2018 was a challenging year for the U.S. manufacturing industry. The global economy began to weaken and continues to show signs of economic strain. Much of this weakness comes from America’s top trading partners — China, Canada, Mexico and the European Union — which buy significant quantities of American goods and services.
Domestically, America’s trade disputes placed manufacturers in the direct crosshairs of our adversaries. Foreign tariffs on U.S. manufactured goods make American products more expensive to buy in overseas markets, thus reducing demand. U.S. tariffs on imported steel and aluminum raise the cost of raw materials. Finally, the four interest rate hikes by the U.S. Federal Reserve in 2018 increased borrowing and operating costs.
Despite these challenges, the U.S. manufacturing industry has held up fairly well, but at times has shown signs of strain. For the financial markets, it is these inconsistencies that have them pondering the true strength of the industry as we continue into the new year.
The ISM Manufacturing Index is a key indicator of the strength of the U.S. manufacturing industry. The index has a benchmark of 50. Any reading above 50 indicates the manufacturing industry is expanding. Below, the industry is contracting.
In March, the index reported a reading of 55.3, marking 31 consecutive months of expansion. Of the 18 manufacturing sectors tracked by the ISM, 16 reported growth in March. The two sectors that declined were apparel, leather and allied products and paper products.
Since recording a 14-year high in August, the ISM Index has gradually declined. In other words, the U.S. manufacturing industry has still been expanding, but at a slightly slower pace. February’s index reading of 54.2 marked a 2-year low.
The importance of America’s manufacturing industry lies in its sizable contributions to our economic growth. On average, the industry accounts for more than 11 percent of our nation’s gross domestic product — the total dollar value of goods and services produced by the U.S. during the year.
The U.S. manufacturing industry, however, does have some definitive tailwinds to help guide its path forward. The U.S. labor market remains strong, employee wages continue to rise and American consumers are confident in their economic and financial future. The U.S.-China trade dispute, entering its second full year, appears close to a final resolution. And after two consecutive years of aggressively raising interest rates, the Federal Reserve seems content, for now, to shelve further plans for additional rate hikes.
This cautious optimism has been reflected in the recent surge in U.S. manufacturing stocks. In the first quarter, the Dow Jones Industrial Average gained an impressive 11.2 percent, its strongest quarterly gain in six years. However, the Dow Jones U.S. Industrial Index — which tracks the performance of the U.S. industrial sector, including manufacturing — gained a massive 18.2 percent in the first quarter.
Yes, a lot can change, and still-unknown obstacles can pop up to impede America’s manufacturing industry. But as 2018’s obstacles slowly start to fall away, the markets are betting a less-constrained U.S. manufacturing industry can finally kick into a much higher gear.