Pace of U.S. Manufacturing Output is Contracting

Written by Peter Wright

Based on Steel Market Update’s analysis of 10 indicators, U.S. manufacturing output is now contracting and articles manufactured from iron and steel are down by 6.1 percent year over year.  

This report summarizes 10 data streams that describe the state of U.S. manufacturing in general and the steel industry in particular. In data released in October, the year-over-year growth rate of six of the 10 data streams was negative on a three- month moving average (3MMA) basis and one was positive.

Figure 1 is a summary of data received in October and shows the year-over-year percentage change on a 3MMA basis. The summary sheet shows directional arrows comparing October data releases to September’s data. On that basis, three of the indicators improved and seven deteriorated.

Based on American Iron and Steel Institute estimates of steel mill shipments by market classification, almost 50 percent of the steel consumed in the U.S. is manufacturing-oriented. This breaks down to about 27 percent in ground transportation, 9 percent in machinery and equipment, 5 percent in appliances, 4 percent in defense and about 4 percent in containers.

The Industrial Production Index

Figure 2 shows the 3MMA of the IP index since January 2007 as the blue line and the year-over-year growth as the brown bars. March 2017 was the first month of positive growth in the 3MMA since April 2015. Year-over-year growth peaked at 5.8 percent in October of last year and has contracted every month through September when it reached 0.2 percent. Manufacturing capacity utilization improved from 74.48 percent in January 2017 to 77.01 percent in December last year and has declined in 2019 to 75.46 percent in September with a negative year-over-year growth rate of 1.9 percent on a 3MMA basis (Figure 3).

New Orders for Durable Goods (Advance Report)

The year-over-year growth rate of durable goods reached 10.1 percent in October last year and since then has declined to negative 1.4 percent in August, which was an improvement from negative 1.6 percent in July. Figure 4 shows the 3MMA since January 2010. This is considered to be one of the earliest indicators of both consumer and business demand for U.S. manufactured goods.

New Orders for Manufactured Products

The growth rate of new orders for manufactured products as reported by the Census Bureau declined every month October 2018 through August 2019 when it reached negative 0.9 percent on a 3MMA basis (Figure 5).

New Orders for Products Manufactured from Iron and Steel

Within the Census Bureau M3 manufacturing survey is a subsection for new orders for iron and steel products. Figure 6 shows the history since January 2000. The year-over-year growth rate has declined every month from 21.6 percent in March last year to negative 6.1 percent in July 2019.

Inventories of Products Manufactured from Iron and Steel

The inventory build was at a rate of 12.2 percent year over year in December and fell every month through July when it was negative 1.8 percent (Figure 7). Inventories declined as new orders declined, therefore we rated this indicator as having a positive direction in Figure 1.

Light Vehicle Sales in the U.S

Year over year on a 3MMA basis, light vehicle sales were up by 0.8 percent in September when sales totaled 17.2 million units annualized and were comprised of 72.1 percent light trucks and 27.9 percent autos. However, light vehicle sales have trended down slightly in the last three years as measured by the cyclical peaks. Declining sales in the auto component in the last three years have resulted in GM closing several small car plants. The light truck category includes SUVs and crossovers. Overall, sales are still higher than the pre-recession level (Figure 8). Import market share in September was 22.1 percent, which was the lowest monthly result since March last year.

Manufacturing Employment

Manufacturing employment plummeted during the recession and gradually improved from the spring of 2010 through 2014. Growth was flat in 2015 and declined slightly in 2016 when 23,000 jobs were lost during the year as a whole. There was a turnaround in 2017, and 264,000 jobs were created in the 12 months of 2018. The annualized rate of manufacturing job creation in the first nine months of 2019 was 55,000, therefore it has slowed markedly from last year (Figure 9). The motor vehicles and parts subcomponent of manufacturing employment had a net loss of 17,000 jobs in the first nine months of 2019.

Manufacturing Productivity

The Bureau of Labor Statistics reported that in Q2 2019 manufacturing productivity gained 0.2 percent, down from an average of 0.74 percent in the four quarters of 2018 (Figure 10).

The ISM Manufacturing Index

The Institute for Supply Management’s Manufacturing Index is a diffusion index. ISM states: “Diffusion indexes have the properties of leading indicators and are convenient summary measures showing the prevailing direction of change and the scope of change. An index value above 50 indicates that the manufacturing economy is generally expanding; below 50 indicates the opposite.”

Figure 11 shows the 3MMA of the ISM index from January 1997 through September 2019. The index surged from January 2016 through October 2017, leveled off through October 2018 and has declined since then. The index had a value of 47.8 in September with a 3MMA of 49.4. The 3MMA was down by 10.4 points year over year. September was the first month for the 3MMA of the index to be below 50 since March 2016.

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