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Global Improvement Supports U.S. Manufacturing Recovery

A modest improvement in global economic conditions, mostly in Asia, is supporting a recovery in U.S. manufacturing growth after an historic second-quarter 2020 crash. The Institute for Supply Management’s Purchasing Managers’ Index (PMI), a notably reliable prognosticator of short-term growth prospects in the U.S. manufacturing sector, registered a healthy 54.2 percent in July, its second consecutive month above the 50 percent mark which points to growth. As the global pandemic was taking hold earlier this year, the PMI hit a trough of 41.5 percent in April. It has gained a remarkable 12.7 percentage points in just three months.

The July improvement appears broad-based. Supported by a resumption of export demand, new orders and production jumped significantly from June. The new orders component of the PMI registered a stellar 61.5 percent in July, up from 56.4 percent in June and has made a remarkable recovery from a recent low of 27.1 percent in April. Supporting an improved dynamic, the backlog of orders, an indicator of the sustainably of demand, jumped from contraction in June to growth in July.

While the July report certainly offer much-needed good news, respondent comments to the July survey are less optimistic than the survey data themselves, a reminder of the long road ahead to full output recovery for U.S. manufacturing as well as the considerable recovery risks from the widely spreading and highly unpredictable coronavirus. One respondent from the chemicals sector noted a 35 to 40 percent increase in new orders while another in the transportation sector revealed that business remains down almost 70 percent. Indicative of a mixed global picture, a respondent in the fabricated metals sector noted that export orders to Brazil, South Africa and the Middle East have been largely cancelled for the balance of 2020. 

A respondent from the critical machinery sector summed up the huge overall uncertainty by noting that subdued business conditions have been “driving highly conservative forecasting due to variability in ongoing pandemic-driven conditions and economic response.” In some form or another we are likely to see this sentence for many months to come.

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