No publication tracks the numbers on US manufacturing like Supply Chain Digest, but we were still surprised to see that virtually no other sources seem to have picked up on the Federal Reserve’s revision of its industrial output numbers in early April that paints a much less rosy picture of US manufacturing.
Each month, the Fed issues numbers on full US industrial production, which includes output from manufacturers, mines and utilities. Each individual component and industrial output as a whole are given an index score relative to some baseline year, which currently is the average month in 2012.
Supply Chain Digest Says... |
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| The new Fed numbers paint a much different picture of the strength of the US manufacturing sector and certainly its growth since the Great Recession and over the past three years. |
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SCDigest usually focuses on just the numbers relative to manufacturing, as that is where our interest lies, and also due to the fact that mining and especially utilities can have highly variable output levels. A super hot July, for example, can send utility output soaring as business and consumers crank up the air conditioning.
A challenge with following the Fed numbers is the frequent revision to the data. And that is certainly the case here in 2016, as this year’s annual revision sheds a very different light on how US manufacturing is performing now some eight years after the Great Recession.
In each of the six months prior to the April revision, US manufacturing output hovered somewhere very close to an index score of 106, meaning output was about 6% above the average month in 2012. That would indicate annual growth of a little less than 2%, lukewarm at best even as many perceive some strength in the manufacturing sector.
But the April revision has pushed that trend line way down. Now, scores for nearly last year are centered around 103, not 106 - a decline of about 3 percentage points. For example, the March score came in at 103.1, down a bit from the 103.4 level seen in February.
But more importantly, this means the new data show that production since 2012 is up only about 3%, not 6%. That means annual growth of only 1% or so since 2012 - and that US manufacturing growth over that time frame is just half of what we thought it was before the new Fed numbers.
There is other bad news in the data. In August of 2014, SCDigest was reporting that at long last, US manufacturing output had finally again reached levels of the previous peak year, 2007, when the output index from the Federal Reserve climbed back the 100 level in July of 2014 and stayed there for many months. (See US Manufacturing Output at Last Makes it Back to Pre-Recession Levels.)
However, after a revision to the data in 2015, that milestone evaporated, and US manufacturing production late in 2015 was below 2007 levels some eight years later. In December of 2015, the Fed index was 106.2, versus 108.3 in December of 2007, a deficit of about 2 percentage points.
That gap has now expanded again with the new revision, as seen in the chart below.
The average monthly index of US manufacturing output in what is the peak all-time year of 2007 equals 109.1, meaning monthly output today is roughly six percent below the peak levels the numbers not long ago had told us we had already surpassed.
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That is quite a change indeed. It may now be many more years before the US reaches those 2007 peak manufacturing levels again.
What happened? A Fed analyst told SCDigest that "In the 2016 annual revision, published on April 1, the gains in manufacturing output from 2011 through 2013 are similar to those reported earlier, but the rates of change for 2014 and 2015 are noticeably lower."
She added that "The lower gains in the Industrial Production index for manufacturing in 2014 reflect new benchmark data for output in 2014 from the U.S. Census Bureau's Annual Survey of Manufacturers, as well as revised data from the 2013 ASM. As a result of these new data, we have revised downward the productivity assumptions for 2015 and after, and we now estimate that manufacturing IP was flat in 2015, rather than having registered a small gain."
Obviously, the level of manufacturing output has a major impact on economic growth, jobs and more. But more directly, the new Fed numbers paint a much different picture of the strength of the US manufacturing sector and certainly its growth since the Great Recession and over the past three years.
It also means the analysis SCDigest has often performed - including earlier this year based on data through the end of 2015 - on output changes by some three dozen manufacturing sectors also needs to be redone.
Usually these data revisions, needed to maintain historical accuracy for sure, result in relatively mild changes in the numbers, but not so here. US manufacturing growth since 2012 is half what the numbers have been telling us until a few weeks ago.
Any reaction to this change in US manufacturing data? Are you surprised the numbers have been revised down so much? Let us know your thoughts at the Feedback section below.
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