Despite premonitions of a reversal, the output of the nation's manufacturers continued its upward climb in July, albeit at a muted pace. This month's 0.1 percent increase marks the seventh consecutive report with good news at the bottom line for the nation's factories. On a cumulative basis, the manufacturing sector has now made up roughly one third of the ground necessary to get back to its pre-recession peak reached in the summer of 2000.

That's good news for a state like Indiana, whose manufacturing-intensive economy has suffered more job loss in the recession than any of its Midwest neighbors. In calendar year 2001, payroll employment here was down by 56,300 jobs, or 1.9 percent. That loss exceeded those posted by more populous states like Illinois, Michigan, and Ohio, who saw declines of 33,300, 22,000, and 50,600 jobs, respectively, over the same period.

But it is clear from the Federal Reserve's report on Industrial Production that conditions in manufacturing remain quite spotty, especially in recent months. Broken down by industry, durable manufacturers as a group posted a surprisingly strong 0.5 percent gain in July. That increase, however, was carried on the shoulders of a single industry, motor vehicle manufacturing. Automakers boosted output by a full 4.2 percent in July, following a 2.8 percent increase in the previous month. 

Take away that growth and what you have left is a manufacturing contraction in July of 0.3 percent. Other than the steel industry, which continued its tentative recovery, most other heavy industries show a slowdown in growth in the second quarter of the year, and outright declines in July. The so-called "media recession" is evident in the continued declines in printing and paper, while food processing output continues to vacillate, albeit around a respectably high level.

The conservative management of inventories since the recession began may make it difficult to assess the true health of manufacturing for the next several months. Reports from other sources, such as the surveys conducted by the Institute for Supply Management, suggest that new order activity has moved sharply downward in recent weeks, which is a troubling sign. However, with inventories already run down over the last eight months, we may see some output increases unassociated with final sales in the months ahead.

Gazing at the data on manufacturing from afar, it would seem that the industrial economy is performing its familiar role in this economic cycle, almost perfectly on cue. Stumbling early, nearly nine months before the recession in the overall economy was declared, the aggregate data now show manufacturing heading back upwards, well before any resumption of job growth that would make us certain that the trough has been passed.

But the profound weakness in business spending that continues to this day throws a monkey wrench into that neat little picture. Broken down by type of good, production of business equipment declined in July, reflecting a downturn in demand for information processing equipment and a 0.6 percent contraction in production of industrial machinery. Given the upheaval in capital markets, there is little prognosis for an immediate change to this situation.

There may be enough momentum in the U.S. economy to keep the industrial sector's seven month-long growth streak alive for at least a little while longer. But a new spark is clearly needed before we can have any confidence that the trough of this cycle has been passed.