Weak global economy continues to weigh on U.S. manufacturers

August 16, 2012

Despite the gains made by U.S. manufacturing firms over the past several years, due to an insourcing trend and an overall adjustment of business strategy, there may be one impediment to the continued growth of these companies.

The global economic meltdown that continues to tear through the European economies has begun to affect demand so much in these countries that it is weighing down several sectors in the U.S. Manufacturers have products that are ready to ship, but the places where they are destined to go have cut their capital investments and are not looking to import at the level that they had initially signaled.

The Philadelphia Federal Reserve Bank noted that this drop in demand has affected the factory activity in the mid-Atlantic region, which shrank in August for the fourth straight month. However, despite the level of activity being in the contraction range, the economic indicators for the region found that this number was higher than the reading for July.

According to Reuters, the Philly Fed reported that its business activity index rose from minus 12.9 in July to minus 7.1 in August. Though the rise represented increased production and demand it came in below the analysts projections of minus 5.

The number has remained below zero, which signals contraction, but it has been rising and may cross this threshold into positive expansion if the global economy recovers.

The more comprehensive report from the Institute for Supply Management showed the sector contracted in June and July as manufacturing has been hurt by economic uncertainty both domestically and abroad, factors that likely weighed down on the Philly Fed numbers.

"The weakness in manufacturing reflects a weaker global economic picture," said Vassili Serebriakov, currency strategist at Wells Fargo in New York.

His sentiment was mirrored by Sean Incremona, a senior economist at 4Cast Inc., who noted that the pace of growth has been unimpressive since the global economy started to dive.

"Externally there are some headwinds with pretty soft global conditions. We think that business investments are pretty tame in 2012 so that is restricting manufacturing from a domestic standpoint as well," Incremona told Bloomberg News.

The optimism in the sector dropped slightly, according to the news outlet, but this is likely linked to the overall economic picture.