Fast Manufacturing Growth Likely To Decelerate

Washington, DC, June 21, 2010--Last week's economic news was more sour than sweet, according to the National Association of Manufacturers, with five of the eight major indicators declining, one decelerating and two improving. It's also likely that manufacturing will begin to slow.

Following broad-based gains during the prior two months, manufacturing production rose 0.8% in May, the ninth increase in the past 11 months It was  the fifth consecutive month that a majority of manufacturing industries posted output gains.

After falling 17% over 18 months, manufacturing production bottomed out in June 2009 and has been on an upward trajectory ever since Still, the level of manufacturing activity in May remained 9% below the prior peak set in December 2007.

The pace of the manufacturing recovery has accelerated in recent months. In fact, the rise in production during the March-May time frame was faster than any three-month period in the entire 2002-2007 expansion. Unfortunately, this pace is likely to decelerate in the months ahead, said NAM Chief Economist Dave Huether.

One of the sources behind the recent surge in manufacturing output was stimulus measures that have -- or are soon to be -- expired. In March and April, production of electrical appliances and equipment increased at an annual rate of 36% -- the fastest two-month rise in 34 years. This was largely due to the tax credits for energy-efficient appliances financed by the federal government and administered by the states.  The program began earlier in the year, and the funds allocated to 16 of these state programs already have been exhausted. In May, manufacturing production in this area fell, as did sales at retail establishments as more of these programs ended.

More recently, strong gains in housing activity from the homebuyer tax credit, which ended in April, spurred strong growth in related manufacturing sectors, like wood products, textile products, nonmetallic minerals and furniture. As last week's reports show, the housing recovery is starting to slow. This likely will dampen manufacturing-related industries in the months ahead, Huether said.