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Manufacturing and exports show signs of strength

May 03, 2012

| MoneyRates.com Senior Financial Analyst, CFA

After a string of disappointing economic reports in April, May began with an encouraging report on U.S. manufacturing growth. One of the few strong points in the first quarter GDP report may also be related to this recent strength in manufacturing, which could represent a sustainable source of progress for the economy.

The question remains, though: Will this be enough to break the economy out of its rut?

Escaping the rut

The recent economic rut represents more than just the dreary series of economic reports that appeared in April -- disappointing employment growth and weak GDP figures among them. Although the economy technically escaped from recession in the third quarter of 2009, for most of the time since it has been in slow-growth mode. Real GDP growth has reached a 3 percent annual rate just once in the past seven quarters.

The signs of the rut are everywhere. Nearly three years into the economic recovery, unemployment is still high. Interest rates, from savings accounts to treasury bonds, are anemic. The stock market's progress comes in fits and starts, and investors are so cautious that they seem almost to be walking on egg shells.

Manufacturing rises

Against this dreary backdrop, a May 1 report on the manufacturing sector provided some welcome good news.

The Institute for Supply Managers announced that its manufacturing index rose to 54.8 in April, up from 53.4 in March. That's the highest level in 10 months, and pushes the index more firmly into the above-50 territory that represents an expansion.

The manufacturing report takes on special significance because it is one of the first major economic indicators for the month of April. Following generally disappointing reports for March, economists are looking anxiously to see if the economy is sliding again toward recession.

Exports provide a source of new demand

One reason for the strength in manufacturing may be found in the first-quarter GDP report. Although overall GDP growth was lackluster, one bright spot was export growth. The Bureau of Economic Analysis reported that real export growth was 5.4 percent in the first quarter, up from 2.7 percent in the fourth quarter of 2011.

Foreign markets have mostly been a cause of concern lately, with a focus on the troubled economies of Europe. However, if large developing economies such as China and Brazil can sustain their growth, it could help demand pull through the current malaise.

What to watch for

Will the strength in manufacturing lead to more jobs, higher rates for savings accounts and a more reliable stock market? The stock market rallied on the news about the manufacturing index, so that's a start. It will take much longer before this translates into higher rates on savings accounts, but in the meantime, the next key sign for the economy will be if the job market firms up after its March stumble.

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