The housing market may have pushed us into the Great Recession, but analysts are increasingly expecting it will be manufacturing that gets the economy back on track. So for insights on when that jump into strong growth might finally arrive, smart investors are keeping a weather eye on the manufacturing reports that detail how much is being produced, where businesses are finding buyers, and what both groups foresee as the near-future state of our economy.
Right now, the answers to those questions aren't all that upbeat: Four new reports released this week suggest there are cracks at the foundation of the economic recovery.
There's no beating around the bush: Manufacturing is making minimal gains at best.
While a Markit manufacturing report released Monday pins May's manufacturing growth at a seven-month low, the Institute for Supply Management saw manufacturing shrinking for the first time since November 2012. The discrepancy between the two reports is significant, but either result is worrisome.
Those top line numbers make for good headline fodder, but it's down in the individual index components that investors can get a more precise perspective.
Five of the ISM index's 10 components fell back from April growth to May contraction. Dips in production, supplier deliveries, and prices point to trouble today, while drops in new orders and order backlogs hint at hurdles ahead. And although Markit's index indicates some minimal May growth, its new export-orders component also contracted.
After a mediocre Monday, a Wednesday factory report from the Department of Commerce did little to lift spirits. Although it showed new orders for manufactured goods increased 1 percent for April, analysts had expected a 1.4 percent bump after March's 4.7 percent drop.
Much like the ISM index, the Commerce Department's data includes both present and future manufacturing indicators. But this report also pinpoints which industries are packing the most production punch.
Here's the key takeaway from that report: Growth in the transportation sector is the only thing keeping manufacturing in positive territory. Excluding transportation, new orders for April drop from a 1 percent gain to a 0.1 percent slump.
And looking ahead, it's worth asking if automakers might be being overly optimistic. A 1.4 percent increase in transportation inventories pushed overall inventories to their highest level since data was first collected in 1992.
Manufacturing takes manpower, and a new productivity and costs report reveals that output isn't adding up to expectations.
Although nonfarm business productivity is up 0.5 percent for the first quarter of 2013, analysts had hoped for a repeat of the 0.7 percent gains experienced in 2012's fourth quarter. Luckily for manufacturers, a 4.3 percent dip in costs helped to minimize the effects of a whopping 11.8 percent fourth-quarter increase.
But the overall picture points to potential bubble trouble in manufacturing employment.
Unit labor costs might be on a short-term rise because manufacturers aren't hiring as many new workers. Both Markit's and the ISM's May reports recorded slower rates of employment expansion, and the ISM's reading hovers just above contraction levels.
Short-term efficiency gains aren't necessarily bad, but if companies are overworking employees or shirking time-intensive tasks, the sector could be hit with a longer-term productivity squeeze in the future.
Can Manufacturing Make It?
"Slow and steady" is the name of the game for the housing recovery and our overall economy, but it might not cut it for manufacturing. Inventories are growing, new orders are drying up, and a closer look at indicators reveals industry-specific discrepancies and precarious productivity.
There's a lot of manure in manufacturing news, but a peck of perspective can keep investors in the macroeconomic know. And while sector trends are no replacement for careful company analysis, the savviest investors will always make the most of the latest manufacturing reports.
You can follow Motley Fool contributor Justin Loiseau on Twitter @TMFJLo.