It's no secret that both the U.S. economy and the U.S. manufacturing sector got off to a sluggish start in 2016. The inflation-adjusted GDP data for the first quarter (to be released later this month) is expected to post a growth rate of less than 1 percent.
This rate of growth is a deceleration from the less-than-stellar gain of 1.4 percent registered in the fourth quarter of 2015. So we are still growing, but we could use a little more speed here.
Fortunately, the most recent data indicate that activity levels for many sectors of the economy, especially manufacturing, perked up in March. Each month, the Institute of Supply Management conducts a survey across a broad swath of American manufacturers that asks about current activity levels, and the results from last month are encouraging.
According to ISM, their Manufacturing Index (formerly known as the Purchasing Managers' Index) for March was 51.8. A value above 50 indicates that activity levels increased in that month when compared with the previous month. This was the first time since August that the index came in above 50.
A closer reading of the data shows that manufacturers reported strong gains in production and new orders. These gains were more than enough to offset small declines in inventories and payrolls.
During periods of strong economic growth, we would expect to see gains across all components of the index. But, like I said, we are not in a period of strong economic growth. We are not really in a recession either. Let's call it a “soft patch.” The question is whether things get better from here.
In my opinion, these data indicate that things will likely get better.
This forecast is based on the idea that new orders are a leading indicator of future business conditions, and employment levels are a lagging indicator. For almost every manufacturer, new orders will need to rise before they consider adding new employees. So if the U.S. manufacturing sector is indeed going to get past the sluggish start to this year and grow out of the recent soft patch, it is going to need sustained increases in new orders and production levels. Employment will follow shortly thereafter.