The Institute for Supply Management (ISM) released their manufacturing review today highlighting continued expansion of the underlying economy. The results today from within the overall manufacturing industry emphasize the 27th consecutive month of growth…. and a future-view that seems to be predicting much more. Much more!
ISM Release […] Manufacturing expanded in November, as the PMI® registered 59.3 percent, an increase of 1.6 percentage points from the October reading of 57.7 percent. “This indicates growth in manufacturing for the 27th consecutive month, led by strong new orders, production output and continued slowing supplier delivery performance,” says Fiore. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting. (more)
Okay CTH, so take the business wonk-speak out of this – what does it mean?
Here’s the summary: Manufacturers are increasing new orders (making more stuff). Production outputs and employment within the manufacturing sector are still growing. Suppliers are still having a tough time filling material orders, but they are finding new and innovative ways to speed up shipments of raw material. However, despite the speed (increased efficiency in delivering the raw material), the backlog of requests is still growing (new orders exceed supply chain). Customer inventories are too low (hence the backlog for new stuff). Inflationary pressure still exists, but the rate of price growth is slowing (increased supplier efficiency). Manufacturing exports and imports are growing. The economy is expanding.
The story within the manufacturing sector is the story within the middle-class U.S. economy. This is MAGAnomics at work.
The bad news is, if you can call it bad news, that our America-First economy is so strong we are struggling to produce, secure and ship enough stuff to fuel the underlying demand. Every nation wishes they had this problem.
The manufacturing sector is trying to find ways to produce more stuff, as the infrastructure for producing more stuff is not yet ready. When the new production capacity (prior investment) comes on-line, it will be easier to make more stuff.
“Efficiency Drivers” – You are seeing this in a few different ways. [Transport] Think about tractor-trailers (18 wheel big rigs) on the roads; you are seeing more dual-trailers being hauled. This is a way to ship more stuff, quicker. Additionally, Trump’s cabinet is pushing the economic gas pedal with DOT Secretary Elaine Chao allowing younger (18-year-old) apprentice truck haulers; to help fill the insatiable need for truck drivers etc.
The manufacturing expansion shows up in the latest Bureau of Labor Statistics production efficiency third quarter report known as “Productivity”.
BEA – Q3 […] Nonfarm business sector labor productivity increased 2.2 percent during the third quarter of 2018, the U.S. Bureau of Labor Statistics reported today, as output increased 4.1 percent and hours worked increased 1.8 percent. (more)
Economic analysis can get weedy…. so a simple way to look at productivity is to think about baking bread in your kitchen.
If you were going to bake 4 loaves of bread it might take you 2 hrs start to finish. However, if you were going to bake 8 loaves of bread it would not take you twice as long because most of the tasks can be accomplished with simple increases in batch size, and only minor increases in labor time. Your productivity, measured in the last four loaves, is higher.
Economic Productivity is measured much the same way, within what’s called a production probability equation. Additionally, if two hours of your time are worth $40, each of four loaves of bread costs $10; but if you make 8 loaves in the same amount of time the labor cost is only $5/per loaf.
From 2007 through 2017 the average rate of productivity increase was 1.3%. However, in the third quarter of 2018 productivity was strong at 2.2% [Q2 productivity 2.9%]. That means total business output increased significantly as more product was demanded from within the business operation. Throughout the economy people just wanted more stuff.
Improved gains in efficiency/productivity (more bread needed) supports faster economic growth without generating higher inflation; no need to raise prices because your cost to make each loaf of bread decreases the more you make. Higher sales and lower per unit cost means more profit for the bread-maker at the same price. No need to raise prices. Without inflation, there should be no motive for the Fed to raise interest-rates.
Increases in productivity generally means the economy is generating more stuff. The more stuff generated the higher the value of all economic activity; this increases GDP growth.
When we see higher productivity in direct alignment with GDP increases, the increased production indicates sustainable GDP growth.
We made 4.1 percent more stuff, and only worked 1.8 percent longer. The net is a 2.2 percent productivity increase:
Manufacturing sector labor productivity increased 0.5 percent in the third quarter of 2018, as output increased 3.4 percent and hours worked increased 2.9 percent. Productivity increased 1.5 percent in the durable manufacturing sector, as output rose 4.9 percent and hours worked increased 3.4 percent. Over the last four quarters, total manufacturing sector productivity increased 1.3 percent, as output increased 3.4 percent and hours worked increased 2.1 percent. Unit labor costs in manufacturing increased 0.9 percent in the third quarter of 2018 and increased 0.9 percent from the same quarter a year ago. (link)
So what do we have? Low inflation; expanding employment opportunity; record low unemployment; and rising wages – meaning more money in your pocket.
These measures all have a cumulative impact on paycheck-to-paycheck Americans. Prices for durable goods are stable, and wage growth is exceeding inflation. That means more disposable income in the middle-class…. which, when combined with the increased pay from lower middle-class tax rates, is exactly the intended outcome of MAGAnomics.
This creates a situation where the U.S. consumer can fuel the the U.S. economy while President Trump, Secretary Ross, Secretary Mnuchin and Ambassador Robert Lighthizer utilize the leverage within tariffs, to negotiate better America-First trade deals.
That is economic nationalism.
That my friends is MAGAnomics.
Sec. Wilbur Ross
Sec. Wilbur Ross