Main Street Macro: Manufacturing: A Cinderella story

I grew up in Indiana, a big basketball state, so college ball has a special place in my heart. My favorite part of the NCAA college tournament has always been the Cinderella team, those players that surprise everyone with a winning streak.

The economy’s winning streak isn’t a big surprise: Private sector employers added 184,000 jobs in March as reported by ADP and 232,000 as reported by the Bureau of Labor Statistics, which kept the labor market in the win column. Companies hired at a faster pace in March than the preceding three-month average.

But lurking inside the big-picture jobs data is a Cinderella story, a faltering sector that’s poised to perform better than expected. Here are three early signs that U.S. manufacturing could post better numbers in 2024 than it has in almost two years.

Demand has improved

A widely watched measure of the manufacturing outlook is the Manufacturing PMI, an index based on a survey of U.S.-based purchasing managers from the Institute for Supply Management. 

This index has been below 50 since September 2022. Historically, an index level below 50 is associated with contraction in the sector.

In March, the Manufacturing PMI reached 50.3, a sign of stabilization that could signal an important turning point for the sector.

Worker sentiment has improved

The Employee Motivation and Commitment Index produced monthly by the ADP Research Institute is a near real-time metric of how people think and feel about their jobs and employers. The EMC Index is highly associated with a worker’s intent to leave their company.  

After a slow start at the beginning of 2024, March showed a big turnaround for factory workers. In January, the EMC Index for manufacturing was at its lowest level since December 2021. Last month, it recorded a 40-point gain to reach its highest level since September 2022.

Pay growth has surged

The March Pay Insights report released by ADP last week showed that people who changed jobs in the past 12 months saw a 10 percent jump in pay, up from 7.6 percent the previous month. 

In manufacturing, pay growth for job changers was even higher, 12.6 percent, up from 9.6 percent the previous month – an impressive three percentage point increase.

My take

The labor market fan base–economists–lately have been cheering job gains in the service sector, and it’s no wonder. Service providers created the lion’s share of jobs over the past two years, while manufacturing stayed largely on the sidelines even as the broader economy scored big.

Manufacturing still has challenges to overcome before it can advance to the finals. Last week, several members of the Federal Reserve Board observed that our recent run of strong economic data could discourage central bank policymakers from making at least one of their highly anticipated interest rate cuts this year. 

Manufacturing is one of the most rate-sensitive parts of the economy, and higher-for-longer rates could be an obstacle to hiring. But an uptick in inflation would be bad for the sector, too. We’ll get a fresh read on inflation this week.

Cinderella teams are defined by their challenges, which is why fans love it when they win. As the labor market underdog, manufacturing might be positioned for a surprise comeback later this year.