As manufacturing output rises, manufacturers ask what's next for expansion

October 23, 2014 - "Industry Insight"

October 20, 2014

Data from Federal Reserve Bank illustrated a resurgence in manufacturing production with output increasing 0.5 percent in September, Bloomberg reported. The gain in manufacturing activity reverses the 0.5 percent decline in August. The rise in overall health in the economy lifted up the manufacturing sector. These slight but steady improvements in manufacturing activity could pave the way for expansion at the end of the year and beyond.

There are various economic developments that could help propel growth in the manufacturing industry. These include the low rate of inflation and the move by the Fed to not raise interest rates higher until the economy has fully stabilized. In this way, manufacturers could look forward to low interest rates to borrow funds to invest in expanding their facilities and purchasing new equipment. 

Earlier this year, a harsh winter cast doubts about the manufacturing sector's recovery as production levels declined. However, with manufacturers approaching near the end of the year, companies are looking much stronger, buoyed by positive economic indicators like a higher employment rate, according to Bloomberg. 

"If U.S. growth holds in like we think it will, that would pull the rest of the global economy along and calm some of the fears," said Michael Feroli, chief U.S. economist at JPMorgan Chase in New York, according to Bloomberg. "The data is still consistent with good, solid growth in the U.S. We're not seeing much evidence that global developments are affecting us."

Manufacturing capacity increases
As manufacturers are seeing signs of growth in the overall economy, they are likely to feel more confident about spending for expansion. More companies in the manufacturing sector in Philadelphia are ramping up investments in equipment and other materials to meet production targets, according to a survey by the Federal Reserve Bank of Philadelphia.

The Philadelphia Fed Bank found that more than 34 percent of manufacturing companies said they had higher rates of activity. Capacity utilization rate in the October report rose to more than 78 percent, up from 76.5 percent in the same period in 2013. With more companies looking to enhance production, capacity utilization rates may continue to increase.

However, to account for greater rates of production, firms will also have to contribute more capital to investments. 

"For most capital spending categories, higher capacity utilization rates were associated with expected increases in spending," the Philadelphia Fed Bank said in a report. "For example, the current utilization rate among firms expecting to increase spending on noncomputer equipment (84 percent) was notably higher than those expecting to decrease spending (69 percent)."

As companies are looking into spending more on resources, they will likely have to look into investing in a greater number of machinery. When firms face higher production rates, they will have to not only increase their employment rates but also their current capacity. Manufacturers that will have to boost production may not be able to reach new targets if they are relying on older technology. Investing in new machinery made with industrial magnets could help raise efficiency, equipping them with the resources to meet production demand.


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