Rapid Growth In Factory Output Could Quicken Economic Recovery

The United States, China and India, all showed rapid growth in manufacturing activity, while U.K. factory output saw the greatest improvement in sixty years. The stronger than expected …

The United States, China and India, all showed rapid growth in manufacturing activity, while U.K. factory output saw the greatest improvement in sixty years. The stronger than expected growth in factory output reflects a broad and deep recovery, and may help the US overcome its main obstacle of unemployment. See the following article from Money Morning for more on this.

The world’s factories are churning out products at record rates, fueling the global economic recovery at a faster pace than thought possible just a few months ago.

The latest figures show factory output is growing at a record rate from the United States to China to Europe and beyond. And as manufacturing expands, economists expect the world’s economies to continue to expand, creating jobs and putting money in consumer pocketbooks.

As long as companies have plenty of cash to finance expansion, output from the world’s factories should continue to grow, according to Money Morning Contributing Writer Shah Gilani, who recently launched the Capital Wave Forecast, a new trading service based on capital flows.

Recent surveys show U.S. companies are sitting on almost $1 trillion in cash.

“Manufacturing cycles are usually sustainable as long as there is capital and credit available to buy finished products,” said Gilani in a recent interview. “That means jobs, opportunities and rising standards of living. Follow those trends and we’ll have a good window into manufacturing trends.”

U.S. Factory Output Puts GDP on the Rise

In the United States, the Institute of Supply Management (ISM) revealed that factory output expanded in March for the eighth consecutive month, accelerating at its fastest pace since July 2004.

ISM’s closely watched Purchasing Manager’s Index (PMI) climbed from 56.5 in February to 59.6 last month, beating economists’ predictions, boosted by a surprise rise in inventories, which have been falling for the last four years. A reading above 50% indicates that the manufacturing economy is expanding; below 50% indicates that it is contracting.

Several factors are driving the manufacturing boom, including gains in employment, new orders, and inventories. Both new orders and production rose above 60% in March, closing the first quarter with significant forward momentum.

The Inventories Index surprised economists by showing growth for the first time after 46 months of liquidation. Norbert Ore, ISM chairman, said that manufacturers are ramping up inventories based on expectations of greater economic activity.

Manufacturing growth is an important indicator of broader economic strength. Almost 22% of the U.S. economy, for example, comes from manufacturing.

“The past relationship between the PMI and the overall economy indicates that the average PMI for January through March corresponds to a 5.4% increase in real gross domestic product (GDP), Ore said. “In addition, if the PMI for March is annualized, it corresponds to a 5.9% increase in real GDP annually.”

“The report is very positive on all points,” Dan Meckstroth, a chief economist with the Manufactures Alliance, told CNNMoney. “The index itself is at its best we’ve seen so far in this recovery.”

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The rebound in manufacturing reflects a broad and deep recovery. In fact, 17 of the 18 manufacturing industries measured by the closely monitored monthly survey showed improvement.

But even more important, overall manufacturing strength is helping the U.S. overcome the biggest obstacle to getting the economy back on track – high unemployment.

Manufacturing employment continued to improve as the hiring index registered a 10% month-over-month improvement, indicating that manufacturers are finally starting to replace laid-off workers.

In fact, the U.S. jobs report for March showed some 17,000 manufacturing jobs were added to the economy last month. So far this year manufacturing has produced 45,000 jobs in the United States.

Global PMI Adds Strength

Growth of the global manufacturing sector accelerated in March, as well.

The JPMorgan Chase & Co. (NYSE: JPM) Global Manufacturing PMI rose to 56.7 in March. That’s up from 55.4 in February and the highest level since May 2004. The headline PMI has remained above the neutral 50.0 mark for nine consecutive months.

“The headline PMI rose to a 70-month high in March. Growth of production and new orders regained most of the momentum lost in February, while global trade volumes rose at a survey record pace ,” David Hensley, Director of Global Economics Coordination at JPMorgan told the Financial Times.

Among the largest industrial nations, manufacturing activity growth was especially rapid in the United States, China, and India.

Meanwhile, U.K. factory output is growing at its fastest rate in 16 years. Factories in the Eurozone are plugging along at a four-year high, due to a record jump in Germany and big gains in France, Italy, the Netherlands and Austria. Even Spain and Ireland are growing their manufacturing sectors again, the survey showed.

March data showed a further increase in total new orders , with the rate of expansion faster than in the previous month. New orders have risen in each of the past nine months.

Growth in global new export orders was the sharpest since data were first compiled in January 1998.

Manufacturing staffing levels increased for the third month in a row in March. Moreover, the Global Manufacturing Employment Index rose to its highest level since June 2007.

The world’s automotive industry continued to bounce back. All the major automakers reported strong sales for March, thanks in part to big incentives. Ford Motor Co.’s (NYSE: F) sales rose 40% and total sales at General Motors climbed 21%. Nissan Motor Ltd. (PINK: NSANF) sales jumped 43%, Honda Motor Co. (NYSE ADR: HMC) sales rose 22%, while scandal-plagued Toyota Motor Corp. (NYSE ADR: TM) said its March sales increased 41% from a year ago.

All of these gains bode well for worldwide trade.

Mexico’s peso has been climbing on speculation rising factory production in the United States will boost demand for the Latin American country’s exports. The peso has risen 7.6% this year versus the dollar, the best performance among the 16 major currencies tracked by Bloomberg. America buys about 80% of Mexico’s exports.

“Evidence of a strong rebound in the global movement of goods is continuing to accumulate,” Paul Horsnell, head of commodities research at Barclays Capital (NYSE ADR: BCS) told the Financial Times.

Risks and Opportunities

Of course, manufacturing is no magic bullet.

Plenty of risks still face the global economy, including inflation worries, continued weakness in real estate, employment and even strained trade relations.

In fact, the cost of manufacturing has been rising along with demand.

All of the national manufacturing surveys for March reported increases in costs, with the sharpest rates of inflation reported by Taiwan and the United States.

Part of the cost increase reflected supply-chain factors, indicating the suppliers of raw materials were having a hard time keeping up with demand. March had the longest vendor lead-times since June 2004.

A 75% increase in oil prices over the past year is starting to worry some policymakers.

David Kirsch, director of market intelligence at consultants PFC Energy, said that Organization of Petroleum Exporting Countries (OPEC) delegations – particularly those of the Gulf Arab states – are increasingly concerned about managing rising prices.

“Concern is shifting toward the possibility of a sharp price rise that could derail the nascent economic recovery,” Kirsch said in a note to clients obtained by The FT.

But the surging manufacturing sector does point to a few industries that stand to gain from the resurgence in production.

Money Morning’s Gilani thinks smaller companies in the natural resources sector should get a close look from investors looking for opportunities.

“Raw materials and basic materials will be the biggest beneficiaries of surging manufacturing,” he said. “Investors need to look for the little components of big products. Who is making the critical components in the big products we all think about? There are lots of little companies who will grow into giants because of the niche products they manufacture that are necessary components of other complex products. Investors should definitely be looking at small cap companies with big futures.”

Gilani also thinks the U.S. technology sector stands to benefit from increased demand, as long as companies keep putting out cutting-edge products that stay ahead of foreign competitors.

“The U.S. has to continue to push the envelope in technology,” Gilani said. “It’s really our ticket onto the global juggernaut. It doesn’t matter that U.S. tech companies mostly manufacture overseas.Products are sold everywhere, and that’s what matters.”

This article has been republished from Money Morning. You can also view this article at
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