Brexit Is No Bust for U.S. Manufacturing

Brexit Is No Bust for U.S. Manufacturing

Jul 1, 2016

By Steven Russolillo, Wall Street Journal

An improving U.S. manufacturing sector is expected to stay on track regardless of Brexit

Brexit’s reverberations across financial markets have been felt far and wide. They probably won’t matter as much to the global economy as the knee-jerk reaction suggested.

One of the first major U.S. economic data points to capture the post-Brexit environment, a monthly manufacturing reading due Friday morning, isn’t expected to be swayed much by the referendum. That bodes well for risky assets such as stocks and commodities, which have rebounded in recent days on the realization that Brexit, while problematic, wasn’t another Lehman moment.

Consider the state of U.S. manufacturing. Only recently has it started to show signs of life following moribund activity for much of the past two years. That is because the dollar’s strength has waned and energy markets have rebounded. And, despite Brexit, economists expect the positive trend to have continued in June. Thursday’s surprisingly strong reading on the regional Chicago PMI suggests as much.

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Those polled by The Wall Street Journal estimate that the Institute for Supply Management’s manufacturing index hit 51.4 in June, up marginally from 51.3 a month earlier. It would be the fourth consecutive month ISM’s metric topped 50, implying customers’ orders and factory production are expanding.

ISM says it receives survey results throughout the month, with “a majority of respondents” typically waiting until the end of the month before submitting responses. That suggests the June results will capture at least some aftermath of the June 23 Brexit vote.

Of course, it isn’t exactly clear how much longer-term pain manufacturers will feel from Brexit. Direct trade links between the U.S. and U.K. are modest, according to Paul Ashworth, chief U.S. economist at Capital Economics. He calculates the U.K. accounts for just 4% of U.S. exports, equivalent to about half a percentage point of U.S. gross domestic product. That doesn’t take into account contagion fears and whether other countries will choose to follow the U.K. Mr. Ashworth says the eurozone accounts for 15% of U.S. exports, the third biggest market behind Canada and Mexico.

Still, firming manufacturing activity of late bodes well for the economy. The Atlanta Fed’s “GDPNow” model forecasts second-quarter growth of 2.7%, up from 1.1% in the first three months of the year.

For manufacturing, Brexit’s shock may result in less awe.

 

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