While the overall 2001 recession was relatively modest by historical standards, the bulk of the economic damage was concentrated in the manufacturing sector. The overall economy actually edged up by 0.5 percent in 2001, with relatively healthy consumer and government spending offsetting large declines in exports and business investment. As a result of this dual export/investment downturn, manufacturing output declined by fully seven percent.
A Slow Start in 2002
Though aided by well-timed tax cuts and sharp cuts in interest rates to their lowest levels in 40 years, both of which aided consumer spending and housing in 2002, the opening stage of the recovery was interrupted by series of shocks that kept the economy from gaining any real momentum. In sequential order, these were (1) the attacks of September 11, 2001 and a new war on terror; (2) the corporate accounting scandals of 2002; (3) and the buildup to the war in Iraq.
Each of these events eroded consumer confidence, which in turn depressed businesses’ willingness to begin to expand plant and equipment spending that historically has been a significant driver during the early stages of economic recovery: Between August 2001 and March 2003, consumer confidence fell 46 percent. At the same time, economic growth abroad remained tepid and there was no export growth. Together the lack of any meaningful recovery in business investment or exports from the beginning of 2002 through the second quarter of 2003 restrained the manufacturing sector: during these 18 months, manufacturing output edged up just 0.5 percent.
Conditions Quickly Improve in Second Half of 2003
With the end of the Iraq war, and the absence of another terrorist attack, consumer confidence in the U.S. recovered quicker than many expected and increased by 66 percent between March 2003 and June 2004. This increase, along with rising profits, encouraged firms to begin to invest again in capital equipment (which increased by 12 percent between the first quarter of 2003 and the first quarter of 2004).
At the same time a decline the value of the dollar from its peak in early 2002, along with increased growth abroad, has encouraged an export recovery. U.S. exports rose9 percent between the first quarter of 2003 and 2004.
This dual recovery has been responsible for nearly half (44 percent) of the 5.4 percent average growth rate in GDP since the second quarter of 2003 and has ignited a cyclical recovery.
Manufacturing production surged more than 6 percent from June 2003 through May 2004. At the same time, the closely-watched PMI (Purchasing Managers’ Index) — where above 50 indicates that manufacturing is growing — surpassed 50 in June of 03 (12 months ago) and for the past 8 months (November 03 through June 04) has been above 60 — for the first time in 20 years.
Since August overall non-farm employment has increased 1.4 million. Since January, manufacturing employment has increased 64,000.
Recent data suggest that consumer spending likely slowed a bit in the second quarter of 2004. In part this was likely a response to the higher-than-expected price of gasoline, which reduced consumer’s disposable income. Despite an ongoing recovery in capital spending and exports, overall economic growth in the second quarter will likely increase between 3.5 and 3.7 percent
The Outlook for the Second Half of 2004
The economy is likely to pick up momentum in the second half. Gasoline prices have been on a downward, though modest, trend since the end of May. This should boost consumer incomes and consumption. At the same time, the dual recovery in exports and capital spending will continue, with both rising at or near double digit rates for the remainder of the year. Thus, overall GDP is expected to increase in the 4.0 - 4.5 percent range in the second half of the year. This will be good news for manufacturers, where industrial output will rise an annual rate of 6 percent. In sum, 2004 will be the first year in half a decade where manufacturing output outpaces overall GDP growth.