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Economic Recovery Weakening?
Subject Economic Recovery
Topic Productivity and Growth
Key Words Index of Manufacturing Activity, Consumer Spending, Job Markets, and Business Inventories
News Story

A recent report from the Institute for Supply Management indicates that its index of manufacturing activity has moved down to 53.7 in September from 54.7 in August. The index is based on a survey of purchasing managers at more than 400 manufacturing firms. When the index is above 50, manufacturing is considered to be expanding; below 50, manufacturing activity is considered to be contracting. So, overall manufacturing activity appears to be expanding, but the slowdown adds concerns that the recovery may not be sustainable.

The slowdown in manufacturing is not the only indication of problems with the current recovery. Consumer spending, which had grown rapidly in July and August, also slowed in September, due mostly to retail sales and auto sales. Job creation also remains a major concern because sustained growth will require the creation of new jobs in the economy and the institute's employment index fell to 45.7 from 45.9 in August. This was the 36th straight month that the index fell below 50, indicating that more manufacturers are reducing their payrolls than are increasing them. Additionally, the weak job market is also affecting paychecks. Human-resource consultants at DBM, a unit of Thomson Corporation, found that 52% of job seekers had to take a pay decrease to get new jobs.

Norbert Ore, chairman of the Institute for Supply Management's manufacturing survey committee, said low inventories and job cutting reflect continued uncertainty about the longer-term success of the current expansion. "If you talk to some of our members, they'd say we're still not seeing a lot of improvement." When inventories are low, the expectation is that new orders to replenish the inventories will eventually lead to increased production. Mr. Ore describes his committee member's mindset as "show me when this is all going to start." More evidence of increased consumer spending, job creation, and increased manufacturing production is needed to signal that a robust economic recovery is underway.


(Updated November, 2003)

Questions
1.

Why are business inventories such an important signal for economic growth?

2. Why have workers had to accept a decrease in pay in order to get new jobs?
3. Explain why job creation is so important to a sustainable recovery.
Source Greg Ip, "Economic Recovery Shows Signs of Weakening," The Wall Street Journal, October 2, 2003.

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