Monday Economic Report - July 11, 2016

A Publication of the National Association of Manufacturers

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

The June jobs numbers provided mixed news on the labor market, but more than anything, they suggest that the U.S. economy remains much weaker than desired, particularly for manufacturing. On the positive side, manufacturers added 14,000 workers in June, which was encouraging. In addition, average weekly earnings among manufacturers have increased 3.7 percent over the past 12 months, which was a relatively healthy jump. Yet, the sector has lost 24,000 employees through the first six months of 2016—a sign that business leaders remain cautious in light of global headwinds and soft demand and production growth.

Other economic indicators out last week tended to echo those ongoing challenges for manufacturing. The U.S. trade deficit rose to a three-month high in May, largely from an increase in goods imports. 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 $431.45 billion year-to-date in May, down 7.5 percent from $466.49 billion in May 2015. Along those lines, exports to our top-five markets for U.S.-manufactured goods have declined 7.5 percent year-to-date relative to the same time frame last year, using non-seasonally adjusted data. More positively, the May petroleum deficit of $2.89 billion was the lowest since February 1999.

Moreover, new orders for manufactured goods have been relatively weak over the past 12 months, with a year-over-year decline of 1.2 percent. Excluding transportation, new factory orders have declined 3.4 percent since May 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 May, new factory orders fell 1.0 percent, ending two straight monthly gains.

Meanwhile, nonfarm payrolls rose by more than expected in June, up 287,000. This would have been more promising if not for the downward revision to May, up by just 11,000 instead of the originally reported figure of 38,000. Indeed, nonfarm payroll growth has eased year-to-date. The U.S. economy averaged 147,333 additional nonfarm payroll workers in the second quarter, slowing from the 282,000 and 195,667 average paces in the fourth quarter of 2015 and the first quarter of this year, respectively. Along those lines, the unemployment rate rose from 4.7 percent in May to 4.9 percent in June, largely on an uptick in the participation rate from 62.6 percent to 62.7 percent. In addition, the so-called real unemployment rate, which includes discouraged workers, the underemployed and those working part time for economic reasons, remained elevated at 9.6 percent despite edging lower for the month.

The big question, of course, is how the data impact decision-making at the Federal Reserve. The Federal Open Market Committee (FOMC) is likely to continue hitting the pause button at its July meeting as enough uncertainties remain in the global marketplace and recent job growth continues to be weaker than desired. Yet, if upcoming data show forward movement on jobs and if other economic indicators continue reporting progress, there will be a renewed focus on the September or December FOMC meetings for a possible short-term rate hike. Either way, it appears more and more likely it is “one and done” for increases in the federal funds rate in 2016, which is clearly a shift from the plans for four rate hikes expected at the end of 2015.

This week, we will get the latest data on industrial production. Manufacturing output was off 0.4 percent in May and essentially stagnant on a year-over-year basis, and we will be looking for signs of a rebound in the June release. The New York Federal Reserve Bank’s monthly survey will also give us our first read on manufacturing sentiment for July, and the question for that report will be whether it can extend the progress seen in the June data. We hope that the latest consumer confidence numbers from the University of Michigan and small business optimism figures from the National Federation of Independent Business will provide some evidence of continued sentiment gains. Of course, such surveys will be closely watched to see if perceptions have shifted post-“Brexit.” Other releases of note this week include the most up-to-date data on consumer and producer prices, job openings and retail sales.

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

Economic Indicators

Last Week's Indicators (Summaries Appear Below)

Monday, July 4
INDEPENDENCE DAY HOLIDAY

Tuesday, July 5
Factory Orders and Shipments

Wednesday, July 6
International Trade

Thursday, July 7
ADP National Employment Report

Friday, July 8
BLS National Employment Report

This Week's Indicators

Monday, July 11
None

Tuesday, July 12
Job Openings and Labor Turnover Survey
NFIB Small Business Survey

Wednesday, July 13
None

Thursday, July 14
Producer Price Index

Friday, July 15
Consumer Price Index
Industrial Production
New York Fed Manufacturing Survey
Retail Sales
University of Michigan Consumer Sentiment

Summaries for Last Week's Economic Indicators

ADP National Employment Report
ADP reported that manufacturing employment declined for the fifth straight month in June, with the sector losing 21,000 workers for the month and 44,000 employees on net year-to-date. Moreover, hiring rose in just four of the past 12 months, losing 41,000 workers in that time frame. This suggests that manufacturers remain 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, but that has not yet translated into more job creation.

Meanwhile, nonfarm payroll employment rose by 172,000 in June, extending the gain of 168,000 workers hired in May. Over the past 12 months, total nonfarm employment grew by 2,278,000. Yet, job growth averaged just 163,000 per month in the second quarter, slowing from the 200,000 monthly pace in the first quarter. In June, the largest job gains were in trade, transportation and utilities (up 55,000) and financial activities (up 2,000). Construction employment was also lower in June, down by 5,000. Small and medium-sized businesses (i.e., those with fewer than 500 employees) accounted for more than 85 percent of all net new workers in the month.

BLS National Employment Report
The June jobs numbers provided mixed news on the labor market, but more than anything, they suggest that the U.S. economy remains much weaker than desired, particularly for manufacturing. On the positive side, manufacturers added 14,000 workers in June, which was encouraging. Yet, the sector has lost 24,000 employees through the first six months of 2016—a sign that business leaders remain cautious in light of global headwinds and soft demand and production growth.

Likewise, the strong nonfarm payroll number for June—up by 287,000—would be more promising if not for the downward revision to May, up by just 11,000 instead of the originally reported figure of 38,000. Indeed, nonfarm payroll growth has eased year-to-date. The U.S. economy averaged 147,333 additional nonfarm payroll workers in the second quarter, slowing from the 282,000 and 195,667 average paces in the fourth quarter of 2015 and the first quarter of this year, respectively. Along those lines, the unemployment rate rose from 4.7 percent in May to 4.9 percent in June, largely on an uptick in the participation rate from 62.6 percent to 62.7 percent.

The so-called real unemployment rate, which includes discouraged workers, the underemployed and those working part time for economic reasons, edged down from 9.7 percent to 9.6 percent. Despite the decline, the labor market remains weaker than the headline number suggests, as this figure continues to be quite elevated.

Looking more closely at the June manufacturing employment data, durable and nondurable goods firms added 3,000 and 11,000 workers on net, respectively, for the month. The largest gains were in the following sectors: food manufacturing (up 13,000), furniture and related products (up 2,800), electrical equipment and appliances (up 2,700), miscellaneous nondurable goods (up 2,200), wood products (up 2,100), miscellaneous durable goods (up 1,800) and machinery (up 900). In contrast, employment was lower for plastics and rubber products (down 2,200), computer and electronic products (down 2,100), nonmetallic mineral products (down 1,800), transportation equipment (down 1,500) and primary metals (down 1,300), among others.

While hiring among manufacturers ticked higher in June, average weekly earnings in the sector edged lower, down from $1,059.01 in May to $1,056.57 in June. On a year-over-year basis, average weekly earnings have increased from $1,019.06 in June 2015, up 3.7 percent for the 12-month period. In comparison, total private-sector average weekly earnings grew 2.3 percent year-over-year. Average weekly hours in manufacturing were unchanged in June at 40.7, with overtime hours also remaining the same at 3.3.

Factory Orders and Shipments
The Census Bureau reported that new factory orders fell 1.0 percent in May, ending two straight monthly gains. Excluding transportation, sales eked out a small increase, up 0.1 percent. Defense aircraft fell sharply in May, but the data can often be quite volatile from month to month. New orders for manufactured goods have been relatively weak over the past 12 months, with a year-over-year decline of 1.2 percent. Excluding transportation, new factory orders have declined 3.4 percent since May 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 2.3 percent in May, with demand for nondurable goods up 0.3 percent. New orders for durable goods excluding transportation fell 0.3 percent. Looking specifically at durable goods sales activity in May, orders increased for machinery (up 0.3 percent) and motor vehicles and parts (up 0.8 percent), with computers and electronic products activity unchanged for the month. At the other end of the spectrum, primary metals (down 1.8 percent), electrical equipment and appliances (down 0.6 percent), fabricated metal products (down 0.3 percent) and furniture and related products (down 0.1 percent) orders decreased in May.

Meanwhile, manufactured goods shipments were flat in May, easing from growth of 0.3 percent and 0.4 percent in March and April, respectively. Nondurable goods shipments rose 0.3 percent for the month, with durable goods shipments down 0.2 percent. Excluding transportation, factory shipments increased 0.1 percent in May. Much like the new orders data discussed above, the value of manufactured goods shipments has fallen 3.1 percent since May 2015, or down 3.8 percent excluding transportation equipment.

International Trade
The Bureau of Economic Analysis and the Census Bureau reported that the U.S. trade deficit rose from $37.39 billion in April to $41.14 billion in May, its highest level since February. The data have been quite volatile through the first five months of 2016, averaging $40.08 billion. That was lower than the $41.70 billion average for 2015 as a whole. The higher figure in May’s report stemmed from an increase in goods imports (up from $178.62 billion to $182.06 billion), which coincided with a slight decline in goods exports (down from $120.04 billion to $119.82 billion).

Even with the pickup, goods exports and imports have both decreased across the past year, down from $127.61 billion and $189.95 billion in May 2015, respectively. This suggests trade volumes have fallen overall, although part of that reduction could be lower petroleum prices. Indeed, the May petroleum deficit of $2.89 billion was the lowest since February 1999.

Digging deeper into the data, goods exports were mixed in May. Increased exports for foods, feeds and beverages (up $544 million), other goods (up $489 million) and industrial supplies and materials (up $47 million) were offset by reduced exports for capital goods (down $835 million), automotive vehicles and parts (down $348 million) and consumer goods (down $263 million). At the same time, goods imports were generally higher, including industrial supplies and materials (up $2.32 billion), consumer goods (up $1.25 billion), automotive vehicles and parts (up $267 million) and foods, feeds and beverages (up $78 million). Capital goods imports were lower in May, down $864 million, largely from reduced activity for aircraft and computers.

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 $431.45 billion year-to-date in May, down 7.5 percent from $466.49 billion in May 2015.

Moreover, exports were lower to the top-five markets for U.S.-manufactured goods, including Canada (down from $119.04 billion to $109.82 billion), Mexico (down from $96.65 billion to $94.06 billion), China (down from $46.19 billion to $42.40 billion), Japan (down from $26.92 billion to $24.97 billion) and the United Kingdom (down from $22.94 billion to $22.65 billion).  

Questions or Comments?

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

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