Monday Economic Report - December 12, 2016

A Publication of the National Association of Manufacturers

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

With the holiday season approaching, financial markets continue to gift us with new all-time highs, boosted by cautious optimism in the outlook and healthy gains in a number of economic indicators. The Dow Jones Industrial Average has now risen roughly 13 percent so far in 2016, with a 7.4 percent gain since the election. Global equity markets have also jumped notably in recent weeks.

As noted in previous reports, the boost in economic assessments has flowed from a belief that there will be meaningful tax and regulatory reforms, along with a significant infrastructure package, among other pro-growth initiatives. (For more information on such ideas, see the NAM’s new “Competing to Win” white papers.) At the same time, markets are also assuming that increased spending will translate into more debt, and as a result, the bond market has weakened significantly, pushing up interest rates. To illustrate this, the average yield of a 10-year Treasury bond has grown from 1.88 percent on November 8 to 2.41 percent on December 9, its highest level since July 2015. The average 30-year fixed-rate mortgage interest rate was 4.13 percent last week as well, up from 3.54 percent on November 3 and the highest rate in more than two years, according to Freddie Mac. 

Consumers have also been more confident, according to the University of Michigan and Thomson Reuters, with sentiment jumping to its highest level in nearly two years in December. Moreover, the confidence index was just shy of the post-recession peak reached in January 2015. With improved perceptions, Americans have opened their pocketbooks in recent months, with consumer spending being one of the bright spots in the U.S. economy. That is good news for retailers—and by extension, for manufacturers—this holiday season. Yet, despite that positive trend, the Federal Reserve reported some slowing in a willingness to take on more credit, with consumer credit outstanding easing from 5.0 percent growth in September to a 2.9 percent increase in October. This might have been some pre-election jitters, however, as credit has increased 6.1 percent over the past 12 months.

Meanwhile, new factory orders rose 2.7 percent in October, the fourth straight monthly gain and the fastest pace of monthly growth since June 2015. Yet, the jump in October came largely from a big boost in aircraft sales, with transportation equipment orders up 12.0 percent. Excluding transportation, new orders for manufactured goods increased 0.8 percent. Over the longer term, new factory orders have started to stabilize on a year-over-year basis, up 1.3 percent since October 2015 and improving from a negative year-over-year position in August. Nonetheless, new orders for manufactured goods excluding transportation have risen just 0.5 percent over the past 12 months. This suggests still-soft demand in the broader manufacturing sector, even as this was the first positive year-over-year reading since October 2014.

With that said, there were also signs of lingering challenges in the manufacturing sector. For instance, net hiring turned negative again in October, ending four straight monthly gains, and manufacturing job openings also pulled back in October, even as they remain relatively elevated in general. We hope hiring will improve moving forward with a better demand and production outlook. Of course, better economic conditions might hinge on growing international demand, and in that regard, manufacturers continue to struggle. Using non-seasonally adjusted data, U.S.-manufactured goods exports were off 6.5 percent year to date through October, falling for the second straight year. For its part, the U.S. trade deficit also widened in October after falling to a 19-month low in September on reduced goods exports and higher goods imports.

The Federal Reserve is set to raise short-term interest rates for the first time in 2016 at the conclusion of its Federal Open Market Committee meeting December 13–14. That move, while expected, will dominate financial market headlines next week. For manufacturers, there will be a number of releases helping us gauge the current state of play, starting with new industrial production data on Wednesday. Look for continued stabilization in manufacturing output, even as year-over-year growth remains quite soft. In addition to production data this week, there will also be regional surveys from the New York and Philadelphia Federal Reserve Banks and flash data from Markit for manufacturing activity in the Eurozone and United States.

In a busy week for economic data, other highlights include the latest figures on consumer and producer prices, housing starts and permits, retail sales, small business optimism and state employment.

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

P.S.: The NAM is hosting a webinar on Wednesday, December 14, at 1:00 p.m. EST on the Industrial Internet of Things. Scott Berg, COO of ServiceMax, and Bobby George, CIO, field services at General Electric (GE), will discuss how GE is embracing digital transformation and leveraging service to drive efficiency, profits and customer experience. Click here to register.  

Economic Indicators

Last Week’s Indicators (Summaries Appear Below)

Monday, December 5
None

Tuesday, December 6
Factory Orders and Shipments
International Trade Report
Productivity and Costs (Revision)

Wednesday, December 7
Consumer Credit
Job Openings and Labor Turnover Survey

Thursday, December 8
None

Friday, December 9
University of Michigan Consumer Sentiment

This Week’s Indicators

Monday, December 12
None

Tuesday, December 13
NFIB Small Business Survey

Wednesday, December 14
FOMC Monetary Policy Statement
Industrial Production
Producer Price Index
Retail Sales

Thursday, December 15
Consumer Price Index
Markit Flash Manufacturing PMIs for the United States and Eurozone
NAHB Housing Market Index
New York Fed Manufacturing Survey
Philadelphia Fed Manufacturing Survey

Friday, December 16
Housing Starts and Permits
State Employment Report

Summaries for Last Week’s Economic Indicators

Consumer Credit
The Federal Reserve Board reported that U.S. consumer credit outstanding rose 2.9 percent at the annual rate in October, slowing from 5.0 percent growth in September. Total consumer credit was $3.727 trillion, with $981.3 billion in revolving credit and $2.746 trillion in nonrevolving credit. Across the past 12 months, consumer credit has increased 6.1 percent, with roughly equal gains for both revolving and nonrevolving credit lines.

Nonrevolving credit, which includes auto and student loans, increased 6.1 percent over that time frame. In addition, revolving credit, which includes credit cards and other credit lines, increased 6.0 percent year-over-year. That is notable because the pace of growth has accelerated across the past 12 months, up from 4.5 percent year-over-year growth in October 2015. That mirrors stronger consumer spending data of late. As such, Americans are more willing to use their credit cards when making purchases, moving on from some of the caution we saw earlier in the year.

Factory Orders and Shipments
The Census Bureau reported that new factory orders rose 2.7 percent in October, the fourth straight monthly gain and the fastest pace of monthly growth since June 2015. Yet, the jump in October came largely from a big boost in aircraft sales, with transportation equipment orders up 12.0 percent. Excluding transportation, new orders for manufactured goods increased 0.8 percent. Over the longer term, new factory orders have started to stabilize on a year-over-year basis, up 1.3 percent since October 2015 and improving from a negative year-over-year position in August. Nonetheless, new orders for manufactured goods excluding transportation have risen just 0.5 percent over the past 12 months. This suggests still-soft demand in the broader manufacturing sector, even as this was the first positive year-over-year reading since October 2014.

In this report, durable and nondurable goods orders increased 4.6 percent and 0.9 percent, respectively. New orders for durable goods excluding transportation were up 0.8 percent. Looking specifically at durable goods sales activity in October, the underlying data were mixed but mostly higher. Demand was stronger for the month for fabricated metal products (up 1.8 percent), electrical equipment and appliances (up 1.6 percent) and computers and electronic products (up 0.8 percent). In contrast, sales fell for furniture and related products (down 1.0 percent) and primary metals (down 0.1 percent), with machinery orders unchanged in October.

Meanwhile, manufactured goods shipments increased 0.4 percent in October, up for the third consecutive month but slowing somewhat from the 0.9 percent gain in September. Nondurable goods shipments increased 0.9 percent in October, but shipments of durable goods products dropped 0.1 percent in the latest release. Much like the new orders data discussed above, growth in the value of manufactured goods shipments has been less than desired, up just 0.4 percent since October 2015. Still, this year-over-year figure has started to stabilize, becoming positive in this report for the first time in two years.

International Trade Report
The Bureau of Economic Analysis and the Census Bureau reported that the U.S. trade deficit rebounded in October after falling to a 19-month low in September. The trade deficit rose from $36.17 billion in September to $42.60 billion in October. It has been highly volatile this year (ranging from $36.17 billion in September to $45.26 billion in February), but the year-to-date average of $40.90 billion in 2016 is somewhat lower than the $41.70 billion average for 2015 as a whole. The October increase in the headline number stemmed from reduced goods exports (down from $126.63 billion to $123.11 billion) that corresponded with higher goods imports (up from $183.72 billion to $186.52 billion). The goods imports pace was the largest in 13 months.

Looking more closely at the underlying data, goods exports were mostly lower in October. The largest export declines were for foods, feeds and beverages (down $1.40 billion), industrial supplies and materials (down $1.04 billion) and consumer goods (down $902 million). Exports for foods, feeds and beverages would have been marginally positive if not for large declines from soybeans (down $984 million) and corn (down $451 million), both of which were rebalancing from healthy gains in the prior month. At the same time, there were significant increases in goods imports for consumer goods (up $2.37 billion) and capital goods (up $1.07 billion), which were enough to offset decreases for automotive vehicles and parts (down $667 million) and industrial supplies (down $340 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 $875.92 billion year to date in October, down 6.5 percent from $936.84 billion in October 2015.

Moreover, exports were lower to the top-six markets for U.S.-manufactured goods, including Canada (down from $236.63 billion to $223.93 billion), Mexico (down from $198.36 billion to $192.26 billion), China (down from $95.33 billion to $92.03 billion), Japan (down from $52.74 billion to $52.16 billion), the United Kingdom (down from $47.27 billion to $46.73 billion) and Germany (down from $41.86 billion to $41.12 billion).

Job Openings and Labor Turnover Survey
The Bureau of Labor Statistics reported that net hiring in the manufacturing sector turned negative again in October, ending four straight monthly gains. According to the latest Job Openings and Labor Turnover Survey, total hiring declined from 279,000 in September to 271,000 in October. Hiring was lower for both durable (down from 163,000 to 156,000) and nondurable (down from 116,000 to 115,000) firms for the month. At the same time, total separations, which include quits, layoffs and retirements, also fell in October, down from 278,000 to 273,000. Overall, net hiring (or hires minus separations) decreased from 1,000 in September to -2,000 in October, the first net decline since May.

Meanwhile, manufacturing job openings also pulled back in October, even as they remain relatively elevated in general. Job openings in the sector edged down from 328,000 to 322,000 in this report, with postings shifting lower since achieving an all-time high of 397,000 in April. Through the first 10 months of 2016, job openings have averaged 346,000 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, despite some easing over the past few months. This gives us optimism for faster hiring growth moving forward. In the October data, nondurable goods firms had more openings, up from 122,000 to 132,000, but there were fewer postings among durable goods manufacturers, down from 206,000 to 190,000.

In the larger economy, nonfarm job openings decreased from 5,631,000 in September to 5,534,000 in October. Postings have largely trended in the right direction over the past year, but remain down from the all-time high of 5,831,000 in July. Job openings were lower in every major sector in October except for education and health services and transportation, warehousing and utilities. In addition, net hiring in the overall economy was stronger in this release, up from 185,000 in September to 224,000 in October.    

Productivity and Costs (Revision)
The Bureau of Labor Statistics reported that manufacturing labor productivity rebounded less than originally estimated in the third quarter. After falling 0.5 percent in the second quarter, output per worker in the sector increased 0.4 percent in the third quarter. It was estimated to grow 1.0 percent in preliminary figures. The downgrade stemmed largely from slower output growth, down from 1.1 percent in the prior assessment to a 0.6 percent increase in the latest data. On the other hand, hours worked improved (although still not robustly), up from 0.1 percent growth in the original numbers to 0.3 percent. Unit labor costs rose 3.3 percent in the third quarter.

Durable goods manufacturers fared better than their nondurable goods counterparts, with labor productivity up 3.0 percent in the former but down 3.0 percent in the latter. Along those lines, durable goods manufacturing output increased 2.7 percent in the third quarter, with output from nondurable goods firms off 1.9 percent. Unit labor costs increased 1.2 percent and 6.0 percent for durable and nondurable goods manufacturers, respectively.

There continues to be sluggish growth in labor productivity in the sector, which has averaged just 0.2 percent annually from 2013 to 2015. On a year-over-year basis, manufacturing labor productivity in the third quarter was unchanged. From 2002 to 2008, output per worker in the sector averaged a more robust 5.2 percent annually. Over the long term, manufacturers have benefited from being leaner in recent years, but the sluggishness in productivity and output growth have meant that unit labor costs have risen 10.4 percent since the end of 2011.

In the larger economy, nonfarm labor productivity rose 3.1 percent in the third quarter, recovering from a decrease of 0.2 percent in the second quarter. The revised number matched the original estimate. Nonfarm output increased 3.6 percent, with unit labor costs edging up 0.7 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. It was unchanged year-over-year in this release. This compares to 2.7 percent growth from 2000 to 2007.

University of Michigan Consumer Sentiment
The University of Michigan and Thomson Reuters reported that consumer confidence jumped to its highest level in nearly two years in December, according to preliminary data. The Index of Consumer Sentiment increased from 93.8 in November to 98.0 in December, the best reading since January 2015’s 98.1 figure, which had represented a post-recessionary high. To explain the rise in the latest data, the press release states, “The surge was largely due to consumers’ initial reactions to Trump’s surprise victory. When asked what news they had heard of recent economic developments, more consumers spontaneously mentioned the expected positive impact of new economic policies than ever before recorded in the long history of the surveys.”

The December data reflected more upbeat assessments of both current (up from 107.3 to 112.1) and future (up from 85.2 to 88.9) economic expectations, with the latter bouncing back strongly from a two-year low in October. Overall, the data are largely consistent with real personal spending growth of 2.5 percent in 2017, according to the University of Michigan.

Questions or Comments?

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

Related Tags: