mode.


April 2010 Manufacturing ISM Report On Business® – ISM

  1. PR says

    This post is the first mention I’ve seen of a potential self-sustaining recovery. My reading of your terminology over the past couple years leads me to believe you see a self-sustaining recovery as distinct from a technical recovery. Do you see them as mutually exclusive?

    1. Edward Harrison says

      PR, I have been using the term technical recovery to mean the period when the economy is growing but is still smaller than when recession began. That’s because a recession is by definition a period after which the economy is smaller than when it started and you need some time to reattain the previous level.

      See the link below:

      The self-sustaining bit is separate. Most recoveries are self sustaining as inventory builds, balance sheet repair, automatic stabilizers all work to create jobs which fuel the additional spending that keeps the recovery alive. So that is the baseline expectation. This time around, many of those factors are contributing less. Jobs and income growth are conspicuously absent. With already high levels of debt and low levels of savings, it will be hard to get more consumption growth to propel the recovery unless we get more jobs. In the meantime, the government is responsible for a large part of the economic uptick. THAT is unsustainable.

      What we need is more jobs, government or private sector ones – most prefer private sector ones. Either way, unless we get our 15 million unemployed back to work and the millions more underemployed back to full employment, the recovery will fade.

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