Monday Economic Report - August 8, 2016

A Publication of the National Association of Manufacturers

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

There were a few encouraging economic reports released last week, with each suggesting that activity has picked up after struggling earlier in the year. Friday’s job numbers were relatively strong for the second straight month. Nonfarm payrolls rose by 255,000 in July, extending the gain of 292,000 in June. As a result, the country has averaged 273,500 net new workers over the past two months, a decent jump over the 151,000 average across the first five months of 2016. The unemployment rate was unchanged at 4.9 percent. In the manufacturing sector, employers added 9,000 workers in July, following an increase of 15,000 in June. With that said, manufacturing employment has declined by 15,000 on net year-to-date, indicating that the sector is not out of the woods yet. On the positive side, manufacturers have added 852,000 workers since the Great Recession.

Beyond jobs, sentiment among manufacturers has also improved of late. The Institute for Supply Management’s Manufacturing Purchasing Managers’ Index reported that manufacturing activity expanded for the fifth straight month in July, albeit with a slight easing. This report would suggest that manufacturers are doing better today than the contracting activity levels seen in the October to February time frame. The boost has come from relatively strong expansions in new orders and production, with the latter growing at its fastest pace in 12 months. That bodes well for a stronger second half of 2016, assuming it can be sustained.

In addition, it appears that Americans have begun to open their pocketbooks again. Personal spending increased 0.4 percent in June and jumped 7.5 percent at the annual rate in the second quarter. Over the past 12 months, personal spending has increased 3.7 percent, a healthy pace that makes consumption one of the bright spots in the economy. With a pickup in spending, the saving rate has dropped from 6.2 percent in March to 5.3 percent in June. These findings are consistent with the most recent real GDP estimates, with consumers being one of the few positive contributors to growth in an otherwise disappointing report. Personal incomes were also higher in June, up 0.2 percent, with year-over-year growth of 2.7 percent.

Even with some progress, there were also indications of lingering challenges for manufacturers, suggesting that better sentiment reports have not fully translated into the “real” data just yet. Along those lines, new factory orders fell for the second straight month in June, down 1.5 percent in this report after being off 1.2 percent in May. Much of that decline stemmed from volatility in aircraft sales, which can experience wide swings from month to month. Excluding transportation equipment, factory orders rose 0.4 percent in June. New orders for manufactured goods have been quite weak over the past 12 months, with a year-over-year decline of 5.6 percent. Excluding transportation, new factory orders were off 4.4 percent since June 2015. This suggests broader softness for manufacturers in terms of demand, perhaps highlighting why business leaders in the sector continue to be so cautious. These anxieties help to explain why private manufacturing construction spending slowed to an 18-month low in June.

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.

This week, we will be looking to see if the healthy gains in personal spending will carry through to the retail sales data. Our first read of consumer confidence for August will also be important to capture the current mood of the public following mixed readings in July. In addition to gauging consumer strength, other measures to look for this week include the latest figures on job openings, labor productivity, producer prices and small business optimism.

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

Economic Indicators

Last Week's Indicators (Summaries Appear Below)

Monday, August 1
Construction Spending
ISM Manufacturing Purchasing Managers’ Index

Tuesday, August 2
Personal Income and Spending

Wednesday, August 3
ADP National Employment Report

Thursday, August 4
Factory Orders and Shipments

Friday, August 5
BLS National Employment Report
International Trade

This Week's Indicators

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)

Summaries for Last Week's Economic Indicators

ADP National Employment Report
ADP reported that manufacturing employment rose for the first time in six months in July, which was an encouraging development. Manufacturers added 4,000 workers on net in July. With that said, hiring in the sector has been challenged so far this year, with employment down by 33,000 workers through the first seven months of 2016. This suggests manufacturers have been wary about adding to their workforce in light of ongoing global headwinds and sluggish growth in demand and production. Recent data have suggested some improvements in activity for manufacturers in the United States, which we hope will translate into increased hiring moving forward for the sector.

Meanwhile, nonfarm payroll employment rose by 179,000 in July, extending the gain of 176,000 workers hired in June. The year-to-date average is 184,000, easing somewhat from the average pace of 207,000 per month during all of 2015. In July, the largest job gains were in professional and business services (up 59,000), trade, transportation and utilities (up 27,000) and financial activities (up 11,000). Construction employment was lower for the second straight month, down by 6,000 in July. Small and medium-sized businesses (i.e., those with fewer than 500 employees) accounted for more than 72 percent of all net new workers in the month.

BLS National Employment Report
For the second straight month, job numbers in the U.S. economy were relatively strong, with each above the consensus estimate. Nonfarm payrolls rose by 255,000 in July, extending the gain of 292,000 in June. As a result, the country has averaged 273,500 net new workers over the past two months, a decent jump over the 151,000 average across the first five months of 2016. This suggests that employers have begun to hire again despite continued cautiousness and lingering weaknesses in the global macroeconomy. The unemployment rate was unchanged at 4.9 percent. Yet, the so-called real unemployment rate, which includes discouraged workers, the underemployed and those working part time for economic reasons, increased from 9.6 percent to 9.7 percent.

In the manufacturing sector, employers added 9,000 workers in July. This followed an increase of 15,000 in June, and like the nonfarm payroll numbers, it was an encouraging sign. With that said, manufacturing employment has declined by 15,000 on net year-to-date, suggesting that softness in demand and production in the sector has dampened hiring activity of late. We hope employment growth for manufacturers continues to tick higher moving forward—something that is likely to happen if the sector continues to stabilize. Since the end of the Great Recession, manufacturers have added 852,000 workers.

Durable goods firms hired an additional 11,000 employees for the month, with 2,000 fewer workers for nondurable goods businesses. The largest gains were in transportation equipment (up 11,500, with 6,700 for motor vehicles and parts), machinery (up 3,300) and nonmetallic mineral products (up 1,200). In contrast, there were notable declines in employment for computer and electronic products (down 3,100), apparel (down 2,500), fabricated metal products (down 1,800) and wood products (down 1,400) manufacturers, among others.

Average weekly earnings in the manufacturing sector edged slightly higher, up from $1,056.98 in June to $1,058.20 in July. On a year-over-year basis, average weekly earnings have increased from $1,029.79 in July 2015, up 2.75 percent for the 12-month period. Average weekly hours in manufacturing were unchanged in July at 40.7, but the average number of overtime hours increased from 3.2 to 3.3.

Construction Spending
The Census Bureau reported that private manufacturing construction spending slowed to an 18-month low in June, reflecting ongoing cautiousness in the sector. The value of construction put in place declined from $73.94 billion in May to $70.58 billion in June, down 4.5 percent for the month and slipping to its lowest level since December 2014. Since achieving an all-time high of $82.15 billion in September 2015, construction activity in the manufacturing sector has pulled sharply lower. On a year-over-year basis, manufacturing construction spending has fallen 10.4 percent, down from $78.76 billion in June 2015.

Yet, the longer-term trend has been positive, boosted in particular by increased investments in the chemical sector, which continues to benefit from cost advantages in the energy sector. To illustrate this growth, manufacturing construction has risen 25.3 percent over the past 24 months.

As a whole, private nonresidential construction spending was down 0.6 percent in June. The underlying data were mixed. The largest monthly decreases included the educational (down 2.8 percent), health care (down 2.0 percent) and commercial (down 1.6 percent) sectors. On the other hand, construction spending increased in June for the religious (up 2.2 percent), amusement and recreation (up 1.2 percent), lodging (up 0.6 percent) and office (up 0.6 percent) segments. Across the past 12 months, private nonresidential construction spending has increased 2.5 percent, led by large increases in office (up 19.6 percent), lodging (up 17.4 percent), commercial (up 7.7 percent) and amusement and recreation (up 7.1 percent), among other segments.

Meanwhile, private residential construction spending was unchanged in June for the second straight month, with 2.6 percent growth over the past 12 months. For the month, single-family (down 0.4 percent) and multifamily (down 1.5 percent) construction activity were both lower. Since June 2015, however, the housing market has been a bright spot, with single-family and multifamily activity up 4.8 percent and 16.4 percent, respectively. At the same time, public construction spending fell 0.6 percent in June, or 6.0 percent year-over-year.

Factory Orders and Shipments
The Census Bureau reported that new factory orders fell for the second straight month in June, down 1.5 percent in this report after being off 1.2 percent in May. With that said, the decline mainly stemmed from volatility in aircraft sales, which can experience wide swings from month to month. Excluding transportation equipment, factory orders rose 0.4 percent in June. New orders for manufactured goods have been quite weak over the past 12 months, with a year-over-year decline of 5.6 percent. Excluding transportation, new factory orders were off 4.4 percent since June 2015. This suggests broader softness for manufacturers in terms of demand, perhaps highlighting why business leaders in the sector continue to be so cautious.

In this report, durable goods sales decreased 3.9 percent in June, with demand for nondurable goods up 1.0 percent. New orders for durable goods excluding transportation were down by a more modest 0.4 percent. Looking specifically at durable goods sales activity in June, orders were higher for motor vehicles and parts (up 3.2 percent), electrical equipment and appliances (up 0.3 percent), fabricated metal products (up 0.3 percent), furniture and related products (up 0.3 percent) and machinery (up 0.2 percent). Yet, those gains were offset by declining activity for transportation equipment (down 10.5 percent), computers and electronic products (down 1.9 percent) and primary metals (down 1.3 percent).

Meanwhile, manufactured goods shipments increased 0.7 percent in June, its fastest monthly gain in 12 months. Shipments of durable and nondurable goods rose 0.4 percent and 1.0 percent, respectively, for the month. Excluding transportation, factory shipments were up 0.5 percent in June. Much like the new orders data discussed above, the value of manufactured goods shipments has fallen 3.5 percent since June 2015, or down 4.2 percent excluding transportation.

International Trade
The Bureau of Economic Analysis and the Census Bureau reported that the U.S. trade deficit rose from $40.96 billion in May to $44.51 billion in June, its highest level since February. The data have been quite volatile through the first half of 2016, averaging $40.79 billion. That was somewhat lower than the $41.70 billion average for 2015 as a whole. The higher figure in June’s report stemmed from an increase in goods imports (up from $182.05 billion to $186.41 billion), which was enough to offset a slight increase in goods exports (up from $119.83 billion to $120.37 billion).

A fair share of the jump in the trade deficit came from petroleum, with the petroleum trade deficit up from $2.89 billion in May—its lowest level since February 1999—to $5.32 billion in June. Petroleum imports accelerated from $11.12 billion to $13.28 billion, but petroleum exports edged down from $8.23 billion to $7.95 billion. Higher crude oil prices likely played a role in the increase in imports.

Looking more closely at the underlying data, goods exports were mixed in June. Increased exports for foods, feeds and beverages (up $587 million), consumer goods (up $427 million) and capital goods (up $339 million) offset declines for automotive vehicles and parts (down $433 million), other goods (down $117 million) and industrial supplies and materials (down $92 million). In contrast, imports of industrial supplies and materials rose sharply, up $2.30 billion, mostly from petroleum products, with increases also observed for consumer goods (up $1.87 billion) and capital goods (up $1.03 billion). Meanwhile, there were fewer imports in June for automotive vehicles and parts (down $541 million) and foods, feeds and beverages (down $336 million).

The bottom line is that manufacturers continue to struggle with international demand, particularly with a strong U.S. dollar and lingering economic challenges to key markets. 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.

Moreover, exports were lower to the top-five markets for U.S.-manufactured goods, including Canada (down from $143.84 billion to $133.79 billion), Mexico (down from $117.10 billion to $113.61 billion), China (down from $55.81 billion to $51.22 billion), Japan (down from $32.14 billion to $30.14 billion) and the United Kingdom (down from $28.25 billion to $27.67 billion).  

ISM Manufacturing Purchasing Managers' Index
The Institute for Supply Management’s Manufacturing Purchasing Managers’ Index reported that manufacturing activity expanded for the fifth straight month in July, albeit with a slight easing. The composite index edged down from 53.2 in June to 52.6 in July, but more importantly, this report suggests manufacturers are doing better today than the contracting activity levels seen in the October to February time frame. The boost in more recent sentiment has come from relatively strong expansions in new orders (down from 57.0 to 56.9) and production (up from 54.7 to 55.4), with the latter growing at its fastest pace in 12 months. Indeed, demand and output have now expanded for seven consecutive months. Exports also slowed a bit in July (down from 53.5 to 52.5) but have expanded for five consecutive months.

Such news suggests some stabilization in the sector, which is encouraging. Yet, to be fair, this does not mean the sector has emerged from its challenges completely. Hiring slipped back into negative territory in July (down from 50.4 to 49.4), with the employment index contracting in eight of the past 10 months. As such, it is clear manufacturers remain cautious enough in their outlook to be hesitant about adding new workers—at least for now. With continued progress, we would expect for firms to begin to add to their workforces moving forward, but that has not happened yet. Look for better job growth in the months to come, particularly if manufacturers are truly seeing better demand and production growth.

Inventories were also negative for the 13th straight month (up from 48.5 to 49.5), albeit at a slower pace of decline in this release. The silver lining is that this could provide a stimulative effect for growth in the coming months, as manufacturers will need to increase production to meet additional demand, with stockpiles quite low. 

Personal Income and Spending
The Bureau of Economic Analysis reported that personal spending increased 0.4 percent in June, mirroring the growth rate in May. More importantly, personal consumption expenditures soared in the second quarter, up an annualized 7.5 percent versus the more sluggish pace of just 1.2 percent in the first quarter. This suggests Americans have begun to open their pocketbooks since the spring after being more cautious in their spending earlier in the year. Indeed, over the past 12 months, personal spending has increased 3.7 percent, a healthy pace that makes consumption one of the bright spots in the economy. With a pickup in spending, the saving rate has dropped from 6.2 percent in March to 5.3 percent in June. These findings are consistent with the most recent real GDP estimates, with consumers being one of the few positive contributors to growth in an otherwise disappointing report.

Meanwhile, personal income grew 0.2 percent in June, consistent with the May pace. Income growth also accelerated in the second quarter, up 3.0 percent at the annual rate; this was an improvement from the 0.7 percent rate of growth in the first quarter. Over the past 12 months, personal incomes have risen 2.7 percent. This continued to be a relatively decent year-over-year pace, albeit one that was down from 4.5 percent in June 2015. At the same time, total manufacturing wages and salaries edged down slightly from $817.4 billion in May to $813.7 billion in June. Despite the decline, the longer-term trend has been more positive, up from the $780.0 billion and $806.7 billion averages of 2014 and 2015, respectively.

In other news, the personal consumption expenditure (PCE) deflator rose 0.1 percent in June, growing for the fourth straight month. The increases since February stemmed largely from higher energy costs, which were up 1.5 percent in this report but remained down 10.0 percent year-over-year. Core inflation, which excludes food and energy, also increased 0.1 percent. The bottom line for this data point, which happens to be the preferred measure of inflation for the Federal Reserve, is that pricing pressures remain minimal for now. The PCE increased 0.9 percent year-over-year in June, and core inflation grew 1.6 percent over the past 12 months.

Questions or Comments?

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

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