This week’s releases offered more signs of slowing in the US manufacturing sector. The ISM manufacturing index declined to 49.7 for June, falling below the symbolic 50 threshold for the first time since July 2009. Hard data on manufacturing activity have also cooled. For instance, growth in domestic manufacturers’ orders has slowed to an annualized rate of -1.0% over the last six months in nominal terms, or -3.6% adjusting for inflation . The ISM survey’s new orders index as well as those from the regional manufacturing surveys suggest orders growth could remain weak for the time being.
US manufacturers export about 20% of their total output, and exports account for about 50% of final demand for US products (a large share of manufacturing output is used as an intermediate input in the production of other goods ). Therefore, slowing growth in foreign economies has likely weighed on firms’ orders and sales. This is certainly one of the messages from the latest survey data: the ISM new export orders index declined by 11.5 points between April and June, the largest two-month drop on record except for September-October 2008.
The decline in manufacturing production during the recession was well beyond what would be predicted by the sector’s “beta”—its normal responsiveness to changes in the overall economy. We estimated a simple regression model which explains quarterly changes in manufacturing industrial production with a constant and changes in real GDP (sample is 1970-2007). We then simulated the model-implied path for manufacturing production since 2007, based on known GDP data. Exhibit 1 (above) shows that manufacturing production declined much more than predicted, even after accounting for the sector’s high beta.
One cannot draw "The Obama Effect: Anti-Business Policies Making the Economy Worse" conclusion from that graph. The overwhelming decline in output occurred before the implementation of any stimulus policy which was signed in Feb 2009 and before Obama was even in office (Obama was inaugurated in January 2009, so there might be 1-2 months tops in output decline during his administration.) The counter factual regression using the betas suggests that firms' output responded differently to changes in GDP during 2008 Financial Crises than during the past 40 years. Given the greater slope of real output and greater current (2012) output relative to the counterfactual regression, one might assert that Obama's policies were beneficial to business, though I am hesitant to draw that conclusion.
ReplyDeleteUnless you can attribute the decline in output as the result of expectation formation (regarding a Democratic administration) on the part of firms, I really can't see how you draw your conclusion.
-A Young Economist
Note: I am assuming your Betas reflect GDP and not NASDAQ