Strong Signs on the Manufacturing Front

By at 4 January, 2018, 10:59 am

by Raymond J. Keating-

The Institute for Supply Management served up some strong data in its December 2017 Manufacturing ISM Report on Business released on January 3.

Key points included:

“Manufacturing expanded in December as the PMI®registered 59.7 percent, an increase of 1.5 percentage points from the November reading of 58.2 percent.” According to the index, manufacturing has now grown for 16 straight months, with new orders and production up strongly.

“New Orders Index registered 69.4 percent in December, which is an increase of 5.4 percentage points when compared to the 64 percent reported for November, indicating growth in new orders for the 16th consecutive month. This is the highest reading since January 2004, when the index registered 70.6 percent.” This points to continued future growth.

And the “Production Index registered 65.8 percent in December, which is an increase of 1.9 percentage points when compared to the 63.9 percent reported for November, indicating growth in production for the 16th consecutive month. This is the highest reading since May 2010, when the index registered 66.5 percent.”

For good measure, a pick-up in new export orders is encouraging, with growth registering a six-month high and extending to 22 months of growth.

The combination of new orders and production hitting recent highs bodes well for the manufacturing sector, and the overall economy. Indeed, regarding how this links to the overall economy, Timothy R. Fiore, chairman of the Institute for Supply Management Manufacturing Business Survey Committee, pointed out: “The past relationship between the PMI and the overall economy indicates that the average PMI for January through December (57.6 percent) corresponds to a 4.5 percent increase in real gross domestic product (GDP) on an annualized basis. In addition, if the PMI for December (59.7 percent) is annualized, it corresponds to a 5.2 percent increase in real GDP annually.”

As for hiring, it continued to expand for the 15th consecutive month. However, it also was reported by Fiore: “Employment expansion remains strong, but difficulties across the supply chain continue to constrain production output. ISM’s recent Semiannual Economic Forecast indicates that 65 percent had difficulty hiring new employees and 44 percent increased starting pay to attract new workers.”

These results also align with the recent measure of manufacturers’ optimism from the National Association of Manufacturers (NAM), which indicated that record-high confidence was tied with the prospects for business tax reform. On December 11, NAM reported that the Manufacturers’ Outlook Survey for the fourth quarter of 2017 showed that manufacturers’ optimism had “risen to unprecedented heights amid the legislative progress made on tax reform. With 94.6 percent of respondents saying they are positive about their own company’s outlook, this quarter’s optimism level is the highest in the survey’s 20-year history. Optimism has been at historically high levels throughout the year, averaging 91.8 percent in the four quarters of 2017, up from a 64.3 percent average in 2016.”

On the tax issue, “the results show more than three-quarters of manufacturers surveyed support the current tax reforms being debated in Congress. Nearly 63 percent of respondents said comprehensive business tax reform would encourage their company to increase capital spending, and more than half said they would expand their businesses (57.9 percent) and hire more workers (53.8 percent), while nearly half would increase employee wages and benefits (48.8 percent).”

With business tax reform now a reality, this bodes well for increased investment and growth among U.S. manufacturers. In addition, continued progress in terms of regulatory relief and reform would further incentivize entrepreneurship, business growth and investment.

Finally, small businesses stand at the center of this story, given that most manufacturing employer firms are in fact small businesses, with 75 percent having fewer than 20 workers and 94 percent less than 100 workers.

In the end, from a policy standpoint, when it comes to encouraging entrepreneurship, investment and growth, it’s about getting the mix right, that is, pro-growth tax and regulatory reform and relief, free trade, limited government, and sound money. Business tax reform passed in late 2017 ranked as a key leap forward, with benefits in the near term and potentially over the long run.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.


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