Manufacturing Economic Report

A Publication of the National Association of Manufacturers

MONDAY ECONOMIC REPORT
NAM/IndustryWeek Survey of Manufactures Business Outlook by Quarter, 2012-2014

Much of the data out last week continued a trend of disappointing releases about the current state of the economy, particularly for August. This included manufacturing production, which fell by 0.4 percent for the month and, coincidently, year over year. Output in the sector had declined in both June and July, providing some indications that manufacturing activity might have stabilized. Instead, just five of the 19 major sectors within manufacturing experienced increased production in August. In addition, capacity utilization for manufacturers decreased from 75.2 percent to 74.8 percent, a three-month low. As such, this report highlights the tremendous challenges in the sector. Nonetheless, we can hope that the August figures were an outlier, with manufacturers cautiously optimistic about modest sales growth over the coming months.

For their part, surveys from the New York and Philadelphia Federal Reserve Banks found mixed news on activity in their districts. The Empire State’s report contracted for the second straight month; whereas activity accelerated to its fastest pace in six months in the Philly Fed region. At the same time, the latest NAM Manufacturers’ Outlook Survey reflects progress from earlier in the year but with ongoing challenges. Overall, one could characterize manufacturers’ current economic outlook as cautiously encouraging, but still less-than-desired and highly varied by firm size and export sales growth expectations. In this survey, 61.0 percent of manufacturers are either somewhat or very positive about their own company’s outlook, easing slightly from 61.7 percent who said the same thing in June. Large manufacturers were more upbeat about their company’s outlook this quarter, but small and medium-sized manufacturers experienced declines in their outlook in this survey.

In the NAM survey, sales and production were seen growing by 1.9 percent and 2.1 percent over the next 12 months, respectively, up from 1.6 percent and 1.5 percent. In addition, one’s capital investment plans tended to increase with size. Smaller entities expected capital spending to decline by 0.3 percent in the next year; whereas, medium-sized and large manufacturers predicted capital investment growth of 0.8 percent and 1.5 percent, respectively. In special questions on capital expenditures, one-quarter of respondents expect to increase their capital spending levels this year relative to last year, with an almost identical percentage noting declines in their investment levels. The attached figure to this report provides possible reasons for not increasing capital expenditures right now, led by reduced or slowing demand (46.6 percent).

Beyond manufacturing, one of the other disappointing indicators last week was retail sales, which fell for the first time since March, down 0.3 percent in August. Spending was pulled lower by weaknesses for motor vehicle and parts dealers (down 0.9 percent), which cooled a little after a relatively strong month in the prior release. Excluding automobiles, sales were off by 0.1 percent. Despite the sub-par data in August, Americans have largely increased their consumer spending modestly, up 1.9 percent over the past 12 months. Meanwhile, Americans continued to be anxious about the economy, according to preliminary data from the University of Michigan and Thomson Reuters. The Index of Consumer Sentiment was unchanged at 89.8 in September, with confidence slowing in the past two months to their lowest levels since April, largely on pocketbook issues. Small business owners were also somewhat cautious in their outlook, with soft sales and lingering economic and political uncertainties.

Much of the economic focus next week will center on the Federal Reserve, which will decide on Wednesday whether to hike short-term rates now or wait until later. The consensus is that the Federal Open Market Committee will opt for later, likely at its December meeting. In the NAM survey discussed above, 45.5 percent of respondents felt that the Federal Reserve would hike short-term interest rates at its December 13-14 meeting, with just 5.7 percent thinking that they would act in September. Fortunately for the Fed, relatively minimal consumer and producer inflation provides it flexibility in making its decision. There will also be additional reports on the manufacturing sector, with surveys from Markit and the Kansas City Federal Reserve Bank. Other highlights next week include the latest figures for housing starts and permits, leading indicators and state employment.

Chad Moutray, Ph.D., CBE
Chief Economist
National Association of Manufacturers

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Economic Indicators

Last Week’s Indicators (Summaries Appear Below)

Monday, September 12
None

Tuesday, September 13
NFIB Small Business Survey

Wednesday, September 14
NAM Manufacturers’ Outlook Survey

Thursday, September 15
Industrial Production
New York Fed Manufacturing Survey
Philadelphia Fed Manufacturing Survey
Producer Price Index
Retail Sales

Friday, September 16
Consumer Price Index
University of Michigan Consumer Sentiment

This Week’s Indicators

Monday, September 19
NAHB Housing Market Index

Tuesday, September 20
Housing Starts and Permits
State Employment Report

Wednesday, September 21
FOMC Monetary Policy Statement

Thursday, September 22
Chicago Fed National Activity Index
Conference Board Leading Indicators
Existing Home Sales
Kansas City Fed Manufacturing Survey

Friday, September 23
Markit Flash PMIs for the U.S. and Eurozone

Economic Indicators

Consumer Price Index
The Bureau of Labor Statistics said that consumer prices rose 0.2 percent in August, bouncing back a bit after being unchanged in July. Since August 2015, the consumer price index increased 1.1 percent, up from 0.9 percent in the past release. Interestingly, the pickup in inflation in August came from non-core sources. Excluding food and energy, both of which were unchanged for the month, consumer prices were up 0.3 percent, its fastest pace in six months. In particular, costs were higher for apparel and for medical care, shelter and transportation services. These were enough to offset lower prices for household furnishings and used cars and vehicles, with prices of new vehicles flat.

On a year-over-year basis, core inflation (which excludes food and energy) increased from 2.2 percent in July to 2.3 percent in August — also a six-month high. While core inflation has picked up recently, overall pricing pressures remain modest and under control for now, providing the Federal Reserve some flexibility even as it decides when to raise short-term interest rates once more.

Turning to food and energy, gasoline prices drifted lower between July and August (down 0.9 percent), but this was counterbalanced by an uptick in electricity costs (up 0.8 percent). To be fair, energy prices have continued to be sharply lower over the past 12 months, down 9.2 percent year over year. Meanwhile, food prices were equally mixed, with increased costs at restaurants (up 0.2 percent) but lower prices at home (down 0.2 percent) with easing seen in baking, cereal and dairy products.

Industrial Production
According to the Federal Reserve, manufacturing production fell by 0.4 percent in August. After two straight months of gains, this news was disappointing, even as it mirrored weaknesses found in other economic indicators in August. Moreover, manufacturing production has declined over the past 12 months, the first year-over-year decline since December. In addition, manufacturing capacity utilization decreased from 75.2 percent to 74.8 percent, a three-month low. As such, this report highlights the tremendous challenges in the sector. Nonetheless, manufacturers continue to be cautiously hopeful for increased activity over the coming months, as noted in our latest survey (see below).

Looking more closely at the August data, durable and nondurable goods production declined 0.4 percent and 0.2 percent, respectively. Just five of the 19 major sectors within manufacturing had increased output for the month, with the data mostly lower. The segments with higher production in August were computer and electronic products (up 1.0 percent), paper (up 0.8 percent), furniture and related products (up 0.6 percent), motor vehicles and parts (up 0.5 percent) and food, beverage and tobacco products (up 0.3 percent).

In contrast, the largest declines were seen in the textile and product mills (down 2.1 percent), machinery (down 1.9 percent), wood products (down 1.6 percent), electrical equipment and appliances (down 1.6 percent), printing and support (up 1.4 percent), miscellaneous durable goods (down 1.4 percent), nonmetallic mineral products (down 1.2 percent) and primary metals (down 1.1 percent) sectors.

In the larger economy, industrial production also fell by 0.4 percent, with a year-over-year decline of 1.1 percent. Beyond manufacturing, mining output increased by 1.0 percent; whereas, utilities production decreased by 1.4 percent. The headline year-over-year industrial production rate was pulled lower by sharply reduced mining activity, down 9.3 percent since August 2015. Total capacity utilization dropped from 75.9 percent to 75.5 percent, returning to the rate seen in June.

NAM Manufacturers' Outlook Survey
In the latest NAM Manufacturers’ Outlook Survey, sentiment appears to have stabilized after several quarters of declining assessments about the economic outlook, and the latest data appear to mostly back up that assertion, but with some caveats. Indeed, economic challenges continue in the sector, among them, concerns over rising health care costs and dampening perceived growth rates over the next 12 months despite some progress in this release. Large manufacturers were more upbeat about their company’s outlook this quarter, but small and medium-sized manufacturers experienced declines in their outlook in this survey. Overall, one could characterize manufacturers’ current economic outlook as cautiously encouraging, but still less-than-desired and highly varied by firm size and export sales growth expectations.

In this survey, 61.0 percent of manufacturers are either somewhat or very positive about their own company’s outlook, easing slightly from 61.7 percent who said the same thing in June. Yet, the outlook remained stronger than at the end of last year and the beginning of this year, marking some progress from earlier softness. At the same time, this marks the fifth consecutive quarter when positive responses about the outlook have fallen below the historic average of 73.0 percent.

Sales and production were seen growing by 1.9 percent and 2.1 percent over the next 12 months, respectively, up from 1.6 percent and 1.5 percent. In addition, companies’ capital investment plans tended to increase with size. Smaller entities expected capital spending to decline by 0.3 percent in the next year; whereas, medium-sized and large manufacturers predicted capital investment growth of 0.8 percent and 1.5 percent, respectively. In special questions on capital expenditures, one-quarter of respondents expect to increase their capital spending levels this year relative to last year, with an almost identical percentage noting declines in their investment levels.

The current data suggest that manufacturing production should grow 1.5 percent year over year in the first quarter of 2017. As such, it would indicate that activity should continue to pick up in the coming months, with output in the sector currently growing by 0.4 percent year over year. At the same time, growth will remain more subdued than we would prefer. In terms of monetary policy, 45.5 percent of respondents felt that the Federal Reserve would hike short-term interest rates at its December 13-14 meeting, with just 5.7 percent thinking the Fed would act at its upcoming September meeting.

Manufacturers consistently rank an unfavorable business environment among their top challenges. Much of that frustration stems from rising regulatory burdens (in addition to a desire for tax reform and frustrations with higher insurance costs). In the last survey, 82.6 percent of respondents said their company’s total spending on state and federal regulatory compliance had increased either modestly or substantially over the past few years. In this report, 88.8 percent of those completing the survey either somewhat or strongly disagreed with the notion that the federal government carefully considers the point of view of small business owners when it imposes new regulations.

New York Fed Manufacturing Survey
The New York Federal Reserve Bank said that manufacturing activity contracted for the second straight month. The Empire State Manufacturing Survey’s composite index increased from -4.2 in August to -2.0 in September, but new orders (down from 1.0 to -7.5) and shipments (down from 9.0 to -9.4) pulled lower. The percentage of respondents saying that sales were higher declined from 29.4 percent in August to 22.6 percent in September. In addition, the labor market variables were also weaker, including hiring (down from -1.0 to -14.3) and the average workweek (down from 2.1 to -11.6).

Nonetheless, manufacturers in the district were cautiously upbeat in their outlook, with more than 48 percent expecting increased sales in the next six months. Forward-looking indices for new orders (up from 27.4 to 31.9), shipments (up from 28.0 to 21.2), employment (up from -6.2 to 7.1) and capital expenditures (up from 4.1 to 10.7) were all higher. Yet, the average workweek (down from -5.2 to -9.8) was seen narrowing further.

NFIB Small Business Survey
The National Federation of Independent Business (NFIB) said that sentiment among small business owners was mostly stable in August. The Small Business Optimism Index edged down from 94.6 in July to 94.4 in August, hovering around 94.5 for the third straight month and generally improving since achieving a two-year low in March (92.6). Nonetheless, small firms continue to be cautious in their economic outlook, with the headline number remaining below 100, a threshold which would suggest more robust growth in the sector. Indeed, the underlying data points for August provided a mixed message even while the longer-term trend indicates a mild degree of progress.

The percentage suggesting that the next three months would be a “good time to expand” inched up from 8 percent in July to 9 percent in August. Nonetheless, the average year-to-date in 2016 has been 8.25 percent, down from 11.58 percent for all of 2015. Economic conditions and the political climate were the most cited reasons for those saying that it would not be a good time for expansion. Beyond those issues, much of the ongoing cautiousness among small businesses stems from soft sales. The net percentage of survey respondents reporting increased sales in the last three months drifted lower, down from -8 percent to -9 percent, its lowest level since January 2014. In addition, the net percentage expecting higher sales in the next three months dropped from 1 percent to -1 percent, the first negative reading in nine months.

The labor market data were mixed. The net percentage adding workers in the last three months has been negative in seven of the past nine months, and the net percentage expecting to hire new workers in the next three months dropped 12 percent to 9 percent. Yet, on a more encouraging note, the percent suggesting they had open positions they were unable to fill right now rose from 26 percent to 30 percent, its highest level since the Great Recession. On a similarly positive note, the percentage planning to increase their capital spending over the next three to six months ticked up from 25 percent to 28 percent, a two-year high.

The top “single most important problem” was taxes, cited by 21 percent of those taking the survey. This was followed by government regulations (20 percent), the quality of labor (15 percent) and poor sales (11 percent).

Philadelphia Fed Manufacturing Survey
Manufacturing activity accelerated in the Philadelphia Federal Reserve Bank’s region, expanding at its fastest pace in six months. The composite index of general business conditions rose from 2.0 in August to 12.8 in September. With that said, many of the underlying data points suggest ongoing softness in the current economic environment. While new orders (up from -7.2 to 1.4) rebounded, shipments (down from 8.4 to -8.8) retreated. Employment (up from -20.0 to -5.3) has contracted in every month so far in 2016, albeit with some easing in the rate of decline in September, with the average workweek (down from –11.5 to -11.7) narrowing relatively strongly.

Turning to the outlook for the next six months, business leaders continued to be mostly positive about future activity, brushing off some of the current concerns. At least 49 percent see sales and shipments being higher moving forward, with one-third of respondents expecting to add workers and 22.5 percent planning for more capital expenditures. Yet, there was also a pullback in confidence in this report despite numbers showing cautious optimism, with the composite index down from 45.8 to 37.5.

Producer Price Index
The Bureau of Labor Statistics said that producer prices for final demand goods and services were flat in August. Costs were lower for final demand goods (down 0.4 percent) but higher for final demand services (up 0.1 percent). For goods, pricing pressures were reduced by declines for the second month in a row in costs for energy (down 0.8 percent) and food (down 1.6 percent). Overall, food costs have trended lower over the past 12 months, down 3.9 percent, with energy prices off 9.9 percent year over year.

Producer prices for final demand goods and services have not changed since August 2015, up after being down 0.2 percent in July. Excluding food and energy costs, core inflation grew 1.0 percent year over year, up from 1.0 percent in the last report. The bottom line of this release is that pricing pressures remain quite minimal for now, remaining below the Federal Reserve’s stated goal of 2 percent for more than two years. This frees the Federal Open Market Committee to continue pursuing stimulative monetary policies, at least for now.

Retail Sales
The Census Bureau said that retail sales fell for the first time since March, down 0.3 percent in August. Spending was pulled lower by weaknesses for motor vehicle and parts dealers (down 0.9 percent), which cooled a little after a relatively strong month in the prior release. Excluding automobiles, sales were off by 0.1 percent. Despite the subpar data in August, Americans have largely increased their consumer spending modestly, up 1.9 percent over the past 12 months. To be fair, gasoline station sales have fallen 9.5 percent year over year on reduced prices, pulling the headline number lower. Excluding gasoline, retail sales were up 2.9 percent since August 2015, suggesting that consumers have increased their purchases at a fairly decent pace over the past year.

The underlying August data were mixed. There was increased spending reported in the following categories: food services and drinking places (up 0.9 percent), clothing and accessory stores (up 0.7 percent), food and beverage stores (up 0.3 percent) and electronics and appliance stores (up 0.1 percent). However, these gains were offset by decreased sales for miscellaneous store retailers (down 2.4 percent), building material and garden supply stores (down 1.4 percent), sporting goods and hobby stores (down 1.4 percent), furniture and home furnishings stores (down 0.7 percent), department stores (down 0.6 percent) and non-store retailers (down 0.3 percent).

On a year-over-year basis, the largest gains in retail spending were for non-store retailers (up 10.9 percent), health and personal care stores (up 7.8 percent), food services and drinking places (up 5.8 percent) and building material and supply stores (up 2.2 percent).

University of Michigan Consumer Sentiment
Americans continued to be anxious about the economy, according to preliminary data from the University of Michigan and Thomson Reuters. The Index of Consumer Sentiment was unchanged at 89.8 in September, with confidence slowing in the past two months to their lowest levels since April. As such, some of the improvements in public perceptions seen in the summer months have now dissipated. The reduced assessments in this report were mainly due to weaker income expectations, with consumer confidence often shifting on pocketbook issues.

The underlying data were varied. Assessments about the current economic environment softened somewhat (down from 107.0 to 103.5), but the public anticipated slightly better data moving forward (up from 78.7 to 81.1), albeit at levels that perhaps remain weaker-than-desired. Nonetheless, the survey’s chief economist, Richard Curtin, noted that the data were consistent with real consumer spending growth of 2.6 percent through mid-2017.

Questions or Comments?

Contact Chief Economist Chad Moutray at cmoutray@nam.org.

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