Lack of Conviction
The headline manufacturing index finished the year just above the 50 line
that separates expansion from contraction in the factory sector. In the final
six months of 2012, the ISM was above 50 and below 50 for three months
each. Business confidence has firmed slightly, but it seems as though there
is a lack of conviction, which may be attributable to congressional discord
and the absence of a long-term fix to the country’s fiscal challenges.
We can find some evidence of that in the selected quotes from various
respondents, which the Institute for Supply Management features each
month in its report. One respondent noted, “Uncertainty in additional
government regulations and tax climate seems to be slowing orders.”
Despite the improvement in the headline index, the new orders index was
unchanged at 50.3.
The production index slowed to 52.6 from 53.7 in November, suggesting a
slower pace of growth for output in the manufacturing sector. Industrial
production has been up one month and down the next every month going
all the way back to March. The improvement in today’s production index is
a welcome indication that output may be on track to firm up in coming
The employment index climbed to 52.7 from 48.4, offering an affirmation
that the labor market is continuing to heal.
Firming Global Economy?
Both the export index and the import index flipped from contraction to
expansion in the month, with the larger increase on the export side. An
improvement in export orders would not only reduce the nation’s trade
deficit, it would offer a welcome offset to order weakness that might be
attributable to uncertainty surrounding the inability of Congress to provide
long-term visibility on fiscal policy. Our global forecast looks for the United
Kingdom and the Eurozone economies to finish 2013 with positive GDP
growth, and we expect growth in China to gain steam as the year
progresses. If realized, this firming in the global economy might allow the
U.S. factory sector to export its way to slow growth.
What Does This Mean for the Growth Outlook?
After a slow start to 2013 attributable to the fiscal cliff, we expect the
economy to move along at a roughly 2 percent annual growth rate from the
second quarter on. In terms of the outlook for business spending, we expect
equipment and software purchases to retrench in the first quarter before
returning to a roughly 2.5 percent growth rate in the remaining quarters of