Manufacturing Resurgence

The week ahead will provide a good look at how the economy held up at the close of Q4/2017. Manufacturing, an unexpectedly strong sector of the US economy in 2017, will be highlighted on Tuesday–the first trading day of the year. The PMI Manufacturing Index for December is expected to come in at 55 versus November’s 53.9. The manufacturing composite index, issued by the Institute for Supply Management (the ISM Mfg Index), will be released Wednesday for December. It is expected to come in at 58, in-line with November’s reading of 58.2.

Manufacturing, as a component of the US economy, has in recent years been considered a necessary casualty in the evolution of our economic model towards more service and technology-centric verticals. In the US, in 2016 for example, the US economy lost over 16k jobs after years of decline. In 2017 however that decline appears to have come to an abrupt halt. Not including December’s final manufacturing figures, the US economy actually added more that 160k jobs in 2017.

Fueling the resurgent US manufacturing vertical of the economy are increased productivity on the part of American workers, cheaper energy in the form of US shale oil and less expensive crude oil, rising wages in emerging economies, and an increased attention to protecting US-based corporate intellectual property rights.

With the passage of the tax bill in December, expect the US manufacturing sector to pick up additional momentum in 2018. Lower corporate tax rates (nominally from 35% to 21%) will likely encourage global manufacturers to relocate to the US. It will also act to encourage US manufacturers to invest in their domestic footprint and in technology to further automate production and increase efficiency. As a result, employment growth in the manufacturing sector, though likely to be muted, is expected to remain constructive.

Auto manufacturing is in many ways the quintessential manufacturing industry. We receive motor vehicle sales figures for December on Wednesday. Consensus for total vehicle sales is calling for 17.5M–matching November’s figures. Domestic totals are expected to be 13.4M. Not only do vehicle sales speak to manufacturing, they also speak to consumer confidence and consumer spending. Given the multi-year high readings that have been set in recent quarters by consumer confidence and clear evidence that our economic expansion is accelerating, the prospect of further gains in auto manufacturing and vehicle sales will likely materialize.

Construction Spending normally posts a seasonal dip in November and December. On Wednesday we receive the Construction Spending data for November. Consensus is calling for 0.6%–weaker than October’s 1.4%.

Though there were clearly other important data releases scheduled for the week, Friday’s release of the Employment Report for December is likely to garner the most attention. Consensus is calling for a gain of 190k nonfarm payrolls, an unchanged unemployment rate of 4.1%, and not surprisingly, a gain in manufacturing payrolls of 17k.

Kenny’s Commentary subscribers receive the note in their inbox Monday’s before the open Subscribe

Flickr photo: Dept. of Commerce by J Sonder