Monday Economic Report - November 7, 2016

A Publication of the National Association of Manufacturers

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

There were some encouraging signs of stabilization in the manufacturing economy last week, even as growth remains subpar due to global headwinds and economic anxieties. For instance, the Institute for Supply Management’s Manufacturing Purchasing Managers’ Index continued to expand modestly in October, sustaining the rebound in September. The composite index edged up from 51.5 in September to 51.9 in October, growing for the second straight month. Production and exports both accelerated in October, and employment expanded for only the second time year to date in the report. In addition, new factory orders rose 0.3 percent in September, slowing slightly from the 0.4 percent gain in August. Still, on a year-over-year basis, new orders for manufactured goods remain quite soft. At the same time, activity in the Dallas Federal Reserve Bank’s district grew slightly in October even as current sentiment remained negative. As with other regional surveys, however, manufacturing leaders were mostly positive about the next six months.

Overall, manufacturers have been rather cautious so far in 2016. This can perhaps best be seen in the hiring data. Manufacturing employment declined by 9,000 in October, down for the third straight month. The sector has now lost 62,000 workers year to date. Despite the drop in hiring, average weekly earnings moved higher for the month and have jumped 3.5 percent year-over-year. In the larger economy, nonfarm payrolls rose by 161,000 workers on net in October, slowing from the 191,000 gain in September. This was mostly in line with expectations, even as it reflects slower job growth this year than last. Through the first 10 months of 2016, nonfarm payrolls have averaged 181,000 per month, down from the 229,000 average for all of 2015. The unemployment rate declined from 5.0 percent in September to 4.9 percent in October.

For the most part, the jobs data in October continued trends seen in prior months—not too hot but not too cold for the larger economy despite more discouraging figures for manufacturing. With that in mind, the October employment report is not likely to change minds for either the general election or the decision to raise short-term interest rates in December. At the conclusion of its most recent Federal Open Market Committee meeting, participants hinted that a rate hike was forthcoming. Specifically, the Federal Reserve’s statement said, “The Committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives.”

Other data out last week were mixed. On the positive side, personal spending rebounded strongly, up 0.5 percent in September after falling 0.1 percent in August. Americans have been more willing to open their pocketbooks in recent months relative to a more cautious approach earlier in the year. Along those lines, personal consumption expenditures grew an annualized 3.0 percent in the third quarter, with the personal saving rate falling from 6.2 percent in March to 5.7 percent in September. Similarly, manufacturing labor productivity improved in the third quarter, bouncing back from a decline in the second quarter largely on better output data. Nonetheless, labor productivity in the sector has risen just 0.2 percent year-over-year, which has been frustrating. Manufacturers have benefited from being leaner in the past several years, but the recent sluggishness in productivity and output growth has meant that unit labor costs have risen 9.7 percent since the end of 2011.

Economic anxieties have also likely contributed to reduced private manufacturing construction spending, which edged lower for the second straight month in September. Activity in September has moved higher since June, when it grew at its slowest pace since January 2015, but the longer-term trend has remained a positive one, up 27.1 percent over the past 24 months. Meanwhile, the U.S. trade deficit declined to its lowest level since February 2015. The reduced headline number stemmed from increased goods exports, fewer goods imports and a higher service-sector trade surplus, with the latter number at its highest point so far this year. Nonetheless, 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 have fallen 6.75 percent since September 2015, with exports lower to our top four trading partners.

There will be fewer economic releases this week, which will mostly be dominated by news about the general election. Highlights will include the latest figures on consumer credit, consumer confidence, job openings and small business optimism.

Chad Moutray
Chief Economist
National Association of Manufacturers

Economic Indicators

Last Week's Indicators (Summaries Appear Below)

Monday, October 31
Dallas Fed Manufacturing Survey
Personal Income and Spending

Tuesday, November 1
Construction Spending
ISM Manufacturing Purchasing Managers’ Index

Wednesday, November 2
ADP National Employment Report
FOMC Monetary Policy Statement

Thursday, November 3
Factory Orders and Shipments
Industry GDP Report
Productivity and Costs

Friday, November 4
BLS National Employment Report
International Trade Report

This Week's Indicators

Monday, November 7
Consumer Credit

Tuesday, November 8
Job Openings and Labor Turnover Survey
NFIB Small Business Survey

Wednesday, November 9
Business Employment Dynamics Report

Thursday, November 10
None

Friday, November 11
University of Michigan Consumer Sentiment

Summaries for Last Week's Economic Indicators

ADP National Employment Report
ADP reported that manufacturing employment edged lower in October, with hiring in the sector down in eight of the 10 months so far this year. In October, there were 1,000 fewer workers on net for manufacturers, which continue to be challenged by global headwinds and economic anxieties. Overall, employment in the sector is down 38,000 year to date, suggesting that manufacturers remain wary about adding to their workforce, particularly with sluggish growth in demand and production. Yet, job openings have been more favorable of late, which could indicate better hiring growth moving forward if manufacturers become less cautious.

Meanwhile, nonfarm payroll employment rose by 147,000 in October, its slowest pace in five months and below the consensus estimate of 165,000. The year-to-date average is 175,000, down from the average pace of 209,000 per month in all of 2015. In addition to manufacturing, goods-producing employment was lower across the board in September, including construction (down 15,000) and mining (down 2,000). The largest job gains in service-providing sectors were in professional and business services (up 69,000), education and health services (up 22,000), financial activities (up 18,000) and trade, transportation and utilities (up 17,000). Small and medium-sized businesses (i.e., those with fewer than 500 employees) accounted for more than 55.8 percent of all net new workers in the month.

BLS National Employment Report
Hiring in the manufacturing sector remained disappointing in October, falling for the third straight month. The Bureau of Labor Statistics reported that manufacturing employment declined by 9,000 in October, and the sector has now lost 62,000 workers year to date. This suggests manufacturers continue to be cautious in their economic outlook, even as there are signs of possible stabilization in demand and production data. Even with indications that activity is slightly improving, there is no getting around the fact there are lingering weaknesses in manufacturing related to global headwinds and economic and political uncertainties. Relatively strong job openings would indicate hiring might pick up in the coming months, but as seen in this latest report, that has not transpired yet.

Nonfarm payrolls rose by 161,000 workers on net in October, slowing from the 191,000 gain in September. This was mostly in line with expectations, even as it reflects slower job growth this year than last. Through the first 10 months of 2016, nonfarm payrolls have averaged 181,000 per month, down from the 229,000 average for all of 2015. The unemployment rate declined from 5.0 percent in September to 4.9 percent in October. For the most part, the jobs data in October continued trends seen in prior months—not too hot but not too cold for the larger economy despite more discouraging figures for manufacturing.

Looking more closely at the data, durable and nondurable goods firms shed 5,000 and 4,000 workers in October, respectively. The underlying data were mixed. The largest declines were in machinery (down 6,200), textile product mills (down 2,400), transportation equipment (down 2,300), plastics and rubber products (down 2,200) and apparel (down 1,800). In contrast, there were employment gains in October for food manufacturing (up 2,300), wood products (up 2,100), miscellaneous durable goods (up 1,300), nonmetallic mineral products (up 1,300), furniture and related products (up 1,200), miscellaneous nondurable goods (up 1,200) and chemicals (up 1,100).

Despite the drop in hiring for the month, average weekly earnings in the manufacturing sector moved higher, up from $1,065.93 in September to $1,072.63 in October. On a year-over-year basis, average weekly earnings have increased from $1,036.22 in October 2015, up 3.5 percent for the 12-month period. Average weekly hours were also up slightly, rising from 40.7 to 40.8, with average overtime hours unchanged at 3.3.

Construction Spending
The Census Bureau reported that private manufacturing construction spending edged lower for the second straight month in September. The value of construction put in place in the sector declined from $77.74 billion in August to $76.57 billion in September, down 1.5 percent for the month. Activity in September, however, remained an improvement from June’s $72.81 billion pace, which was the slowest since January 2015. The data have been mixed, with strong gains over the long term but with recent softness due to sluggish economic growth and a more cautious outlook. For instance, construction activity in the manufacturing sector has pulled sharply lower since achieving the all-time high of $82.15 billion in September 2015. Yet, manufacturing construction spending has risen 27.1 percent over the past 24 months, boosted in particular by increased investment in the chemical sector, which continues to benefit from cost advantages in the energy sector.

As a whole, private nonresidential construction spending fell 1.0 percent in September, but with year-over-year growth of 4.1 percent. In this report, construction spending increased for educational (up 5.5 percent), transportation (up 0.6 percent) and lodging (up 0.3 percent) sectors. Yet, these gains failed to offset decreases elsewhere. The segments experiencing the largest declines in September included religious (down 5.1 percent), commercial (down 2.4 percent), communication (down 1.6 percent), amusement and recreation (down 1.5 percent), manufacturing (down 1.5 percent), power (down 1.4 percent) and health care (down 1.0 percent), among other sectors.

Meanwhile, private residential construction spending increased 0.5 percent in September, with 0.9 percent growth over the past 12 months. For the month, single-family construction activity inched up 0.1 percent, whereas multifamily activity rose 2.0 percent. At the same time, public construction spending decreased 0.9 percent in September, with declines of 7.8 percent year-over-year.

Dallas Fed Manufacturing Survey
The Dallas Federal Reserve Bank reported that manufacturing activity grew slightly in October even as sentiment remained negative. The composite index of general business conditions increased from -3.7 in September to -1.5 in October, bringing it closer to neutral territory but contracting for the 22nd straight month. At the same time, the underlying data were mixed. Production (down from 16.7 to 6.7), shipments (down from 20.1 to 1.9), capacity utilization (down from 13.5 to 0.8) and employment (down from 2.3 to 0.2) each expanded in October, albeit at a slower pace. Indeed, hiring growth was essentially stagnant, but marginally positive. On the other hand, capital expenditures accelerated in this report (up from 3.1 to 8.7).

In contrast to those measures, new orders declined at a somewhat faster pace (down from -2.9 to -3.5), illustrating ongoing headwinds in the sector. Many of the sample survey responses highlight those challenges, including a computer and electronic products manufacturer who said, “We are just bumping along in a low-growth environment.” Beyond soft demand and global uncertainties, respondents once again noted difficulties in attracting and retaining skilled talent.

Moving forward, manufacturing leaders were mostly positive about the next six months. Expected indices for new orders (up from 29.1 to 32.2), production (up from 30.5 to 33.0), shipments (up from 26.1 to 26.5), employment (down from 14.5 to 14.2) and capital expenditures (up from 13.5 to 14.0) continue to reflect decent growth anticipated in the months ahead. While the forward-looking composite index eased from 9.3 to 4.8, it expanded for the fifth straight month. With that said, the comments provided indicate some lingering anxieties regarding the outlook, even with cautious optimism in the data.

Factory Orders and Shipments
The Census Bureau reported that new factory orders rose 0.3 percent in September, slowing slightly from the 0.4 percent gain in August. The data were pulled somewhat lower by a sharp decline in defense aircraft and parts, with transportation equipment orders down 1.1 percent. Excluding transportation, new orders for manufactured goods increased 0.6 percent. Over the longer term, new factory orders have been quite soft over the past 12 months, up 0.6 percent since September 2015 or down 0.1 percent year-over-year with transportation excluded. This suggests broader weaknesses for manufacturers in terms of demand, perhaps highlighting why business leaders in the sector continue to be so cautious.

In this report, sales of nondurable goods increased 0.9 percent, but durable goods activity fell 0.3 percent. New orders for durable goods excluding transportation were up 0.1 percent. Looking specifically at durable goods sales activity in September, the underlying data were mixed. Demand was stronger for the month for motor vehicles and parts (up 2.6 percent), furniture and related products (up 1.2 percent), machinery (up 1.1 percent) and electrical equipment and appliances (up 0.9 percent). Yet, some segments were weaker, including computers and related products (down 0.9 percent), fabricated metal products (down 0.6 percent) and primary metals (down 0.3 percent).

Meanwhile, shipments of manufactured goods jumped 0.8 percent in September, extending the 0.2 percent increase in August. There were larger shipments for both durable (up 0.8 percent) and nondurable (up 0.9 percent) goods manufacturers in the latest release. Much like the new orders data discussed above, the value of manufactured goods shipments has been less than desired since September 2015. Year-over-year shipments are down 0.6 percent, with a decline of 0.5 percent when excluding transportation equipment.

Industry GDP Report
Real GDP grew 2.9 percent in the third quarter, accelerating from the 1.4 percent increase in the second quarter. The Bureau of Economic Analysis provided more detail about second quarter growth by industry. In short, real value-added output in the manufacturing sector increased 0.8 percent in the second quarter, extending the 0.5 percent contribution in the first quarter. Real value added from durable and nondurable goods firms rose 0.3 percent and 1.3 percent at the annual rate, respectively. As a result, manufacturers contributed 0.09 percentage points to headline growth in the second quarter, up from 0.06 percent in the first quarter but still rather subpar.

The largest contributors to real GDP in the second quarter included professional and business services (0.44 percent), transportation and warehousing (0.40 percent), educational services, health care and social assistance (0.30 percent) and finance, insurance, real estate, rental and leasing (0.20 percent). In contrast, significant drags to growth in the second quarter came from mining (-0.31 percent), retail trade (-0.17 percent) and construction (-0.16 percent).

Overall, manufacturing gross output increased from $5.689 trillion in the first quarter to $5.739 trillion in the second quarter. Gross output from nondurable goods was higher in the quarter, up from $2.744 trillion to $2.796 trillion; however, durable goods gross output fell from $2.946 trillion to $2.943 trillion. In general, the data have drifted lower since reaching an all-time high of $6.113 trillion in the third quarter of 2014, highlighting the challenges for manufacturers in the global economy since then.

Those findings closely mirrored the value-added data for manufacturing, which rose from $2.155 trillion in the first quarter to $2.172 trillion in the second quarter. Value added for durable (up from $1.177 trillion to $1.178 trillion) and nondurable (up from $0.978 trillion to $0.994 trillion) goods were both higher in this report. Value added in manufacturing peaked at $2.188 trillion in the third quarter of 2015. The bottom line is that manufacturing accounted for 11.8 percent of real GDP in the first and second quarters of 2016, down from 12.1 percent in the third quarter of 2015.

International Trade Report
The Bureau of Economic Analysis and the Census Bureau reported that the U.S. trade deficit declined from $40.46 billion in August to $36.44 billion in September, its lowest level since February 2015. The reduced headline number stemmed from increased goods exports (up from $125.48 billion to $126.13 billion), fewer goods imports (down from $185.61 billion to $183.65 billion) and a higher service-sector trade surplus (up from $19.67 billion to $21.08 billion), with the latter number at its highest point so far this year. The 2016 year-to-date average for the U.S. trade deficit was $40.77 billion in September, down 2.23 percent from the $41.70 billion average for 2015 as a whole.

Looking more closely at the underlying data, goods exports were higher on net in September but mixed. Increased exports for capital goods (up $1.58 billion), consumer goods (up $738 million) and industrial supplies and materials (up $497 million) were enough to offset declines for foods, feeds and beverages (down $1.73 billion) and automotive vehicles and parts (down $458 million). Exports for foods, feeds and beverages would have increased if not for a sharp decrease in exports for soybeans (down $2.02 billion). At the same time, goods imports were lower for capital goods (down $1.69 billion), consumer goods (down $837 million) and industrial supplies and materials (down $39 million). Those decreases more than offset increases for automotive vehicles and parts (up $1.18 billion) and foods, feeds and beverages (up $4 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 $785.01 billion year to date in September, down 6.75 percent from $841.85 billion in September 2015.

Moreover, exports were lower to the top four markets for U.S.-manufactured goods, including Canada (down from $212.78 billion to $200.63 billion), Mexico (down from $177.20 billion to $172.05 billion), China (down from $83.92 billion to $79.33 billion) and Japan (down from $47.53 billion to $46.38 billion). In Europe, exports were slightly higher to the United Kingdom (up from $41.93 billion to $42.13 billion) but marginally lower to Germany (down from $37.11 billion to $36.84 billion), our fifth- and sixth-largest trading partners, respectively.

ISM Manufacturing Purchasing Managers' Index
The Institute for Supply Management’s Manufacturing Purchasing Managers’ Index continued to expand modestly in October, sustaining the rebound in September. The composite index edged up from 51.5 in September to 51.9 in October, growing for the second straight month. Overall, this is encouraging for a sector that has seen subpar growth over much of the past two years due to global headwinds and economic anxieties. On the positive side, production (up from 52.8 to 54.6) and exports (up from 52.0 to 52.5) both accelerated in October, and employment expanded for only the second time year to date (up from 49.7 to 52.9). Manufacturers have been rather cautious so far in 2016, with hiring pulling back. We hope better hiring data will follow stronger demand and output figures moving forward.

Along those lines, new orders slowed in October (down from 55.1 to 52.1), but the trend line remained reassuring. Sales have expanded in nine of the 10 months so far this year, and many of the sample comments tended to echo some optimism regarding demand. For instance, respondents noted steady business, a strong economy and favorable outlook as examples of more upbeat assessments in this report. Of course, there were also reminders that challenges remain, including for the primary metals manufacturer saying production was down considerably for its business.

Meanwhile, inventories contracted for the 16th consecutive month (down from 49.5 to 47.5). 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 rebounded strongly, up 0.5 percent in September after falling 0.1 percent in August. The healthy increase stemmed from a notable jump in durable goods sales, up 1.8 percent and essentially offsetting the 1.9 percent decline in the prior report. This included strong growth for motor vehicles and parts; recreational goods and vehicles; and furnishings and durable household equipment. Overall, Americans have been more willing to open their pocketbooks in recent months relative to a more cautious approach earlier in the year. Along those lines, personal consumption expenditures (PCEs) grew an annualized 3.0 percent in the third quarter, up sharply from just 1.2 percent in the first quarter, with year-over-year growth of 3.7 percent. Indeed, the personal saving rate has fallen from 6.2 percent in March to 5.7 percent in September.

Meanwhile, personal income accelerated from 0.2 percent growth in August to 0.3 percent in September. On a year-over-year basis, personal incomes have increased 3.2 percent. This continued to be a relatively decent year-over-year pace, albeit one that was down from 4.0 percent in September 2015. Total manufacturing wages and salaries edged higher, up from $827.6 billion in August to $828.1 billion in September. The longer-term trend has also been positive, up from the $780.0 billion and $806.7 billion averages of 2014 and 2015, respectively.

In other news, the PCE deflator increased 0.2 percent in September, the same pace as August. Higher energy costs were enough to outpace lower food costs. Core inflation, which excludes food and energy, inched up 0.1 percent in September. While pricing pressures remain minimal for now, they are also picking up. The PCE increased 1.2 percent year-over-year in September, its fastest rate since November 2014. Likewise, core inflation has risen 1.7 percent over the past 12 months, matching its August pace, which was the fastest rate since September 2014.

Productivity and Costs
The Bureau of Labor Statistics reported that manufacturing labor productivity rebounded in the third quarter. Output per worker in the sector increased 1.0 percent in the third quarter, bouncing back from a decline of 0.5 percent in the second quarter. The improvement largely stemmed from better output data, which rose 1.1 percent in the third quarter after falling by the same percentage in the second quarter. At the same time, hourly compensation costs jumped 3.2 percent in this report, pushing unit labor costs up 2.2 percent.

Durable goods manufacturers fared better than their nondurable goods counterparts, with labor productivity up 2.5 percent in the former but down 1.1 percent in the latter. Along those lines, durable goods manufacturing output increased 1.9 percent in the third quarter, with output from nondurable goods firms unchanged. Unit labor costs increased 0.7 percent and 4.6 percent for durable and nondurable goods manufacturers, respectively.

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. On a year-over-year basis, manufacturing labor productivity increased 0.2 percent. 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 the past several years, but the recent sluggishness in productivity and output growth has meant that unit labor costs have risen 9.7 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. Nonfarm output increased 3.4 percent, with unit labor costs edging up 0.3 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.

Questions or Comments?

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

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