Upturn in manufacturing appears to have begun

The Outlook

August rebound suggests sector has turned the corner

September 05, 1999|By Sean Somerville

A KEY GAUGE of U.S. manufacturing activity moved higher in August, the nation's purchasing managers reported last week, underscoring a strong rebound in the industrial sector that had been hit hard over the past year amid weak export demand.

The National Association of Purchasing Management said its manufacturing index rose to 54.2 in August from 53.4 in July. A reading above 50 signals factory-sector growth. Manufacturing is being driven by a revival of overseas economies and continued strength in the domestic economy. How broad is this manufacturing upturn? Which sectors are benefiting most? How likely is it to continue?

David Greenlaw

Economist, Morgan Stanley Dean Witter

The data suggest that the upturn is relatively broad. You have sectors like motor vehicles and electrical equipment and computers that appear to be quite strong.

You might throw in furniture and appliances. And I think it is likely to continue. With demand strong and the recovering Asian economies, I think manufacturing has turned the corner.

Some of the sectors, motor vehicles and appliances, are certainly subject to interest rate swings. But I don't think we've seen enough of a rise to cool off interest-sensitive sectors.

Anirban Basu

Director of research and applied economics, Regional Economic Studies Institute, Towson University

It's true that manufacturers have been hurt since the summer of 1997 by the decreased global demand for U.S. products that followed onset of the Asian crisis. But that is not where the pain ended. Manufacturers not only suffered from decreased exports but also felt the sting of increased import penetration.

Indeed, while many analysts focused on weakness in steel and other sectors of heavy manufacturing, light manufacturers have also been hurt. In 1998, employment declines among nondurable goods manufacturers such as apparel were more rapid than on the durable goods side of the economy.

The reason is the cheap supply of imports to American retailers. Consumers benefited tremendously from low prices, but at the same time the presence of low-priced goods has severely cut into U.S. manufacturing profit margins.

That dynamic is beginning to change. Asian currencies are beginning to rise against the dollar and import prices are rising correspondingly. That will provide U.S. manufacturers with more pricing power going forward.

Export-oriented sectors such as industrial machinery and transportation equipment will benefit most from rising levels of exports in the months ahead. Apparel and furniture will benefit from the other side of the coin -- the fact that import prices are rising.

Paul Engle

Senior manager, management consulting, with Grant Thornton

Our view is that the Asian currency crisis of 18 months ago had a fairly significant impact on certain businesses, primarily electronics and some other industries.

Now that the currency situation has moderated and there is some stability there, folks in those industries are seeing an upturn.

The business people we talk to, primarily with the electronics industry, are having a very good year. They're ahead of 1998 and ahead of where they had planned to be. The consumer is probably the biggest driver of the economic boom. And I don't see any evidence of moderation in that consumer boom.

People are taking profits from the stock market and stock options, and they are buying summer homes, automobiles and vacations. How long this will last I think is the $64,000 question.

A lot of people two or three years ago were saying this economic boom couldn't last through 1998 or 1999, and it has.

The key is interest rates. As long as they're at a low level, they will fuel optimism and encourage capital equipment purchases.

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