Spending, Hiring, and Building Speed: Measuring the Manufacturing Economy in the Middle Years

  • Recent comments from some public-company leaders point to more steady growth. Speaking after its group announced its quarterly results on June 20, Commercial Metals Co. CEO Peter Matt said the peak construction season had gotten off to a good start. Supported by strong May numbers– and infrastructure spending trends cheer him: „We expect this momentum to build in the coming quarters, contributing to an already healthy demand backdrop in North America, driven by positive long-term structural trends,” Matt said.

A case for caution

However, there are several reasons and data points to be cautious about current growth projections. At the top level, some analysts and economists worry that the Federal Reserve will wait (or already wait) too long to cut its benchmark interest rate. Delays, they argue, would contribute to a deterioration of the labor market beyond its current state of equilibrium, in addition to stifling demand and investment.

Dealing with that dynamic and other uncertainties:

  • Both the Duke and Dallas Fed surveys pointed to some labor-related slack amid their broad optimism. CFOs responding to Duke researchers on average expect their workforces to grow solidly, with their median response falling to 0.8% growth from 2.1% in the first quarter. Meanwhile, respondents to the Dallas Fed’s survey said six-month expectations for jobs and working hours were lower than in May, despite a better outlook for orders and output growth.
  • At least one senior central bank official is taking note. Austin Goolsbee, president of the Federal Reserve Bank of Chicago, said on June 24 that he was still broadly optimistic about growth but worried about the central bank becoming too restrictive: „You’ve got two warning signals from the real economy,” he said. „You can’t help but Look at the real side economics and decide it’s not too hot.”
  • One reason for the lack of apparent risk of overheating: The uncertainty surrounding November’s presidential and congressional elections has left enough executives to rein in investment plans. Of the nearly 450 CFOs who responded to the Duke survey, nearly 35% said they had delayed or reduced investments. Only 6.5% are accelerating or increasing spending plans.
  • Even the shadow of inflation lingers. Diane Swonk, chief economist at KPMG US, said last week that inflation was „still burning” for consumers and business leaders. The rate of growth has slowed down and is still slow, but we are all still getting used to overall price levels. Concerns are also bullish in the Duke survey: spending pressures „rebounded” during Q2, trailing only executives’ most pressing concerns and monetary policy.
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The glass is half full

However, combining all the data points and sentiment indicators doesn’t lead many economists and analysts to make a strong call about an imminent recession. The consensus is that we are at the point where normalization from the pandemic era has run its course, which has injected classic forms of uncertainty into the economic debate. KPMG’s Swonk predicts US GDP will be 1.7% in 2025, below the economy’s potential and below 2022’s 1.9% growth—a recession many considered at the time.

A continued bright spot, Swonk added, is continued wage growth that will keep consumers on firmer footing. Driving that trend is steady capex, which helps drive productivity improvements. A key reason why the team at private-equity titan KKR is writing big about the health of businesses.

„The AI ​​boom will drive a sustained high capex before actually being reflected in corporate profit results,” Henry McVay, head of global macro, balance sheet and risk at KKR, wrote recently. „However, what we’re saying is that the recent surge in productivity has actually occurred before the AI ​​benefits have been realized at scale, further underscoring our view that the corporate sector could enjoy a long-term profitable renaissance.”

Long tail components in today’s economy will end differently in the second half of 2024 and early next year. Spending on infrastructure, technology and energy needs—by both government and private companies—is increasingly working its way through the system and benefiting companies like commercial metals. That pipeline won’t dry up anytime soon, and it will continue to support a working market.

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Armada Corporate Intelligence economist Chris Kuehl said during an Industry Week webinar last week that the recent positive manufacturing data echoed his firm’s The Watch indicator of late. Growth across the industry hasn’t been rapid or universal, but its diversity means overall activity has been solid, he said.

„It’s consistently above the 20-, 30-year trend line,” Kuehl said of The Watch. „In some cases, it’s going down a little bit. In some cases, it’s actually going up—especially if it’s tied to public sector or non-residential construction. So I’m uncharacteristically optimistic. I’m leaning toward the glass half full.”

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