(What’s Left of) Our Economy: No Delta Effect on U.S. Manufacturing Growth In Sight. Yet.

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aerospace, aircraft, aircraft parts, appliances, automotive, Boeing, CCP Virus, coronavirus, COVID 19, Delta variant, electrical components, electrical equipment, fabricated metal products, Fed, Federal Reserve, inflation-adjusted growth, inflation-adjusted output, machinery, manufacturing, medical supplies, medicines, personal protective equipment, petroleum and coal products, pharmaceuticals, plastics, PPE, real growth, recovery, reopening, rubber, textiles, vaccines, {What's Left of) Our Economy

The after-inflation U.S. manufacturing production data reported today by the Federal Reserve revealed plenty of newsy developments. But my choice for biggest is the finding that, in price-adjusted terms, domestic manufacturers’ output finally nosed back above its last pre-CCP Virus (February, 2020) level.

The new number isn’t an all-time high – that came in December, 2007, just as the financial crisis was about to plunge the entire U.S. economy into its worst non-pandemic-related downturn since the Great Depression of the 1930s. As of this July, real manufacturing production is still 5.94 percent below that peak.

Measured in constant dollars, however, such output is now 1.15 percent greater than just before the virus arrived in the United States in force. Not much, and of course any Delta variant-prompted curbs on economic activity or extra caution in consumer behavior could wipe out this progress. But you know what they say about a journey of a thousand miles.

Had this milestone not been reached, I’d have led off this post by noting that although some really unusual seasonal factors in the volatile automotive sector definitely juiced the excellent July sequential output gain, U.S.-based industry outside automotive performed impressively during the month as well.

Specifically, as the Fed’s press release noted, the whopping 11.24 percent jump in the price-adjusted output of vehicles and parts contributed about half of overall manufacturing’s 1.39 percent growth. That automotive figure was the best monthly improvement since the 29.39 percent rocket ride the sector generated in July, 2020 – when the whole economy was staging its rebound from that spring’s deep but brief virus-induced recession. And that overall real on-month production advance was the best for manufacturing in general since the 3.39 percent achieved in March – earlier in the initial post-pandemic recovery.

But in July, the rest of domestic industry still expanded by a strong 0.70 percent after inflation – its best inflation-adjusted growth since the 3.31 percent also recorded in March.

The revisions in this morning’s Fed data for the entire manufacturing sector were mixed. June’s initially reported 0.05 percent decline is now judged to be a 0.10 percent increase, and April’s previously reported 0.39 percent drop now stands as a 0.21 percent decrease. But May’s last reported increase – upgraded slightly to a strong 0.92 percent – is now estimated at just 0.65 percent.

Looking at broad industry categories, the big real output July winners in domestic manufacturing’s ranks aside from automotive were electrical equipment, appliances, and components (up 2.31 percent); plastics and rubber products (up 2.02 percent); machinery (1.91 percent); the broad aerospace and miscellaneous transportation sector (think “Boeing”), which rose by 1.90 percent; textiles (up 1.67 percent); and miscellaneous durable goods, which includes but is hardly confined to many pandemic-related medical supplies (up 1.55 percent).

As I keep noting, good machinery growth is especially encouraging, since its goods are used both throughout manufacturing and the economy as a whole, and strong demand signals optimism among manufacturers about their future prospects – which tends to feed on itself and impart continued momentum to industry.

The list of significant losers was much shorter, with real fabricated metal products output 0.42 percent lower than June levels and petroleum and coal products shrinking by 0.60 percent.

Turning to narrower manufacturing categories that remain in the news, despite Boeing’s still serious manufacturing and safety problems, and ongoing CCP Virus-created weakness in air transport, inflation-adjusted production of aircraft and parts continued its strong recent run. June’s initially reported 5.24 percent monthly output surge was revised down to 3.57 percent. But that’s still excellent by any measure. And July saw production climb another 2.78 percent. As a result, real output in this sector is now 9.95 percent higher than it was just before the pandemic’s arrival in the United States in February, 2020.

Real output in the pharmaceuticals and medicines sector (which includes vaccines) grew by 0.77 percent sequentially in July, and its real output is now 11.35 percent greater than just before the pandemic. But those revisions!

June’s initially reported 0.89 percent increase is now judged to be a 0.34 percent decrease, and May’s previously downgraded 0.15 percent rise has now been upgraded all the way to 1.54 percent.

An even better July was registered by the vital medical equipment and supplies sector – which includes virus-fighting items like face masks, face masks, protective gowns, and ventilators. Monthly growth came in at 1.71 percent. But revisions here were puzzling, too.

June’s initially reported 0.99 percent sequential real production improvement is now seen as a major 1.54 percent falloff. And May’s monthly constant dollar growth, already upgraded from 0.19 percent to 1.18 percent, is now pegged at 1.86 percent.

I’m still optimistic about domestic manufacturing’s outlook, and that’s still based on domestic manufacturers’ own continued optimism – which as shown by the two major private sector monthly manufacturing surveys remained strong in July. (See here and here.)

But I also continue to view U.S. public health authorities’ judgment as suspect when it comes to the balance that needs to be struck between fighting the virus and keeping the economy satisfactorily open. So as long as new virus variants pose the threat of higher infection rates (though not at all necessarily of greater damage to Americans’ health), my own optimism has become more tempered.

(What’s Left of) Our Economy: A New Wrinkle but Same Old Manufacturing Renaissance Fairy Tale

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Akron, Brain Belt, IndustryWeek, inflation-adjusted growth, Laura Putre, manufacturing, Ohio, plastics, polymers, recession, recovery, rubber, Rust Belt, technology, The Smartest Places on Earth, {What's Left of) Our Economy

Akron, Ohio, has become one of my favorite places in the world – honest to gosh. I’ve made some wonderful friends there over the years, had some great times, and learned lots from area manufacturers I’ve been lucky enough to get to know.

And because I’ve gotten pretty well acquainted with the city, and studied its economy, I was immediately suspicious of the recent IndustryWeek post spotlighting a book touting Akron as a leading example of “how the Rust Belt is turning into the Brain Belt.”

The thesis of The Smartest Places on Earth, by a former leading Dutch financial journalist and a Washington, D.C.-based economic consultant, has the ring of plausibility. For all its obvious struggles, America’s midwestern manufacturing heartland remains blessed with a wealth of engineering and technological talent and skilled workers. Therefore, it seems well positioned to capitalize on the promise of the newest technologies – which often spring in part from older technologies – and all their outsized growth and employment benefits.

Akron is also a plausible example of this transition. As IndustryWeek reporter Laura Putre correctly observes, “Times were dire for years” in this former center of rubber production. (Think “tires.”) But

“gradually, the region began to capitalize on its existing strengths—the material science expertise of its research universities, its workforce of engineers, scientists and tradespeople—and reinvent itself as the center of the polymer industry. According to statistics from the city’s website, upwards of 35,000 people in the Akron area are now employed in approximately 400 polymer-related companies.”

But here’s the problem: Despite making this transformation, at least according to the most authoritative (U.S. government) data available, Akron remains not only an American growth laggard, but an American manufacturing laggard. And P.S., I’m not talking about employment, which is what practically everyone thinks of when gauging manufacturing’s performance. There’s no doubt that, thanks to productivity improvement, industry today can turn out as much or more product than ever with fewer employees. I’m talking about output – the real measure of the sector’s health.

If Akron was getting so successful, why did its inflation-adjusted manufacturing production fall by so much more during the last recession (26.71 percent) than that of America’s cities as a whole (9.71 percent)?

Maybe something about the recession hit Akron harder than the rest of the country’s urban areas, and since the recovery has begun, it’s done much better? The numbers don’t bear out that thesis, either. From 2009 through 2014 (the latest figures available), Akron’s real manufacturing production rose by just 6.70 percent. Overall U.S. manufacturing urban output was up by 10.69 percent.

As a result, as of 2014, manufacturing in America’s cities was just 0.60 percent smaller than the peak it reached in 2007, just before the recession struck. In Akron, industry was still 21.80 percent below that peak.

The Smartest Places on Earth looks right on one point: The plastics and rubber industry (government data don’t separate them) helped prevent Akron manufacturing from performing even worse. During the recession, its after-inflation production dropped by only 6.52 percent, and since 2010, it’s risen by 19.45 percent. (These more detailed data only go up to 2013.)

But that improvement hasn’t been nearly enough to offset subpar performances in other major manufacturing sectors, especially fabricated metal products, machinery, and chemicals. Largely as a result, in real terms, manufacturing’s share of the Akron economy dipped from 15.63 percent in 2009 to 15.45 percent in 2014. (For U.S. metropolitan areas as a whole, it inched up from 11.51 percent to 11.55 percent.)

And that’s not because the rest of Akron’s economy has been killing it, even relatively speaking, during this historically feeble economic recovery. Since 2009, its constant-dollar growth has trailed that of American cities as a whole by 9.04 percent to 10.30 percent.

One of The Smartest Places on Earth‘s authors told Putre in an interview that the results of the kinds of transformations foreseen in the book “start to show up really in ten plus years.” And certainly no one should expect miracles, or anything close, overnight. But in the last year, American manufacturing has gone through an especially tough stretch, and Akron manufacturers told me on a recent trip that their area has been no exception. So just as with claims of a general U.S. Manufacturing renaissance, a heavy burden of proof remains with those insisting that a Brain Belt transformation will be a Rust Belt miracle worker.