American Factories Will Keep Humming

Even if Covid-19’s resurgence cuts into Americans’ penchant for spending, factories will probably keep on humming. That assumes, of course, that they can get the parts and labor.

The Institute for Supply Management on Wednesday said that its index of manufacturing activity came in at 59.9 in August, up a bit from July’s 59.5, keeping at what is historically a high level. Anything over 50 indicates expansion.

The heady pace of manufacturing stands in contrast to some of the recent news on how consumers are faring. The Delta variant, and the jump in Covid-19 cases, hospitalizations and deaths it is generating, has made people more glum about the outlook. The University of Michigan’s measure of consumer sentiment dropped sharply in August from July, as did the Conference Board’s consumer-confidence index. Spending appears to have weakened, too, with people again hesitant to do things like dine in restaurants or book flights.

The apparent disconnect isn’t hard to explain, of course: Manufacturers have a lot of work to catch up. The combination of the rapid rebound in demand since Covid-19 first struck last year and the global shortages of raw materials and parts brought on by the pandemic has led to a massive decline in inventory levels across the economy. As of the second quarter the ratio of nonfarm inventories to final sales of goods and structures, adjusted for inflation, was 3.75, according to the Commerce Department. Before the pandemic, that figure averaged about 4.25.

Because of the desperate need for restocking, manufacturing output could continue to expand even if demand didn’t grow at all. It is one reason that gross domestic product should keep growing quickly through the end of the year despite Covid-19.

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