To understand the state of domestic manufacturing industries in the United States, we need to look at the ISM manufacturing index. This metric, known as the purchasing managers’ index (PMI), is a gauge of the monthly change in US economic activity. The number comes from a survey of purchasing managers at over 300 manufacturing companies conducted by the Institute for Supply Management (ISM).
Is Domestic Manufacturing on the Rise?
Understanding the Importance of the ISM Manufacturing Index
The ISM manufacturing index measures changes in manufacturing production across the United States monthly. It’s a vital gauge of the economy’s health as manufacturing forms the backbone of GDP numbers (alongside the services PMI number).
The report is released on the first business day of each month. And indicates the health of the manufacturing sector in the United States. It’s a very important economic indicator. Many businesses and investors use it to measure the country’s investment prospects in the manufacturing sector.
Small Businesses in Manufacturing
A large percentage of manufacturing companies in the United States are small businesses. This sector is made up of companies with fewer than 20 employees. During the COVID-19 pandemic, manufacturing fell significantly, manufacturing facilities were closed and global supply chains were disrupted.
Small businesses had to adapt. Some businesses adjusted to the pandemic by increasing telework, adding workplace flexibilities, or changing pay for jobs.
Domestic Product Manufacturing Outlook
According to the January ISM report, the manufacturing index experienced an uptick to 49.1, beating the expected figure of 47.2. Compared to the December report, four industries experienced growth, compared to one in the previous month.
The 5.5-point rise in the new orders sub-index to 52.5 indicates growth. However, the contraction in export orders continues to decrease, tumbling by 4.7 points to 45.2. The industry employment index figures further contracted to 47.1 for the fourth consecutive month.
Manufacturing production signaled growth in January, increasing by 0.5 points to 50.4. While companies experienced an increase in demand, the backlog of orders dropped for the 16th consecutive month to 44.7.
The prices paid index increased by 7.7 points, rising to 52.9. This figure represents the first rise in raw material prices since April 2023.
Therefore, the headline number suggests a continuing decline in the manufacturing sector. However, there is a light at the end of the tunnel for the US manufacturing sector. The new orders subindex increased to the highest level since figures released in May 2022, breaking a 16-month decline.
According to experts, these numbers show that the US manufacturing sector may be experiencing the bottom of the decline. This will result in the end of weakness and a transition to growth, and strengthening domestic manufacturing.
If we look at the rest of 2024, several data points suggest growth. However, are highly dependent on the direction of US monetary policy set by the Federal Reserve.
What Influences the Growth of Domestic Manufacturing in the United States?
One of the key factors influencing the recovery will be the Federal Reserve’s stance on loosening monetary policy. The promise of interest rate cuts brings favorable economic conditions for the manufacturing sector.
However, the recent Fed meeting suggests that chair Jerome Powell may be returning his stance on six to eight interest rate cuts in 2024 to two or three. It’s uncertain how this new outlook will affect US manufacturing.
Therefore, we’ll need to pay close attention to the ISM manufacturing index as an important indicator as we advance through the year.
Economic and National Security and Domestic Manufacturing
A strong manufacturing base is essential to the national security of the U.S. The nation must be able to defend itself with a strong and self-sufficient manufacturing industry long term.
Economic Policy states the Infrastructure Investment and Jobs Act (IIJA) will support over 89,000 jobs each year. This will support wage growth and better-paying jobs.
Along with this, the Inflation Reduction Act aims to tackle inflation, promote economic growth, and establish US leadership. Including new and fast-growing energy systems of the next decade. Under the act, electric vehicles will qualify for tax breaks. Domestic manufacturing will increase and through research and development, show a positive incline.
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