Manufacturing fundamentals continue to improve. Both the U.S. and global economy are strengthening and at the same time, the dollar has depreciated against the Broad Index, (basket of countries’ currencies that the U.S trades with). In addition, inventories that were previously seen as a drag on production have now shifted to a supporting role.

Manufacturing capacity utilization (MCU), scored a 75.3% in August, down 0.25 percentage point month on month, (m/m) after a string of six consecutive monthly gains. On a year on year (y/y) comparison the MCU was up 0.9%. According to the Federal Reserve release, Hurricane Harvey is estimated to have reduced factory output by approximately ¾ percentage point. Manufacturing industries most impacted by the storm were energy related, chemical and plastics. The storm’s effect on manufacturing are expected to be temporary in nature.

Figure 1, charts capacity utilization from 2010 to present. The MCU index is currently in the green zone which is considered to be ideal. However, the MCU is at the bottom of the “green zone” where it has languished for five plus years.

Figure 2 shows the same data in Figure 1 from the year 2004 with the addition of MSCI service long products shipment data on the right-hand Y axis in red. The two data sets are correlated at 0.60 over the entire period shown. In an encouraging sign, after falling away from the MSCI line from 2014 through 2016, service center shipments (MSCI, red line) have begun to close the gap thus far in 2017.

The ISM manufacturing index recorded a value of 58.8 for August, with new orders at 60.3 and production at 61.0. All numbers were solidly in the expansion zone. Manufacturing employment was12.425 million at the end of August, up 16,000 month on month, (+0.13%) and up 134,000 year on year, (+1.09%). The US dollar continues to fall. In intraday trading today, the Euro recorded its highest level since early 2015 touching 1.20 EUR/USD. A lower dollar helps U.S. manufacturers increase export sales.

Talk of a significant business income tax reduction has buoyed enthusiasm for a stronger U.S. manufacturing base going forward. The Washington Times, reported today that a deal was struck by Senators Bob Corker and Pay Toomey “paving the way for potentially $1.5 trillion in tax cuts over the next decade, a broad outline of a plan to be presented next week.” Another article in today’s Washington Post reported the White House’s tax cut plan, “is gaining new momentum as Republicans attempt to set aside months of intraparty squabbling and unify behind a key part of President Trump’s agenda.” Overall, this month’s manufacturing capacity utilization was very positive.

At Gerdau we regularly monitor the manufacturing capacity utilization date issued by the Federal Reserve because it provides excellent insight into the health of US manufacturing activity. We know that when manufacturing is performing well, so are steel sales and want to keep you our valued customers and readers informed.