Updating readers on the state of the economy has been a painful task over the past several years. It has been many decades since we've had such a convergence of negative results across virtually all major indicators used to measure our economic performance. While it will still be some time until we return to consistent and sustainable growth that can support the creation of millions of high-paying jobs, recent reports suggest we may be seeing the first signs that we are moving towards improvement. Let’s take a closer look at three important economic indicators that are turning positive: GDP growth, durable goods orders and the ISM Factory Index.
According to the Bureau of Economic Analysis, the U.S. Gross Domestic Product (“GDP”) grew at an estimated 2.5 percent during the third quarter of 2011. This is more than many economists anticipated and represents a significant improvement over the previous quarter's 1.3 percent growth. GDP growth is one of the most important measures for the overall health of the economy. It tracks the value of all goods and services produced in the United States over a period of time. While this is good news, we need to take it with a grain of salt. This measure of growth is an "advance estimate" which means it is subject to further revision over the next several weeks. There can be significant changes between the advance estimate and the actual growth experienced.
Durable goods orders
Durable goods orders are an important measurement of the performance of the U.S. economy. A durable good is an asset with two main characteristics: first it has a long useful life, typically more than three years; second, it has to be manufactured. Construction machinery and sports equipment are examples of durable goods. Durable goods are expensive compared to non-durable goods which are instead consumed in a single use like a tank of gasoline or last a short amount of time. Retail stores that sell durable goods have to monitor demand carefully before placing orders from manufacturers. Ordering too much durable goods inventory relative to demand will consume a retailer's cash and leave them with stores full of outdated items that won't sell. When economic conditions are poor, orders for these types of items plummet.
According to the Department of Commerce orders for most durable goods—all excluding transportation equipment—rose by 1.7 percent during the month of September. This is the highest percentage growth in half a year and exceeded by four times the growth that many economists had forecasted.
According to Carlos Seiglie, Ph.D., Professor of Economics at Rutgers University, a significant portion of the increase in these orders is due to foreign buyers. “As the U.S. dollar maintains a relatively low value compared to other currencies, demand for U.S. manufactured goods increases which boosts durable goods orders and leads to more domestic manufacturing jobs” he indicated. Within the durable goods category, several subcategories stand out in terms of new orders. Industrial machinery orders increased by nearly 2 percent and information technology orders increased by a whopping 6 percent.
ISM Factory Index
Despite the fact that we live in a service-based economy, manufacturing still represents approximately 12 percent of our gross domestic product and continues to play a material role in generating jobs. Tracking changes in manufacturing activity provides a solid indicator for the performance of our economy. One of the most widely watched indicators is produced by The Institute for Supply Management ("ISM") which is a non-profit organization that has served the supply management industry for nearly a century. Among their duties is to track and publish statistics related to manufacturing, including the "factory index" which measures whether manufacturing companies are expanding or contracting production. The September ISM Factory Index rose to 51.6; any reading above 50 indicates an expansion in manufacturing activity.
Is the economy out of the woods?
Our economy still has a very long way to go before we can consider ourselves to be on a path towards sustainable, productive growth. The change won't happen overnight; it will happen gradually. Improving GDP growth, durable goods orders and manufacturing activity are good first steps. Let’s see if our economy can continue this trend.