The U.S. manufacturing industry plays a large role in the fabric of our economy. In 2017, the manufacturing industry accounted for 11.6 percent of our nation’s Gross Domestic Product, the total dollar-value of goods and services produced during the year.
In 2018, corporate America has been balancing a strong U.S. economy and labor market with the recent pressures of rising inflation, energy costs and interest rate hikes. But manufacturers have become increasingly embroiled with the complexities and challenges of America’s ongoing trade disputes. For nearly six months, the U.S. and some of its largest trading partners have imposed multiple rounds of tariffs on each other. Amidst heated rhetoric, mutual threats of additional tariffs seem almost a weekly occurrence.
A tariff is essentially a tax imposed by a government on foreign goods entering its borders. Unfortunately, American manufacturers often feel the negative impact from both sides of the trade dispute spectrum. First, U.S. tariffs imposed on imported steel and aluminum increase their manufacturing costs. Second, foreign tariffs imposed on their American made goods inherently reduce overseas demand for their products.
So, with all the impact from higher costs and trade disputes, how is the U.S. manufacturing industry holding up?
Actually, the U.S. manufacturing industry is holding up quite well. Yes, higher costs and tariffs are having an impact, but so far, both global and domestic demand for their products has been strong enough to help offset this impact.
The latest corporate earnings season — when companies release their financial results for the prior quarter — is starting to wrap up. Overall, the second quarter has proven to be exceptionally strong even for the industrial sector, which consists of manufacturing and industrial companies in aerospace and defense, construction and engineering, machinery and building products, among others.
According to financial data provided by FactSet, 86 percent of the S&P 500 industrial companies have reported better-than-expected corporate earnings. Of the 11 economic sectors tracked by FactSet, only telecom, health care, information technology and consumer staples have reported a higher percentage of companies beating earnings expectations than the industrial sector. Year-over-year revenue growth in the second quarter for industrial companies is a very solid 9.3 percent, just below the 9.8 percent pace for the broader S&P 500.
Despite the challenges created by the trade disputes, job growth in the manufacturing industry has been exceptional. Of the 1.5 million new jobs added so far this year, 193,000 — nearly 13 percent — have been in manufacturing. In July, 37,000 manufacturing jobs were added, the strongest monthly gain so far this year. For the last 12 months ending in July, the manufacturing industry added a hefty 327,000 new jobs, the best 12 months stretch of job growth for manufacturing in 23 years. Among all U.S. economic sectors, the 327,000 gain was behind only professional and business services (518,000) and education and health services (427,000).
Further signs of strength are evident in the latest ISM Manufacturing Index, released each month by the Institute for Supply Management. The index measures the strength of the manufacturing industry via factors such as new customer orders, employment and production output, among others. The index has a benchmark of 50. Anything above 50 indicates growth in the manufacturing industry.
In July, the index was reported at a very strong 58.1, slightly below June’s measure of 60.2. The index reported growth in 17 of the 18 manufacturing sectors. The sector reporting a decline was primary metals, which consists of companies that smelt or refine metals. Year-to-date, the index has an average measure of 59.1, a pace not seen since 2004. The average index reading in 2017 and 2016 was 57.5 and 51.5, respectively.
But what about the future? On Wednesday, President Trump announced tariffs on another $16 billion of Chinese imports that will go into effect on Aug. 23. As expected, China says it will retaliate. The U.S. manufacturing industry has proven its durability in absorbing the current level of tariffs. However, the great unknown is to what extent, and how long, will the manufacturing industry remain resilient if these trade disputes continue.