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December 27, 2002

Crunch Time for Manufacturing Economy

Maybe the best plan of action for the manufacturing economy is to rip up the old playbook and start all over again.  Certainly the second half of 2002 has been a disappointment.  After an impressive rebound from its recession low point of December 2001, factory output nationwide has slipped and stumbled since mid-summer.  Coming into the month of November, the manufacturing component of the Federal Reserve's Index of Industrial Production had registered four consecutive monthly declines.

According to the November report released by the Fed, that streak has now been halted.  The manufacturing index edged up for the month by 0.1 percent, thanks largely to a 3.9 percent increase in the output of motor vehicles.  But the details of the report confirm that the manufacturing economy remains in very frail health.

The November index is among the first to reflect the Federal government's new industry classification system -- the North American Industry Classification System, or NAICS.  The impact of this change on manufacturing data is fairly small, with only a few individual industries, including portions of the printing, publishing, and lumber industry groups.  The Federal Reserve has put those groups back into the total Index to preserve historical consistency.  

More importantly, the NAICS data open windows to important individual industries that never existed with the older SIC system.  The new system gives us much better estimates of the impact of high-technology industries on the overall manufacturing economy, as well as output indices for industries such as semiconductors, computers, and communications equipment.  Since the historical data have been restated back as far back as the 1970s, this puts the trends that have brought us to this point in an exciting new light.

The new data underscore the depth of the contraction in the high technology economy.  Since the official onset of the recession in March 2001, the high tech sector of the economy has made no contribution to overall growth in manufacturing, whereas in the 1990s it added between 3 and 4 percentage points to annual growth.  Within high tech, the output of computers and semiconductors has recovered from the recession and is growing, whereas communications output continues to fall.

Over the course of the recession, the capacity utilization rate in high technology industries has crashed from a pre-recession peak of over 90 percent, down to its current level of just above 60 percent.  It is no wonder that the makers of capital goods in these industries face such dire prospects.

But when it comes to the current state of the economy, it’s the story in the older, bricks and mortar side of manufacturing that is the most important.  If you take out the motor vehicle manufacturing industry, then the manufacturing output of the economy has fallen by 0.3 percent for two consecutive months.  That kind of contraction is more reminiscent of the recession we thought was behind us.

The fear of many analysts is that low interest rates and other sales gimmicks are causing today's motor vehicle sales to borrow from the future.  If that is true, and sluggish sales are right around the corner, the manufacturing economy will have to line up a few more star players in a hurry.

Link to this commentary: https://commentaries.cberdata.org/390/crunch-time-for-manufacturing-economy

Tags: manufacturing, recession


About the Author

Pat Barkey none@example.com

Patrick Barkey is director of the University of Montana Bureau of Business and Economic Research. He served previously as Director of the Bureau of Business Research (now the Center for Business and Economic Research) at Ball State University, overseeing and participating in a wide variety of projects in labor market research and state and regional economic policy issues. Note: The views expressed here are solely those of the author, and do not represent those of funders, associations, any entity of Ball State University, or its governing body.

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