US Production Probably Down in April

One of the views widely bandied about is that a weak dollar helps exports, which means primarily manufacturing. Narrowly speaking, thats’ true, but in some respects there is less there than meets the eye.

One element we have mentioned is that there are limits near term to how much the US can gain, in terms of a balance of trade improvement, from a weaker dollar. The US has ceded a good deal of productive capacity to foreign operators, and some people argue not all of that was necessary. Germany and Japan are both advanced economies that maintain significant trade surpluses.

But the second notion that we’ve heard and seen (it was aired frequently at the Milken Institute Global Conference) was that manufacturing in the US was hitting on all cylinders due to more favorable terms of trade. Recent data releases belie that idea, since all manufacturing is not created equal.

Output in March increased 0.3% and expectations are that April’s release will show an 0.3% decline. One culprit is the continued weak performance of US automakers. Yet even Deere, which was believed to be performing strongly due to robust exports, showed weaker second quarter results, in part due to softening demand.

But another issue is that some manufucturers focus on the domestic market. Even if their product is now more competitive overseas, it takes time and effort to build or extend foreign sales channels and develop name recognition and customer acceptance. And with currencies volatile and renewed talk of dollar appreciation, a producer can reasonably question whether that sort of investment will pay off. High oil prices, which means increased shipping costs, are another conundrum in the equation.

From Bloomberg:

Production at U.S. industries probably dropped in April, as the slowdown in consumer spending prompted automakers to cut back, economists said before a report from the Federal Reserve today.

Output at manufacturers, mines and utilities fell 0.3 percent after rising 0.3 percent in March, according to the median forecast in a Bloomberg News survey. Separate regional Fed reports may also show the decline continued into May….

“Manufacturing is in a mild downturn,” said Michael Moran, chief economist at Daiwa Securities America Inc. in New York. “The trade sector is doing well. Companies don’t have to cut back a lot.”…

Sales of cars and light trucks in April slid to a 14.4 million annual rate, the fewest since 1998, according to industry figures…

“There have been a lot of questions about whether the U.S. economy is in recession — the U.S. auto industry is definitely in a recession,” GM’s Chief Operating Officer Fritz Henderson said in a May 13 conference call…

Consumers aren’t the only ones tightening their belts. Business investment in new equipment and software dropped last quarter for the first time in more than a year, according to figures from the Commerce Department.

Deere & Co., the world’s largest maker of tractors and combines, yesterday reported second-quarter profit grew less than analysts estimated because of a 7.2 percent drop in demand for construction equipment and rising raw-material costs.

So far, manufacturing has done better than in past economic slowdowns, in part due to gains in exports. The Institute for Supply Management’s factory index reached a five-year low of 48.3 in February, and then stabilized just above that level over the last two months. The index fell as low as 42.1 in February 2001, a month before the start of the last recession.

The purchasing managers’ group export index has averaged 57.1 so far this year, up from 55.8 in 2007. A reading of 50 is the dividing line between contraction and expansion.