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Wells Fargo Securities Economics Group: Factory Sector Still Treading Water

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 months.

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 the year.


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