Question

U.S. Factory Sector Clocks Strongest Growth in 14 Years

Analysts had expected a slowdown given rising trade tensions By Sharon Nunn

WASHINGTON—American factory activity in August expanded at the strongest pace in more than 14 years, despite rising tensions with some of the U.S.’s largest trade partners.

The Institute for Supply Management on Tuesday said its manufacturing index rose to 61.3 in August, the highest level since May 2004, from 58.1 in July. Sales of factory-made products, or new orders, output and employment all grew at a faster pace in August.

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Tuesday’s release surprised analysts who had expected a slowdown in the industry in light of rising trade tensions and a typically weaker month for factory activity. Economists surveyed by The Wall Street Journal had expected a 57.5 reading for August.

“Despite concerns over U.S. protectionist policies, manufacturing sentiment remains on a solid footing, supported in large part by firm domestic demand,” said Pooja Sriram, U.S. economist at Barclays.

The U.S. and Europe, China and other countries are in the midst of trade battles stemming from steel and aluminum tariffs the Trump administration enacted earlier this year.

Mohamed A. El-Erian, chief economic adviser at Allianz, tweeted, “In addition to highlighting the strength of the U.S. #economy, this also points to the more general theme of divergence in advanced countries’ economic performance and policies.”

Though most economists hailed Tuesday’s report as a sign of robust growth continuing into the second half of 2018, some analysts said there are signs of overheating in the manufacturing industry.

“The last time we have seen something akin to the current run late in an expansion occurred in” the late 1980s, when the Federal Reserve had to raise the fed funds target rate to almost 10% to tamp down inflation, according to Stephen Stanley, chief economist at Amherst Pierpont Securities. “If you want to conclude from this quick history lesson that the Fed is currently too easy and in the process of making a policy mistake, I would not object.”

Most private economists expect the Fed will raise short-term interest rates two more times this year, once in September and again in December, with strong economic data continuing to roll into the summer months.

Despite the headline growth in factory activity, there are latent signs recent trade actions may be beginning to take a toll. An underlying gauge of new export orders for primary metals, transportation equipment and machinery declined in August, with machinery last declining at the beginning of 2017.

“We’re a significant exporter of railcars, airplanes, automobiles…Machinery is our number 6 industry sector,” said Tim Fiore, who oversees the ISM survey of factory purchasing and supply managers. “If export markets are closed off to us, orders will go down, [then] exports and production.”

Trade tensions, coupled with what appear to be economic slowdowns in some of the U.S.’s biggest trading partners, could be headwinds for the manufacturing sector.

Tuesday’s ISM report also showed a measure of inflation grew at a slower pace; the Backlog of Orders Index continued to expand, at higher levels compared with the previous month; and imports grew at a slower pace.

Broader economic growth picked up robustly in the second quarter after a modest slowdown in the early months of 2018. The unemployment rate declined below 4% this spring and forecasters expect solid growth this year, supported by recent tax cuts and strong consumer sentiment.

QUESTIONS:

	1. Describe the different measures mentioned in the article. How do you suppose they are calculated? Using statistics to support your response, how can these measures be determined to be reliable? How can measures across industries and companies be standardized to give reliable results?
	2. Why do economists look at manufacturing indices when evaluating the direction of the economy? What does this imply about the importance of operations management?
	3. Based upon the reading of the article, do you consider the manufacturing sector to be growing or shrinking? Justify your response.
	4. How does your company utilize industry trend indicators in planning your operations? What additional indices could you use to prepare for potential changes in demand?
	5. What trends are your business seeing? How is your company preparing for changes that might occur in the next year?

Answer 1

A Data Levels of Measurement. A variable has one of four different levels of measurement: Nominal, Ordinal, Interval, or Ratio. (Interval and Ratio levels of measurement are sometimes called Continuous or Scale).

Productivity, in economics, the ratio of what is produced to what is required to produce it. Usually this ratio is in the form of an average, expressing the total output of some category of goods divided by the total input of, say, labour or raw materials.

In principle, any input can be used in the denominator of the productivity ratio. Thus, one can speak of the productivity of land, labour, capital, or subcategories of any of these factors of production. One may also speak of the productivity of a certain type of fuel or raw material or may combine inputs to determine the productivity of labour and capital together or of all factors combined. The latter type of ratio is called “total factor” or “multifactor” productivity, and changes in it over time reflect the net saving of inputs per unit of output and thus increases in productive efficiency. It is sometimes also called the residual, since it reflects that portion of the growth of output that is not explained by increases in measured inputs. The partial productivity ratios of output to single inputs reflect not only changing productive efficiency but also the substitution of one factor for another—e.g., capital goods or energy for labour.

Labour is by far the most common of the factors used in measuring productivity. One reason for this is, of course, the relatively large share of labour costs in the value of most products. A second reason is that labour inputs are measured more easily than certain others, such as capital. This is especially true if by measurement one means simply counting heads and neglecting differences among workers in levels of skill and intensity of work. In addition, statistics of employment and labour-hours are often readily available, while information on other productive factors may be difficult to obtain. Although ratios of output to persons engaged in production or to labour-hours are referred to as labour productivity, the term does not imply that labour is solely responsible for changes in the ratio. Improvements in output per unit of labour may be due to increased quality and efficiency of the human factor but also to many other variables discussed later. There is special interest in labour productivity measures, however, since human beings are the end as well as a means of production.

The productivity of land, though it receives considerably less attention than the productivity of labour, has been of historical interest. In ancient and preindustrial times the products of the soil constituted the bulk of total output, and land productivity thus constituted the major ingredient in a people’s standard of living. Soil of low productivity could, and over much of the Earth still does, mean poverty for a region’s inhabitants. It is, however, no longer generally believed, as it was in past centuries, that a country’s economic well-being is inevitably tied to the productive powers of the land, and the productive potential of the land itself has proved to be not fixed but greatly expandable through the use of modern agricultural methods. Moreover, industrialization, where it has taken place, has greatly reduced people’s dependence on agriculture. These circumstances, together with expanding opportunities for trade, have enabled some countries to overcome in substantial degree the handicaps of a meagre agricultural endowment.

The productivity of capital—plant, equipment, tools, and other physical aids—is a subject of long-standing interest to economists, though concern with its empirical aspects is of more recent origin. Improved statistical reporting and the availability of data in some industrially advanced countries, notably since World War II, have encouraged systematic efforts to measure the productivity of this factor. Compared with achievements in measuring labour productivity, however, the progress realized has been quite limited. There are considerable theoretical and practical difficulties to be overcome.

Not just artificial intelligence, but augmented intelligence, man + machine, is here. The use of AI to augment our performance is being implemented across a variety of industries. These changes are subtle but they’re taking hold as the pressure to over perform at work grows.

• Automotive: Assembly line workers are relying on AI powered software and robotics to keep up with the overwhelming demand. These changes have made advanced cars more affordable to the average consumer.
• Airlines: Let’s say your flight is going to be delayed. IBM’s Watson notifies flight attendants automatically. Watson lets them know which passengers are going to miss their connecting flight. Watson then provides attendants with instructions. Where to go when they land, alternate connecting flights and more.
• Marketing: Amazon is using AI to augment worker productivity. One area that’s received a significant amount of attention is marketing. Amazon uses AI to regulate dynamic pricing. They use it to change product descriptions. To alter product rankings based on a variety of factors. Amazon uses your spending habits to determine the price you’ll pay. Loyal customers pay more, infrequent or irregular customers pay less.
• Warehousing: Robotics company Symbiotic is working to augment and automate the grocery distribution business. Blue chip brands like Amazon and Lego have already used AI and robotics to augment or in some cases, completely automate their warehouses.

Augmented intelligence is, for many industries, a fundamental part of work. Instead of replacing productive workers, technology at this stage is being used to amplify performance