Reference no: EM132307931

U.S. Factory Sector Clocks Strongest Growth in 14 Years

Analysts had expected a slowdown given rising trade tensions By Sharon Nunn

WASHINGTON—American factory activity in August expanded at the strongest pace in more than 14 years, despite rising tensions with some of the U.S.’s largest trade partners.

The Institute for Supply Management on Tuesday said its manufacturing index rose to 61.3 in August, the highest level since May 2004, from 58.1 in July. Sales of factory-made products, or new orders, output and employment all grew at a faster pace in August.

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Tuesday’s release surprised analysts who had expected a slowdown in the industry in light of rising trade tensions and a typically weaker month for factory activity. Economists surveyed by The Wall Street Journal had expected a 57.5 reading for August.

“Despite concerns over U.S. protectionist policies, manufacturing sentiment remains on a solid footing, supported in large part by firm domestic demand,” said Pooja Sriram, U.S. economist at Barclays.

The U.S. and Europe, China and other countries are in the midst of trade battles stemming from steel and aluminum tariffs the Trump administration enacted earlier this year.

Mohamed A. El-Erian, chief economic adviser at Allianz, tweeted, “In addition to highlighting the strength of the U.S. #economy, this also points to the more general theme of divergence in advanced countries’ economic performance and policies.”

Though most economists hailed Tuesday’s report as a sign of robust growth continuing into the second half of 2018, some analysts said there are signs of overheating in the manufacturing industry.

“The last time we have seen something akin to the current run late in an expansion occurred in” the late 1980s, when the Federal Reserve had to raise the fed funds target rate to almost 10% to tamp down inflation, according to Stephen Stanley, chief economist at Amherst Pierpont Securities. “If you want to conclude from this quick history lesson that the Fed is currently too easy and in the process of making a policy mistake, I would not object.”

Most private economists expect the Fed will raise short-term interest rates two more times this year, once in September and again in December, with strong economic data continuing to roll into the summer months.

Despite the headline growth in factory activity, there are latent signs recent trade actions may be beginning to take a toll. An underlying gauge of new export orders for primary metals, transportation equipment and machinery declined in August, with machinery last declining at the beginning of 2017.

“We’re a significant exporter of railcars, airplanes, automobiles…Machinery is our number 6 industry sector,” said Tim Fiore, who oversees the ISM survey of factory purchasing and supply managers. “If export markets are closed off to us, orders will go down, [then] exports and production.”

Trade tensions, coupled with what appear to be economic slowdowns in some of the U.S.’s biggest trading partners, could be headwinds for the manufacturing sector.

Tuesday’s ISM report also showed a measure of inflation grew at a slower pace; the Backlog of Orders Index continued to expand, at higher levels compared with the previous month; and imports grew at a slower pace.

Broader economic growth picked up robustly in the second quarter after a modest slowdown in the early months of 2018. The unemployment rate declined below 4% this spring and forecasters expect solid growth this year, supported by recent tax cuts and strong consumer sentiment.

QUESTIONS:

1. Describe the different measures mentioned in the article. How do you suppose they are calculated? Using statistics to support your response, how can these measures be determined to be reliable? How can measures across industries and companies be standardized to give reliable results?

2. Why do economists look at manufacturing indices when evaluating the direction of the economy? What does this imply about the importance of operations management?

3. Based upon the reading of the article, do you consider the manufacturing sector to be growing or shrinking? Justify your response.

4. How does your company utilize industry trend indicators in planning your operations? What additional indices could you use to prepare for potential changes in demand?

5. What trends are your business seeing? How is your company preparing for changes that might occur in the next year?