Growth in the third quarter may turn out to be a bit less than we saw in the first half of the year, though we think there is only a slight risk of a double dip. The road to recovery is turning out to be a bit bumpy as relatively weak consumer spending and the ongoing problems in financial markets are keeping growth far less robust than we would like. To date, the manufacturing sector has been a key source of growth during the recovery. After an unusually steep decline from late 2007 to mid-2009, manufacturing output has grown rapidly over the past year, although the level of manufacturing output remains well below the previous peak. A major force behind the growth of manufacturing output has been an unusually pronounced inventory cycle. Production has expanded as firms across a variety of industries have been rebuilding their stocks to bring them into a better balance with sales. Another driver of manufacturing output over the past several quarters has been a pronounced rebound of our exports of manufactured goods. Economic activity abroad has been recovering from its weak levels in 2009, and that global recovery has helped fuel demand for our products, particularly capital goods. The importance of manufacturing in the recovery makes it a timely topic for our regional economic briefing, namely, trends in the manufacturing sector here in the Second District. II.
These productivity gains – the result of innovation and adaptation – have been accompanied by rising average wages in manufacturing. Like the rest of the country, our job losses have been heavily concentrated in lower-skill positions, resulting in a leaner and more skilled manufacturing industry. The manufacturing sector and its structural job-wage dynamics are particularly important in upstate New York. Upstate (especially in its rural areas) manufacturing workers tend to earn higher wages than the average in their region, and the sector employs a larger share of the workforce there than it does nationally. 2  BIS Review 100/2010  Outlook How will the current recovery in manufacturing employment play out? Nationally, the growth in manufacturing output over the past year has occurred in a variety of industries, including autos, machinery, and computers and other electronic equipment. This growth reflects a combination of the restocking of inventories, domestic demand growth (particularly in investment goods), and higher exports. The concentration of these industries in parts of our region meant that those areas were poised to take advantage of this growth. The region has seen some increase in factory jobs in recent months, which undoubtedly reflects the expansion of production that has occurred nationally in these industries. A number of indicators suggest that the inventory cycle may be largely complete – that is, the recent restocking has brought inventories into a better balance with sales. If so, we will lose restocking as an impetus for growth.