Spending, Hiring and Building Momentum: Sizing Up The Manufacturing Economy at Midyear

An image of U.S. consumers handing the baton of economic growth to the business sector would be an upbeat (and admittedly oversimplified) way to digest several recent pieces of economic data and sentiment as we run toward the second half of 2024. But that idea does do a fairly good job of illustrating what appears to be happening in the U.S. economy as its growth rate slows and it continues to normalize from the extremes of the COVID-19 pandemic and its aftershocks.

Economists, market observers and leaders of consumer-focused companies have found consensus around the assessment that U.S. shoppers and diners are still in decent shape but also are no longer building on their spending boom that fueled much of 2023’s stronger-than-expected GDP growth. Combined with a labor market that is (for now at least) gently weakening, they see the proverbial soft landing taking shape nicely.

Business leaders look to be playing a part in that landing. They aren’t expecting a boom but they have grown more confident over the past year in the prospects of their firms. They also are generally worrying far less about the labor and supply-chain pains they’ve endured since 2020. For instance:

June’s U.S. Composite Purchasing Managers Index from S&P Global showed growth at its fastest pace since the spring of 2022. Services businesses led the way, analysts said, but manufacturing output also rose for the fifth consecutive month and new factory orders posted their best performance in three months.
Optimism among more than 400 CFOs surveyed by researchers at Duke University’s Fuqua School of Business as well as the Federal Reserve banks of Atlanta and Richmond has risen every quarter since mid-2022 except for two—when it stayed level. On average, executives expect their companies to post revenue growth of 5.5% this year and 8% in 2025. They also plan to grow their payrolls by 5.3% in 2024 and another 4% next year.
Manufacturers in Texas also are upbeat about what lies ahead—even though their assessment of broader business conditions fell this month. Executives’ take on their companies’ prospects rose for the seventh successive month and their view of future general activity has climbed to its highest level since February 2022.
Real gross private domestic investment is a big driver of the GDPNow tracker from the Atlanta Fed estimating second-quarter GDP growth of about 3%. Fed analysts are forecasting that spending on equipment, buildings and inventories is growing this quarter at an annualized rate of more than 8%. Is that sustainable? Not at all. But does it say good things about business leaders’ overall disposition? Very much so.

Recent commentary from some public-company leaders also points to more steady growth ahead. Speaking after his team reported its quarterly results on June 20, Commercial Metals Co. CEO Peter Matt said the peak construction season got off to a good start—an anecdote since backed up by strong May numbers—and added that infrastructure spending trends have him upbeat: “We expect this momentum to build over the coming quarters, contributing to an already healthy demand backdrop in North America, which is being propelled by positive long-term structural trends,” Matt said.

The Case For Caution

Still, there are also several reasons and data points to be wary of predictions about ongoing growth. On a high level, some analysts and economists are fretting that the Federal Reserve will wait (or already has waited) too long to cut its benchmark interest rate. The delay, they argue, is choking off too much demand and investment and will contribute to the labor market deteriorating beyond the balanced state it is in today.

Speaking to that dynamic and other uncertainties are:

Both the Duke and Dallas Fed surveys hinted at some labor-related reticence amid their broader optimism. While the CFOs responding to Duke researchers said they expect on average to solidly grow their workforce, their median response slipped to 0.8% growth from 2.1% in the first quarter. Respondents to the Dallas Fed’s survey, meanwhile, said their six-months-out expectations for employment and hours worked were lower than in May despite their better outlook for orders and production growth.
At least one senior Fed official is taking note. Austan Goolsbee, president of the Federal Reserve Bank of Chicago, said June 24 that he’s still broadly optimistic about growth but also is worried that the central bank is being too restrictive: “You’ve got a couple of warning signals from the real side of the economy,” he said. “You cannot help but look at the real-side economy and conclude this is not overheating.”
One reason there’s no apparent risk of overheating: Enough executives are reining in investment plans because of uncertainty around November’s presidential and congressional elections. Of the nearly 450 CFOs who responded to the Duke survey’s question about this, nearly 35% said they have delayed or downsized investments. Only 6.5% are accelerating or scaling up spending plans.
The shadow of inflation lingers, too. Diane Swonk, chief economist at KPMG US, last week said inflation “still has a burn to it” for consumers and business leaders alike. The rate of growth has slowed and is still slowing, she said, but we’re all still getting used to overall price levels. Concerns also are climbing in the Duke survey: Cost pressures “rebounded” during Q2 among executives’ most pressing concerns and trailed only monetary policy.

Glass Half Full

Still, synthesizing all the data points and sentiment indicators isn’t driving many economists and analysts to make a strong call about an imminent recession. The consensus is that we’re at a point where the normalization from the pandemic era has run its course, which has injected more classic forms of uncertainty into the economic debate. KPMG’s Swonk is forecasting that U.S. GDP will grow at 1.7% in 2025, below the economy’s potential and also below 2022’s 1.9% growth—which at the time felt like a recession to many people.

A continued bright spot, Swonk added, is that continued wage growth will keep consumers in solid shape. Driving that trend is consistent capex, which is helping generate productivity improvements. That dynamic also is a prominent reason the team at private-equity titan KKR is upbeat about the health of businesses writ large.

“The AI boom will drive a sustained period of higher capex before it is actually reflected in corporate profitability results,” Henry McVey, KKR’s head of global macro, balance sheet and risk, wrote recently. “Implicit in what we are saying, though, is that the recent ongoing surge in productivity has actually occurred before AI benefits have been realized at scale, further underscoring our view that the corporate sector could enjoy a longer-tailed profitability renaissance.”

The longer-tail elements in today’s economy may end up being the difference in the second half of 2024 and early next year. Spending on infrastructure, technology and energy needs—by both government and private players—is increasingly working its way through the system and benefiting companies such as Commercial Metals. That tap won’t run dry soon and will support the job market as it persists.

Economist Chris Kuehl of Armada Corporate Intelligence said last week during an IndustryWeek webinar that recent positive manufacturing data echoes what his firm’s The Watch indicator has been showing of late. Growth isn’t rapid or universal across the industrial sector, he added, but its diversity means overall activity remains solid.

“It’s been consistently above the 20-, 30-year trend line,” Kuehl said of The Watch. “In some cases, it’s dipping just a little bit. In more than a few cases, it’s actually increasing—particularly if it’s connected to things like the public sector or non-residential construction. So I am uncharacteristically optimistic. I’m sort of leaning toward the glass half full.”