Evidence of Impending US Economic Growth Surge

In Economic Growth Could Get Scary I predict US GDP growth of 5.5% to 6.5% between April 2010 and April 2011. In my article Global Trade Data Suggest US Growth Surge I buttress that case pointing to clues from foreign trade data.

In this article, I'll provide few additional pieces of evidence that I believe allow for little doubt that the US economy is about to enter into a cyclical boom phase.

Manufacturing Production Binge

Let us consider the latest Purchasing Manager’s Index (referred to as PMI) data from the Institute for Supply Management (ISI).
 

• Overall manufacturing PMI. The overall ISM manufacturing diffusion index rose to 59.6% in March from 56.5% in February, the highest reading since July 2004. Historically, a PMI above 42 has generally indicated expansion in the overall US economy. The March figure, if annualized, corresponds to a 5.9% growth of real GDP. This strongly corroborates my GDP growth forecast of 5.5% to 6.5% in "Economic Growth Could Get Scary."
  
  
• Across-the-board strength. The expansion of manufacturing activity isn't isolated. Seventeen of 18 industries were growing in March.
  
  
• Production index. The production index rose above 61%, which is boom territory.
  
  
• New orders. The boom in manufacturing will likely be sustained for some time as indicated by the New Orders Index, which expanded to a whopping 61.5.
  
  
• Order backlogs. Even though the index eased relative to February, the March reading of 58 is still in boom territory.
  
  
• Supplier deliveries. The index increased to 64.9 from 61.1 registered in February. A reading above 50 indicates slower deliveries. This means that demand is so strong that there are significant pressures building up in the supply chain. One of the main ways that these pressures will be alleviated is through increased hiring.
  
  
• Inventories. The inventories index spiked from 47.3 to 55.3 in March after 46 months of contraction (below 50). An Inventories Index greater than 42.6 is generally consistent with expansion in the Bureau of Economic Analysis' figures on overall manufacturing inventories. This is extremely important because it suggests that inventory building will be a major contributor to GDP growth in the first quarter of 2010 and especially in the second quarter of 2010. Many analysts were claiming that the inventory gains in the fourth quarter of 2009 would be a “one-off.” These analysts were mistaken. I suggest readers take a look at the analysis provided in my article Prospects for a Strong Recovery in Employment, in which I describe why inventory building is going to provide a big boost to GDP in the next few months. An inventory-to-sales ratio at an all-time low combined with various indicators suggest that businesses are about to rebuild inventories in a big way, providing a major boost to GDP growth.
  
  
• Customer inventories. The customer’s inventory index is at 39, which indicates that manufacturers believe that their customer’s inventory levels are too low. There was not a single industry report of customers' inventories being too high during March. In short, inventories have to be restocked and this is going to fuel growth.