#670 – U.S. Manufacturing Primed for Another Growth Year

Posted on | The Agurban

Some economists thought 2017 was the peak year for U.S. manufacturers. Now they believe 2018 could be even better. That’s good news, as reported recently in IndustryWeek.com.

US Manufacturing Primed for Another Growth Year
Bloomberg View | Jan 19, 2018 | Neil Dutta

U.S. manufacturing production just had its best year since 2011, yet some argue that 2017 was as good as it will get and that a slowdown is ahead.

We think the opposite is more likely: Factory output is poised to speed up. Investors worried that the equity market is stretched should take heart. Stronger growth in factory output is a good reason to remain cyclically oriented, especially in U.S. industrial stocks.

Trade, one of the biggest engines of the sector in 2017, is likely to continue to gather momentum. Stronger global growth expectations and a weaker dollar should help as manufacturing goods represent about half of all exports.

Moreover, at least some of the current recovery in factories can be traced to the rebound in the mining industry. Mining output declined steadily from December 2014 to September 2016. Production was down 0.6% during this period, when there was also a sharp pullback in oil and drilling equipment. Today, we are seeing the opposite dynamic. With commodity markets in recovery, mining-related investment is more of a tailwind to factories.

While the global economy is a big driver of manufacturing growth, U.S. domestic demand is even more important. Every 1 percentage point increase in domestic demand (GDP net of trade) boosts manufacturing production by 1.34 percentage point on an annualized basis, while every 1 percentage point increase in global industrial production outside the U.S. lifts domestic manufacturing production by 0.44 percentage point.

Next week we will follow-up this Agurban with the signs pointing to a positive manufacturing outlook.