America's Manufacturing-Led Recovery-TD

Observation TD Economics www.td.com/economics March 25, 2011 AMERICA’S MANUFACTURING-LED RECOVERY HIGHLIGHTS • Manuf acturi ng has been the star of the economic recov - ery.Whilemakinguparound 12%oftotaleconomicoutput, manufacturinghascontribut - edover30%oftheeconomy’s growth since the recession ended. • The outsi zed contribution of manufacturing to growth is duetothreefactors:inventory investment,risingdemandfor durablegoods,andanunder - performance from housing andservicesrelativetopast economicrecoveries. • Recent data suggest that manufacturing momentum mayslow in thethe mont hs ahead,butthisislikelytobea short-livedphenomenon.With lowinterestratesandpentup demand suppor tingdemand for manufactured goods at home,andacontinuedglobal recoverysupportingexports, manufacturingislikelytore - mainakeysourceofeconomic growthin2011. • This dispropo rt ionat e cont ri - butionisdestinedtofadein 2012asotherssectorsshow astrongerperformance. JamesMarple SeniorEconomist 416-982-2557 [email protected] AlistairBentley Economist 416-307-5968 [email protected] The Great Recession has ended, but the U.S. economy is nowhere near full health. As many areas of the economy continue to limp along, the manufacturing sector has bounced back with a vengeance. Rebounding manufacturing activity was pivotal in driving the U.S. economy out of the recession in mid-2009, and strength in the sector continues to buoy economic growth to this day. While recent weakness in new durable goods orders and the disaster in Japan have suggested that manufacturing momentum may be slowing, growth has continued to impress in recent months. February’s data from the Institute for Supply Management (ISM) showed manufacturing activity at its highest level since May 2004. The outsized contribution of manufacturing to the economic recovery is due to three factors: an initial strong contribution from inventory investment, rising demand for durable goods both at home and abroad, and an underperformance in housing and services relative to past economic recoveries. Supported by record low interest rates and stimulative tax policy , manufacturing will continue to play a leading role in the recovery over the next year. But, this disproportionate contribution is destined to fade in 2012, as others sectors show a stronger performance. Manufacturing–AlmostV-Shaped Manufacturing has been the star of the economic recovery. Conservative esti- mates suggest that the sector, while making up around 12% of total economic output, has contributed close to 30% to the economy’s growth since the recovery started. By these metrics, it seems like manufacturing activity is turning in a stronger performance relative to past recovery experiences. However, on closer viewing it is performing exactly as it should. When the global recession started, manufacturing sales declined dramatically as consumers delayed big ticket purchases and global trade collapsed. This unex- pected decline in sales left rms with large inventories of unsold goods. In order to bring them down, rms cut production to a level below the pace of sales and inventories declined. As the nancial crisis subsided and sales stabilized, the need ISM MANUFACTURING AND REAL GDP GROWTH 30 35 40 45 50 55 60 65 70 20 00 20 01 20 02 20 04 20 05 20 06 20 08 20 09 201 0 -8 -6 -4 -2 0 2 4 6 8 ISM Manufacturing (lhs) Real GDP (rhs) Index (50+ indicates expansion) Q/Q % Chg (Annualized). Source: BEA, ISM

America's Manufacturing-Led Recovery-TD

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