Impediment to growth in U.S. manufacturing: Global recession and reduced demand

August 2, 2012

Though U.S. manufacturing has rebounded over the past decade, reversing years of outsourcing and stagnation in domestic investment, one major impediment to further growth has presented itself in the summer of 2012.

After three straight years of increased activity in the sector, the summer months have brought with them global recession fears and a drop in consumer demand. Though losses have been minimal for the industry, due to a move to lean manufacturing and more efficient practices by many firms, there needs to be a reversal in the resources and capital available to companies.

Bloomberg News reported that the Institute for Supply Management's factory index grew by 0.1 percent in July, but the 49.8 reading was still below the benchmark barrier for contraction and expansion of 50.

According to the news outlet, the projections from industry analysts were also much higher than the actual reading, signaling that the overall economy may be doing worse than expected. This sentiment comes from the notion that manufacturing is doing well, but demand from other areas of the world is too low for expansion of any industry. 

"We’ve seen slower growth in emerging markets, the recession in Europe – all of that is still ever-present," Sam Bullard, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina, told Bloomberg. "Firms are holding pat right now."

However, there may be an uptick in demand from Europe and within the U.S. in the near future, as the central banks for both economies have hinted that potential stimulus measures could be taken.

The sentiment of consumers has also affected the sector, as manufacturers have been hurt by a slowdown in spending across a number of industries, including retail and construction, according to a separate Bloomberg article.

"You can point to general uncertainty in the economy that’s caused households to increase their savings and caused businesses to be more cautious," Ellen Zentner, senior economist at Nomura Securities International Inc. in New York, told the news outlet. "Businesses are reporting that their clients are waiting until the last minute to place orders."

The Associated Press reported that the future of U.S. manufacturing remains positive, despite the ISM survey, but further slowdowns in emerging markets and major economies could limit growth potential for firms in the industry.