The PNC Financial Services group reported recently that the ISM manufacturing index fell from 54.2 percent in February to 51.3 percent in March. However, it remained above the 50 level that indicates expansion in manufacturing, and has been above 50 in 43 of the last 44 months. For all of the first quarter the ISM manufacturing index averaged 52.9 percent, up from 50.6 percent in the fourth quarter of 2012, a positive for GDP growth in early 2013. The production, new orders, inventories and supplier deliveries components fell in March, while the employment index rose, from 52.6 percent to 54.2 percent.
Of the 18 industries covered in the survey, 14 reported expansion in March, with the biggest gains in wood products and furniture and related products, both industries that are benefitting from the recovery in the housing market. Just three industries reported contraction in March: petroleum and coal products, chemicals and machinery.
Factory orders rose 3.0 percent in February, more than reversing January’s 1.0 percent decline (revised up from a 2.0 percent decline). However, most of the growth came from a huge increase in aircraft orders for Boeing; excluding transportation goods, factory orders were up just0.3 percent. Core capital goods orders—non-defense capital goods excluding aircraft—fell 3.2 percent in February, revised from a 2.7 percent decline in the advance estimate. Core capital goods orders were up 6.7 percent in January.
Shipments of manufactured goods were up 0.9 percent in February, and have been increasing steadily since the spring of 2012. Core capital shipments rose 1.9 percent in February, after falling 0.7 percent in January. Manufacturing is expanding but is now roughly keeping pace with overall economic growth, rather than leading it, as was the case earlier in the recovery. Manufacturing industries tied to the housing market are doing especially well given improving homebuilding and rising home sales.
Business investment continues to expand, supporting manufacturing, although growth has slowed after a big cyclical run-up early in the recovery. Gradually improving consumer demand, including the improvement in light vehicle sales, is also boosting the industry. Manufacturing export growth has slowed with the ongoing recession in Europe, although conditions there appear to be stabilizing.
Real GDP growth in the fourth quarter of 2012 was only 0.4 percent at an annual rate, but as the first quarter ends the economy is expanding at a pace closer to its potential, around 2.5 percent at an annual rate. Homebuilding continues to lead economic growth and business investment is also a positive. Consumer spending is increasing despite the hit to incomes from higher Social Security and personal income taxes. Smaller investment in inventories and a big cut in defense spending were big onetime drags on growth in the fourth quarter that reversed in the first quarter. However, trade was a weight on first quarter growth, and federal spending cuts from the sequester will be a near-term drag. PNC is forecasting that the economy will expand around 2 percent from the fourth quarter of 2012 to the fourth quarter of 2013, allowing for further gradual improvement in the labor market.