Why U.S. Factories are so Strong in a Pandemic

U.S. manufacturing has more than made up ground lost during Covid’s spread, in contrast to services.

By guest author Justin Lahart from Wall Street Journal

Caption and Graphic courtesy by Wall Street Journal

Manufacturing is usually one of the worst places to be when a recession strikes. But not this time.

The Institute for Supply Management on Tuesday,September 2, 2020, said that its index of manufacturing rose to 56 in August from 54.2 in July, extending its rebound from March, when it fell to 41.5. Anything over 50 represents expansion.

The ISM index is a diffusion index, based on the share of survey respondents who say business is getting better versus those saying it is getting worse, so it is only a loose measure of manufacturing growth. But there is little doubt that American factories are in fine fettle, benefiting from a surge in consumer spending on goods that has far outpaced the rebound in spending in the far larger services sector.

Commerce Department figures released last week that showed monthly spending on goods, which fell by about 15% from February to April, was 6.1 % above its February level in July. Spending on services, on the other hand, was still 9.3 % below its February level in July. It is a change from what has happened in past recessions, where services spending usually holds up while goods spending falls and takes a long time to recove.

These flip-flopping fortunes are being driven by a variety of factors. First, manufacturers are benefiting from pent-up demand that doesn’t have as much of an effect on services industries.

People are now buying the cars they were making plans to buy before the Covid-19 crisis struck, but there is no catch-up spending on the haircuts or restaurant meals they missed. Second, in many places there remain restrictions on services, such as movie theaters, and even in instances where restrictions have been lifted, many consumers are uncomfortable about returning to their old routines.

Meanwhile, despite the severe hit the economy took during the spring, and despite an unemployment rate that as of July was above 10%, stimulus payments and generous unemployment benefits provided people with plenty of money to spend—probably more than they would have if the Covid-19 crisis hadn’t struck. Much of that money was diverted to spending on manufactured goods.

Whether people will continue to have the wherewithal to keep buying goods, buoying manufacturers, is an open question—one that may hinge on whether Congress and the White House are finally able to cobble together another stimulus package this month. For now, though, cutting metal is a better business to be in than cutting hair.Video