Monday Economic Report - August 15, 2016

A Publication of the National Association of Manufacturers

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

In the second quarter, spending on goods was one of the brighter spots in an otherwise disappointing real GDP report, with personal consumption expenditures up 4.2 percent at the annual rate. Last week, we learned that retail sales cooled as we began the third quarter. Retail spending was unchanged in July, with Americans pausing in their consumer spending growth after jumping 0.8 percent in June. This suggests that the public was more cautious in July, likely on uncertainties in the global economy and some soft economic data. However, consumers have increased their spending at a modest pace over the past 12 months, up 2.3 percent since July 2015 or, more positively, up 3.5 percent excluding gasoline station sales. Still, consumer confidence has remained muted, even as sentiment ticked marginally higher in August in preliminary data. Beyond global headwinds, the University of Michigan and Thomson Reuters cite political uncertainties as a concern for consumers.

Slowing productivity growth has also been a worry, with manufacturing labor productivity averaging just 0.6 percent annually from 2011 to 2015. In comparison, output per worker in the sector from 2002 to 2008 averaged a more robust 5.2 percent annually. Over the longer term, manufacturers have benefited from being leaner, but the recent sluggishness in productivity and output growth has meant that unit labor costs have risen 8.1 percent since the end of 2011. In the latest release, manufacturing labor productivity edged lower in the second quarter, down 0.2 percent, on reduced output. Manufacturing output fell 0.8 percent, and hours worked dropped 0.7 percent, but hourly compensation costs were 2.9 percent higher. As a result, unit labor costs jumped 3.1 percent.

Perhaps more encouraging for manufacturers, job openings in the sector accelerated in June after dipping in May. Net hiring also turned positive for the first time in five months. We hope this is the beginning of a new, positive trend, especially given the relative strength in the job openings data. However, growth in manufacturing employment remains quite soft. In other news, the Small Business Optimism Index from the National Federation of Independent Business rose marginally from 94.5 in June to 94.6 in July, its highest level since December. It marked some continued improvement from March’s two-year low in optimism, even as small firms continue to be concerned about the overall economic outlook. Small business owners cited regulatory burdens as their top challenge, followed by taxes, the quality of labor and poor sales.

This week, we will be looking for signs of a continued rebound in manufacturing production, which grew 0.4 percent in June. While this was good news, manufacturing output has increased by only that same rate in the past year, a sign of just how challenged the sector has been over that time. Surveys from the New York and Philadelphia Federal Reserve Banks will also be released, both of which pulled lower in their July releases. We hope the August survey shows a turnaround in that trend. The other big headline of the week will be the Federal Reserve, with the release of the minutes from the July 26–27 Federal Open Market Committee meeting. Analysts will be looking for clues about the timing of the next short-term rate hike, which economists now expect to be during the December 13–14 meeting. One thing that has helped this decision has been minimal inflation, including from producer prices, giving the Federal Reserve more flexibility in its timing.

One of the larger areas of weakness continues to be the global economic environment. For its part, the U.S. trade deficit rose to a four-month high in June, and manufacturers continue to struggle with international demand. Using non-seasonally adjusted data, U.S.-manufactured goods exports totaled $522.62 billion year-to-date in June, down 7.3 percent from $563.99 billion in June 2015. The softness in exports extended to the top-five markets for U.S.-manufactured goods, which also have been lower year-to-date so far this year.

Other highlights of note this week include the latest figures for consumer prices, housing starts and permits, leading indicators and state employment.

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

P.S.: If you have not already done so, please take a moment to complete the latest NAM Manufacturers’ Outlook Survey. This 24-question survey will help us to gauge how manufacturing sentiment has changed since June’s survey. The survey includes special questions on monetary policy, capital spending, regulatory compliance costs and international trade. To complete the survey, click here. Responses are due by Monday, August 29, at 12:00 p.m. EDT. As always, all responses are anonymous.

Editor’s Note: I am excited to announce that there will be excellent guest authors of the Monday Economic Report over the next two weeks: Luke Chandler (deputy chief economist, Deere & Company) on August 22 and Arun Raha (vice president and chief economist, Eaton Corporation) on August 29. This will give us an opportunity to gain insights from well-respected economists with on-the-ground expertise in the sector.

Economic Indicators

Last Week's Indicators (Summaries Appear Below)

Monday, August 8
none

Tuesday, August 9
NFIB Small Business Survey
Productivity and Costs

Wednesday, August 10
Job Openings and Labor Turnover Survey

Thursday, August 11
None

Friday, August 12
Producer Price Index
Retail Sales
University of Michigan Consumer Sentiment (Preliminary)

This Week's Indicators

Monday, August 15
NAHB Housing Market Index
New York Fed Manufacturing Survey

Tuesday, August 16
Consumer Price Index
Housing Starts and Permits
Industrial Production

Wednesday, August 17
FOMC Minutes – July 26–27 Meeting

Thursday, August 18
Conference Board Leading Indicators
Philadelphia Fed Manufacturing Survey

Friday, August 19
State Employment Report

Summaries for Last Week's Economic Indicators

Job Openings and Labor Turnover Survey
The Bureau of Labor Statistics reported that manufacturing job openings accelerated in June after dipping somewhat in May. Postings in the sector jumped from 350,000 in May to 377,000 in June, even as they remained below the all-time high of 397,000 in April. In the first half of 2016, job openings have averaged 353,000 per month, up from 311,000 for 2015 as a whole. As such, we have continued to see relatively healthy gains in manufacturing job openings, giving us optimism for faster hiring growth moving forward. In the June data, the increase in job openings stemmed from a pickup in activity for durable goods firms (up from 180,000 to 217,000), whereas postings for nondurable goods entities declined for the second straight month (down from 170,000 to 160,000). Both have trended higher over the past 12 months, however, with job openings for durable and nondurable goods manufacturers measuring 182,000 and 103,000 in June 2015, respectively.

With that said, net hiring remained soft, even as it returned positive again for the first time in five months. Manufacturers hired 283,000 in June, up from 268,000 in May. Hiring increased for both durable (up from 160,000 to 165,000) and nondurable (up from 108,000 to 118,000) goods businesses. At the same time, total separations, which include quits, layoffs and retirements, dropped from 294,000 to 270,000, its lowest level since January. As a result, net hiring rose by 13,000 workers in June, stabilizing somewhat after four consecutive months of declines. We hope this is the beginning of a new, positive trend, especially given the relative strength in the job openings data discussed above.

In the larger economy, nonfarm job openings were also higher, up from 5,514,000 in May to 5,624,000 in June. This was closer to the all-time high in July 2015 of 5,788,000. The June job openings data were mostly higher across the board, with the exception of reduced postings in the month in the finance and insurance; government; leisure and hospitality; and retail trade sectors. Beyond openings, net hiring in the overall economy picked up, rising from just 69,000 in May to 222,000 in June.

NFIB Small Business Survey
The National Federation of Independent Business reported that sentiment among small business owners ticked higher in July. The Small Business Optimism Index rose marginally from 94.5 in June to 94.6 in July, its highest level since December. It marked some continued improvement from March’s two-year low in optimism, even as small firms continue to be concerned about the overall economic outlook. As a sign of this caution, the percentage suggesting the next three months would be a good time to expand remained unchanged at 8 percent, down from 10 percent in January and 12 percent one year ago. Respondents cited economic conditions and the political climate as reasons for not being a good time for expansion.

Much of the ongoing cautiousness among small businesses stems from soft sales. The net percentage of survey respondents reporting increased sales in the past three months drifted lower, down from -4 percent to -8 percent, and the net percentage expecting higher sales in the next three months dropped from 2 percent to 1 percent. At the same time, the labor market data were mixed. The net percentage adding workers in the past three months has been negative in five of the past six months, and the percentage suggesting they had open positions unable to fill right now dropped from 29 percent to 26 percent. Yet, the net percentage expecting to hire new workers in the next three months edged up from 11 percent to 12 percent.

Likewise, capital spending was varied. The percentage reporting making a capital expenditure over the past six months increased from 57 percent to 59 percent, a three-month high. Nonetheless, the percentage planning to increase their capital spending over the next three to six months edged down from 26 percent to 25 percent. Separately, inventories were seen not changing in the next three to six months, but that represents some stabilization after respondents anticipated falling stockpiles in five of the past six surveys.

The top problem for respondents was government regulations, cited by 22 percent, followed by taxes (20 percent), the quality of labor (14 percent) and poor sales (12 percent).

Producer Price Index
Reduced food and energy costs in July pulled producer prices lower. The Bureau of Labor Statistics reported that producer prices for final goods and services decreased 0.4 percent in July, the first decline in four months. For final demand goods, food and energy prices fell 1.1 percent and 1.0 percent for producers, respectively. Regarding energy, the price of West Texas Intermediate crude oil declined from $48.76 per barrel in June to $44.65 in July. Meanwhile, the decrease in food prices in July stemmed from drops in the cost of beef and veal, fish and shellfish, fruits and vegetables, grains and oilseeds that were enough to offset higher prices for dairy products and eggs. Overall, food costs have trended lower over the past 12 months, down 2.5 percent, with energy prices off 11.5 percent year-over-year.

Producer prices for final demand goods and services have increased 0.2 percent since July 2015. Excluding food and energy costs, core inflation was unchanged in this report. Core producer prices grew 0.7 percent year-over-year in July, down from 1.3 percent in June. 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 26 straight months. While prices had started to accelerate in recent months, the July data clearly show a pause in that trend. This frees the Federal Open Market Committee to continue pursuing stimulative monetary policies—at least for now.

Productivity and Costs
The Bureau of Labor Statistics reported that manufacturing labor productivity edged lower in the second quarter, down 0.2 percent, on reduced output. This followed a 1.5 percent gain in the first quarter, but the larger story continues to be about sluggish growth in labor productivity in the sector, which has averaged just 0.6 percent annually from 2011 to 2015. From 2002 to 2008, output per worker in the sector averaged a more robust 5.2 percent annually. Over the longer term, manufacturers have benefited from being leaner, but the recent sluggishness in productivity and output growth has meant that unit labor costs have risen 8.1 percent since the end of 2011. In this report, manufacturing output fell 0.8 percent, and hours worked dropped 0.7 percent, but hourly compensation costs were 2.9 percent higher. As a result, unit labor costs jumped 3.1 percent.

In the second quarter, labor productivity for durable goods manufacturers rose 2.6 percent, with output up 0.5 percent but hours worked down 2.0 percent. Therefore, unit labor costs for durable goods businesses inched down 0.1 percent in this report. In contrast, nondurable goods firms saw labor productivity decline 4.1 percent in the second quarter, essentially offsetting the 4.0 percent gain in the first quarter. Nondurable goods output was off 2.4 percent, with hours worked up 1.8 percent and unit labor costs jumping 8.7 percent. On a year-over-year basis, durable and nondurable goods labor productivity were up 1.3 percent and 0.3 percent, respectively, with unit labor costs up 1.0 percent and 3.0 percent over the past 12 months.

In the larger economy, nonfarm labor productivity fell 0.5 percent in the second quarter, extending the 0.6 percent decline in the first quarter. Output increased 1.2 percent, with unit labor costs up 2.0 percent. Similar to the manufacturing data described above, nonfarm labor productivity has slowed considerably since the Great Recession, averaging 0.6 percent per year from 2011 to 2015. This compares to 2.7 percent growth from 2000 to 2007.

Retail Sales
The Census Bureau reported that retail sales cooled in July after strong gains in the second quarter. Sales were unchanged in July, with Americans pausing in their consumer spending growth after jumping 0.8 percent in June. This suggests that the public was more cautious in July, likely on uncertainties in the global economy and some soft economic data. Retail sales have risen 2.3 percent over the past 12 months, a modest pace but down from 3.0 percent in the prior report. To be fair, gasoline station sales have fallen 11.0 percent year-over-year on reduced prices, pulling the headline number lower. Excluding gasoline, retail sales were up 3.5 percent year-over-year, suggesting that consumers have increased their purchases at a fairly decent pace over the past year.

The underlying July data were mixed. There was increased spending reported in the following categories: nonstore retailers (up 1.3 percent), motor vehicles and parts (up 1.1 percent), miscellaneous store retailers (up 0.3 percent), furniture and home furnishings stores (up 0.2 percent) and health and personal care stores (up 0.1 percent). However, those gains were offset by decreased sales for gasoline stations (down 2.7 percent), sporting goods and hobby stores (down 2.2 percent), food and beverage stores (down 0.6 percent), building material and garden supply stores (down 0.5 percent), department stores (down 0.5 percent) and clothing and accessory stores (down 0.5 percent), among others.

On a year-over-year basis, the largest gains in retail spending were for nonstore retailers (up 14.1 percent), food services and drinking places (up 5.0 percent), furniture and home furnishings stores (up 4.3 percent), building material and supplies (up 3.5 percent), miscellaneous store retailers (up 3.1 percent) and motor vehicles and parts dealers (up 2.4 percent).

University of Michigan Consumer Sentiment (Preliminary)
The University of Michigan and Thomson Reuters reported that consumer confidence ticked marginally higher in August in preliminary data. The Index of Consumer Sentiment increased from 90.0 in July to 90.4 in August. While it was positive that assessments improved a bit in August, Americans remain anxious about the economy as they process mixed reports on growth and global news headlines. To illustrate this, the index has ranged year-to-date from a low of 89.0 in April to a high just one month later of 94.7 in May. According to the release, “Concerns about Brexit have faded amid rising references to the outcome of the presidential election as a source of uncertainty about future economic prospects.”

Despite that comment, respondents were slightly more positive in their expectations for the future (up from 77.8 to 80.3), even as this index continues to remain subdued. In contrast, survey takers were less optimistic about current economic conditions (down from 109.0 to 106.1). Nonetheless, the survey’s chief economist, Richard Curtin, noted that the data were consistent with real consumer spending growth of 2.6 percent over the next 12 months.

Questions or Comments?

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

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