Monday Economic Report - June 6, 2016

A Publication of the National Association of Manufacturers

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

Despite encouraging signs earlier elsewhere in the economy, including retail sales, housing and manufacturing sentiment, employers remain cautious enough in their economic outlook to hold back on hiring—at least for now. The U.S. economy added just 38,000 net new nonfarm jobs in May, well below the consensus estimate of around 160,000. This is the slowest monthly gain since September 2010. Over the past three months, nonfarm payroll growth has averaged just 115,667 per month, down significantly from the 224,000 per month pace in the prior three months. In addition, the participation rate dropped once again, pushing the unemployment rate to 4.7 percent, its lowest level since November 2007. The drop in the unemployment rate would normally be cheered, but in this case, it is hard to celebrate. There is no getting around the fact that this was a disappointing jobs report.

Indeed, employment dropped by 10,000 in May for manufacturers, with 35,000 fewer workers year-to-date. As such, it is another reminder that manufacturers’ struggles are far from over. On the positive side, average weekly earnings edged higher for the month, up from $1,054.54 in April to $1,060.39 in May. On a year-over-year basis, average weekly earnings have increased from $1,024.01 in May 2015, up 3.6 percent for the 12-month period.

Beyond jobs, other reports out last week also reflected ongoing weaknesses in the economy. On the trade front, manufacturers continue to struggle with international demand, particularly with a strong U.S. dollar and lingering economic challenges to key markets, with the U.S. trade deficit rising somewhat in April. Using non-seasonally adjusted data, U.S.-manufactured goods exports fell 7.5 percent year-to-date in 2016 relative to the same time period in 2015, with reduced exports to our top four markets.

Moreover, the Dallas Federal Reserve Bank reported that manufacturing activity in Texas weakened further in May, contracting for the 17th straight month, even as manufacturers continued to be cautiously optimistic about the next six months. At the same time, demand for manufactured goods remained quite soft, down 1.8 percent year-over-year, even as new factory orders rose for the third time in the past four months in April. Much of the latest increase stemmed from strong growth in aircraft and automobiles, with broader weaknesses outside of transportation, especially over the past 12 months. Excluding transportation, new factory orders fell 3.8 percent since April 2015. Meanwhile, private manufacturing construction spending declined once again in April on recent weaknesses, even as the longer-term trend remained positive.

At the same time, it was not all bad news, and prior to the release of the employment figures, the overriding narrative about the current economic mood centers on better consumer spending and improved manufacturing activity. On this latter point, the Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers’ Index expanded for the third straight month. The increase was stronger than anticipated, with decent growth in new orders and modest gains in production and exports. Yet, even in the ISM figures, there were continuing signs of caution. Employment contracted for the sixth straight month, with inventories shrinking for the 11th consecutive month.

There have been mixed reports about consumers of late. While consumer spending remains one of the brighter aspects in the U.S. economy, there has been a sense that Americans have held back a little in their purchases in light of anxieties in their outlook, particularly regarding the labor market. Indeed, the Conference Board’s measure of consumer confidence fell to a six-month low in May on such concerns. Nonetheless, there was also evidence that the public has begun to open their pocketbooks once again, with personal spending rebounded strongly in April after stagnating in March. Personal consumption expenditures rose 1.0 percent in April, its largest monthly gain since September 2009. With increased spending, the saving rate dipped from 5.9 percent in March, its highest level in more than three years, to 5.4 percent in April.

This week, we will get some additional insights about consumers, with June data on sentiment from the University of Michigan and the latest figures on consumer credit from the Federal Reserve. Other highlights for the week include new figures for labor productivity, job openings and wholesale trade.

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

Economic Indicators

Last Week's Indicators (Summaries Appear Below)

Monday, May 30
MEMORIAL DAY HOLIDAY

Tuesday, May 31
Conference Board Consumer Confidence
Dallas Fed Manufacturing Survey
Personal Income and Spending

Wednesday, June 1
Construction Spending
ISM Manufacturing Purchasing Managers’ Index

Thursday, June 2
ADP National Employment Report

Friday, June 3
BLS National Employment Report
Factory Orders and Shipments
International Trade

This Week's Indicators

Monday, June 6
None

Tuesday, June 7
Consumer Credit
Productivity and Costs (Revision)

Wednesday, June 8
Job Openings and Labor Turnover Survey

Thursday, June 9
Wholesale Trade

Friday, June 10
University of Michigan Consumer Sentiment

Summaries for Last Week's Economic Indicators

ADP National Employment Report
ADP reported that manufacturing employment declined for the fourth straight month in May, with the sector losing 3,000 workers for the month and 23,000 employees on net year-to-date. Moreover, hiring has been stagnant over the past 12 months, with no change between the May 2015 and May 2016 levels of 12,311,000. Recent data have suggested some improvements in activity for manufacturers in the United States, but that has not yet translated into more job creation. Indeed, business leaders remain cautious about adding to their workforce with significant challenges to demand and production growth continuing.

Meanwhile, nonfarm payroll employment rose by 173,000 in May, extending the gain of 166,000 workers hired in April. Over the past 12 months, total nonfarm employment grew by 2,435,000. In May, the largest job gains were in professional and business services (up 43,000), trade, transportation and utilities (up 28,000), construction (up 13,000) and financial activities (up 13,000). Small and medium-sized businesses (i.e., those with fewer than 500 employees) accounted for more than 80 percent of all net new workers in the month.

BLS National Employment Report
Despite encouraging signs earlier elsewhere in the economy, including retail sales, housing and manufacturing sentiment, employers remain cautious enough in their economic outlook to hold back on hiring—at least for now. The U.S. economy added just 38,000 net new nonfarm jobs in May, well below the consensus estimate of around 160,000. This is the slowest monthly gain since September 2010. Moreover, nonfarm payrolls were revised down by 59,000 in March and April, suggesting that job growth in those months was weaker than estimated originally. Indeed, over the past three months, nonfarm payroll growth has averaged just 115,667 per month, down significantly from the 224,000 per month pace in the prior three months.

In addition, the participation rate dropped once again, down from 62.8 percent to 62.6 percent. With the reduced participation, the unemployment rate fell to 4.7 percent, its lowest level since November 2007. The drop in the unemployment rate would normally be cheered, but in this case, it is hard to celebrate. There is no getting around the fact that this was a disappointing jobs report. 

Of course, the biggest short-term effect of this jobs picture will be on monetary policy. The Federal Reserve was poised to increase short-term rates at its next meeting, but always hedged by saying that any moves on rates would be data-dependent. Weak job growth will make a rate hike that much harder in June, likely pushing back the next 25-basis-point increase in the federal funds rate to either July or September.

For manufacturers, employment dropped by 10,000 in May, with 35,000 fewer workers year-to-date. As such, it is another reminder that manufacturers’ struggles are far from over. In May, nondurable goods firms added 8,000 employees on net, with durable goods manufacturers hiring 18,000 fewer workers. The largest declines were in machinery (down 7,300), furniture and related products (down 3,400), transportation equipment (down 3,200) and fabricated metal products (down 2,900). In contrast, there were gains in employment for plastics and rubber products (up 3,400), food manufacturing (up 3,200) and chemicals (up 1,000).

Even with reduced employment in the sector, average weekly earnings edged higher for the month, up from $1,054.54 in April to $1,060.39 in May. On a year-over-year basis, average weekly earnings have increased from $1,024.01 in May 2015, up 3.6 percent for the 12-month period. Average weekly hours were also higher, up from 40.7 to 40.8, with average overtime unchanged at 3.2 hours.

Conference Board Consumer Confidence
The Conference Board reported that consumer sentiment fell to a six-month low in May. The Consumer Confidence Index has fallen from 96.1 in March, to 94.7 in April, to 92.6 in May, its lowest level since November. As such, Americans remain anxious in their economic assessments. For what it is worth, this measure differed from the more positive reading in the latest University of Michigan measure of consumer perceptions, which rebounded for the month but also remained somewhat weaker than desired.

In this report, respondents were less upbeat about the current economic environment (down from 117.1 to 112.9), with the index for future expectations also lower (down from 79.7 to 79.0). As is often the case, labor market worries weighed heavily on respondents. For instance, the percentage suggesting that jobs were hard to get increased from 22.8 percent to 24.4 percent, and the percentage expecting decreased income in the next six months has risen from 9.5 percent in December to 12.4 percent in May. With that said, the percentage saying jobs were plentiful edged up from 24.2 percent to 24.3 percent in this report, and those predicting higher incomes moving forward rose from 15.8 percent to 16.2 percent.

Construction Spending
The Census Bureau reported that private manufacturing construction spending declined once again in April after rebounding slightly in March. The value of construction put in place declined from $76.83 billion at the annual rate in March to $75.64 billion in April, down 1.5 percent for the month. Since achieving the all-time high of $89.65 billion in May 2015, construction activity in the manufacturing sector has ebbed somewhat. Yet, the larger 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 47.4 percent over the past 24 months, even as the year-over-year pace was a decline of 10.0 percent. 

As a whole, private nonresidential construction spending was also down 1.5 percent in April. The largest monthly decreases were in the following segments: communication (down 7.2 percent), amusement and recreation (down 3.7 percent), commercial (down 3.6 percent), health care (down 3.6 percent), educational (down 2.4 percent) and lodging (down 2.1 percent). On the other hand, spending increased in April for religious (up 9.6 percent), transportation (up 1.8 percent) and office (up 1.6 percent) construction projects.

Over the past 12 months, private nonresidential construction spending rose 3.4 percent, boosted by strong growth in lodging (up 25.3 percent), office (up 24.4 percent), amusement and recreation (up 11.9 percent), transportation (up 10.7 percent) and educational (up 8.7 percent) activity, among other segments.

Meanwhile, private residential construction spending was off 1.5 percent in April as well, with 8.0 percent growth over the past 12 months. At the same time, public construction spending was down 2.8 percent in April, but up 1.2 percent year-over-year. Public spending data were mixed in April, with notable construction gains for amusement and recreation (up 5.7 percent), public safety (up 5.5 percent) and power (up 5.2 percent) projects. There was reduced activity for highway and street (down 6.6 percent), commercial (down 4.1 percent), transportation (down 3.4 percent), educational (down 2.5 percent), sewage and waste disposal (down 1.3 percent) and conservation and development (down 1.1 percent) projects.

Dallas Fed Manufacturing Survey
The Dallas Federal Reserve Bank reported that manufacturing activity in Texas weakened further in May, contracting for the 17th straight month. The composite index of general business conditions declined from -13.9 in April to -20.8 in May. Still-low crude oil prices and a strong U.S. dollar continue to hamper economic growth in the region, as noted in the sample comments. (There were also frustrations with the recently finalized overtime regulations from the U.S. Department of Labor, with three respondents expressing their concerns with the new thresholds.) In terms of activity, the data were lower across the board, including new orders (down from 6.2 to -14.9), production (down from 5.8 to -13.1), shipments (down from 7.1 to -11.5), hiring (down from -3.7 to -6.7) and capital spending (down from 1.6 to -6.6). Indeed, nearly one-third of respondents said new orders had declined for the month, with 18.2 percent citing increased sales and 48.6 percent noting no change.

Despite the challenging current environment, manufacturing leaders continued to be cautiously optimistic about the next six months, albeit with a pullback in confidence in this release. For instance, more than 42 percent of respondents expect higher demand and production in the coming months. Yet, growth in employment (down from 9.4 to 2.7) and capital expenditures (down from 8.5 to 2.9) both slowed, and the measure for hours worked returned to negative territory (down from 14.6 to -4.4). This suggests that manufacturers in the region remain anxious about growth, even as they are upbeat for better data in the coming months.

Factory Orders and Shipments
The Census Bureau reported that new factory orders rose for the third time in the past four months, up 1.9 percent in April. Excluding transportation equipment, the gain would have been 0.5 percent, with transportation boosted by strong growth in aircraft and automobiles. Nondefense aircraft orders can be highly volatile from month to month, with sales often announced during large tradeshows. Despite the recent increases, new orders for manufactured goods have been relatively weak over the past year, with a year-over-year decline of 1.8 percent. Excluding transportation, new factory orders fell 3.8 percent since April 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, sales of durable and nondurable goods increased 3.4 percent and 0.4 percent, respectively. New orders for durable goods excluding transportation rose 0.5 percent. Looking specifically at durable goods sales activity in April, the data were mixed. Orders were higher for fabricated metal products (up 3.6 percent), computers and electronic products (up 2.4 percent), motor vehicles and parts (up 2.4 percent) and electrical equipment and appliances (up 0.5 percent). At the other end of the spectrum, orders for furniture and related products (down 2.2 percent), machinery (down 1.9 percent) and primary metals (down 0.1 percent) decreased for the month.

Meanwhile, manufactured goods shipments increased 0.5 percent in April, extending the 0.3 percent gain in March. Shipments of durable and nondurable goods products rose 0.5 percent and 0.4 percent, respectively. Excluding transportation, factory shipments rose 0.4 percent in April. Much like the new orders data discussed above, the value of manufactured goods shipments has fallen 3.4 percent since April 2015. The year-over-year decline, however, was 1.1 percent with transportation equipment shipments excluded.

International Trade
The Bureau of Economic Analysis and the Census Bureau reported that the U.S. trade deficit rose from $35.54 billion in March to $37.44 billion in April. The increase stemmed from a growth in goods imports (up from $174.62 billion to $178.87 billion) that was enough to offset the gain in goods exports (up from $117.18 billion to $120.06 billion). Even with the pickup, goods exports and imports have both declined across the past year, down from $128.97 billion and $192.13 billion in April 2015, respectively. That suggests that trade volumes have fallen overall, although part of that reduction could be lower petroleum prices. Indeed, the April petroleum deficit of $3.13 billion was the lowest since February 1999.

Digging deeper into the data, goods exports were higher across the board in April, including growth in exports for industrial supplies and materials (up $1.79 billion), automotive vehicles and parts (up $839 million), foods, feeds and beverages (up $420 million), consumer goods (up $188 million) and capital goods (up $109 million). The downside was that goods imports also rose in each category. Goods imports rose for capital goods (up $2.51 billion), industrial supplies and materials (up $1.13 billion), consumer goods (up $509 million), automotive vehicles and parts (up $498 million) and foods, feeds and beverages (up $222 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 $342.72 billion year-to-date in April, down 7.5 percent from $370.51 billion in April 2015.

Moreover, exports were lower to the top four markets for U.S.-manufactured goods, including Canada (down from $94.28 billion to $87.00 billion), Mexico (down from $77.04 billion to $75.02 billion), China (down from $37.43 billion to $33.88 billion) and Japan (down from $21.49 billion to $19.75 billion). Exports to the European Union were also off, down from $92.09 billion to $90.72 billion, even as there was slight growth to the fifth-largest market, the United Kingdom (up from $17.66 billion to $18.40 billion).

ISM Manufacturing Purchasing Managers’ Index
The ISM’s Manufacturing Purchasing Managers’ Index expanded for the third straight month. The composite index rose from 50.8 in April to 51.3 in May. This was stronger than anticipated, with a consensus estimate of 50.5. New orders continued to grow at a decent pace, albeit with an ever-so-slight easing for the month (down from 55.8 to 55.7). The expansions for production (down from 54.2 to 52.6) and exports (unchanged at 52.5) were both modest, with the former slowing somewhat from the prior release. In general, the data provide another piece of evidence of stabilization in the manufacturing sector, with better economic conditions following significant weaknesses at the end of last year and the beginning of this year.

At the same time, manufacturing growth remains slower than desired, as global headwinds continue to challenge firms. As a result, manufacturers remain cautious. This can perhaps best be seen in the hiring data. Employment has now contracted for six consecutive months (unchanged at 49.2). 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. Meanwhile, inventories contracted for the 11th straight month (down from 45.5 to 45.0). 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. 

Input prices accelerated in May (up from 59.0 to 63.5). The increase likely came from somewhat higher commodity prices, including energy costs. Nonetheless, even with the pickup in raw material costs, manufacturers have largely benefited from reduced pricing pressures over the past year or so. Overall, core inflation remains modest and under control—at least for now.

Personal Income and Spending
The Bureau of Economic Analysis reported that personal spending rebounded strongly in April after stagnating in March. Personal consumption expenditures rose 1.0 percent in April, its largest monthly gain since September 2009. Healthy gains in apparel, food, home furnishings and motor vehicle sales helped to buoy the spending data in April, with durable and nondurable goods spending up 2.2 percent and 0.7 percent, respectively. Over the past 12 months, personal spending has grown 4.1 percent, up from 3.5 percent in the previous release. This suggests that consumers have resumed making purchases, shifting from the cautiousness seen in recent months. With increased spending, the saving rate dipped from 5.9 percent in March, its highest level in more than three years, to 5.4 percent in April.

At the same time, personal income increased 0.4 percent in April, the same pace as in March. Personal incomes have grown 4.4 percent over the past 12 months. Meanwhile, total manufacturing wages and salaries edged up slightly from $827.3 billion in March to $836.0 billion in April. This continues a steady increase over the longer-term trend, up from the $780.9 billion and $804.9 billion averages of 2014 and 2015, respectively.

In other news, the personal consumption expenditure (PCE) deflator rose 0.3 percent in April, up from 0.1 percent in March. The increase in March and April came mostly from higher energy costs, up 1.1 percent and 3.8 percent, respectively. Core inflation, which excludes food and energy, increased 0.2 percent. Overall pricing pressures continue to remain minimal for now, with the PCE increasing 1.1 percent year-over-year, up from 0.8 percent in the last report. Core inflation increased 1.6 percent over the past 12 months in April, mirroring the rate in March.

Questions or Comments?

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

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