Monday Economic Report - October 11, 2016

A Publication of the National Association of Manufacturers

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

We continue to receive mixed messages about the current state of the manufacturing sector, ranging from rebounding demand and production in the Institute for Supply Management’s (ISM) survey to lingering weaknesses in the job market. We will start with some positives. After unexpectedly contracting in the prior release, the ISM’s Manufacturing Purchasing Managers’ Index rose from 49.4 in August to 51.5 in September, expanding for the sixth time in the past seven months. This suggests that the August reading was a bit of an outlier, particularly with new orders recovering strongly and with modest growth in production and exports. The report mostly supports the notion that manufacturing activity has stabilized but expanding at a still-sluggish pace. Yet, the report also continued to reflect ongoing challenges, including job growth and inventories.

Along those lines, the U.S. economy continues to add jobs at a modest pace, but perhaps at a rate that remains less than desired and certainly slower than last year. This is especially the case for manufacturing, which continues to struggle on the hiring front. For the second straight month, manufacturing employment fell. More importantly, manufacturing employment has decreased by 58,000 year-to-date, suggesting continuing cautiousness among manufacturing business leaders to add workers in light of lingering weaknesses in the global economy. Despite the drop in hiring for the month, average weekly earnings in the manufacturing sector moved higher, with year-over-year growth of 3.2 percent.

In the larger economy, nonfarm payrolls rose by 156,000 in September, and the unemployment rate edged up to 5.0 percent, its highest level since April. So far in 2016, nonfarm payrolls have grown by 178,000 per month on average, slowing from the average gain of 229,000 per month in 2015 as a whole. The increase in the unemployment rate likely stemmed from an uptick in the participation rate, which inched up from 62.8 percent to 62.9 percent, a six-month high.

Turning to other indicators out last week, new factory orders were up 0.2 percent in August, slowing from a gain of 1.4 percent in July. With that said, the July increase came mostly from a large jump in nondefense aircraft orders, and that figure dropped significantly in the August report. Excluding transportation equipment, factory orders were unchanged for the month. Moreover, new orders for manufactured goods have been quite weak over the past 12 months, with a year-over-year decline of 1.6 percent. A similar decline can be found for new factory orders excluding transportation, which have also fallen 1.6 percent since August 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 addition, private manufacturing construction spending declined 1.4 percent in August after rebounding in July.

Meanwhile, the U.S. trade deficit edged up from $39.55 billion in July to $40.73 billion in August. More importantly, the data show 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 have fallen 7.1 percent since August 2015. Indeed, exports were lower to the top-six markets for U.S.-manufactured goods, including Canada, Mexico, China, Japan, the United Kingdom and Germany.  

This week, we will get more insights into consumer spending, with September retail sales figures and another update on confidence. Much like other indicators, retail spending data were soft in August, even as it remains clear that Americans are more willing to make purchases today than earlier in the year. I would expect a rebound in retail sales in September, but that release will be closely watched. Other highlights this week include the latest numbers for job openings, 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, October 3
Construction Spending
ISM Manufacturing Purchasing Managers’ Index

Tuesday, October 4
None

Wednesday, October 5
ADP National Employment Report
Factory Orders and Shipments
International Trade

Thursday, October 6
None

Friday, October 7
BLS National Employment Report

This Week's Indicators

Monday, October 10
COLUMBUS DAY HOLIDAY

Tuesday, October 11
NFIB Small Business Survey

Wednesday, October 12
Job Openings and Labor Turnover Survey

Thursday, October 13
None

Friday, October 14
Producer Price Index
Retail Sales
University of Michigan Consumer Sentiment

Summaries for Last Week's Economic Indicators

ADP National Employment Report
ADP reported that manufacturing employment declined again in September, with hiring in the sector down in seven of the past eight months. In September, there were 6,000 fewer workers on net for manufacturers, which continue to be challenged by global headwinds and economic anxieties. Overall, employment in the sector is down by 42,000 through the first nine months of 2016. This suggests 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 when manufacturers become less cautious.

Meanwhile, nonfarm payroll employment rose by 154,000 in September, slowing from gains of 196,000 and 175,000 in July and August, respectively. The September increase was slightly below consensus, which was 170,000. The year-to-date average is 181,000, down from the average pace of 207,000 per month during all of 2015. In September, the largest job gains were in professional and business services (up 45,000), trade, transportation and utilities (up 15,000), construction (up 11,000) and financial activities (up 11,000). Construction employment rose for the first time since May, which was encouraging. Small and medium-sized businesses (i.e., those with fewer than 500 employees) accounted for more than 58 percent of all net new workers in the month.

BLS National Employment Report
For the second straight month, manufacturing employment fell, which was disappointing. Given the rebound in sentiment and activity seen in other measures, there was some hope that job growth might stabilize in this report. Instead, manufacturers lost 13,000 workers on net in September, extending the loss of 16,000 employees in August. More importantly, manufacturing employment has decreased by 58,000 year-to-date, suggesting continuing cautiousness among manufacturing business leaders to add workers in light of lingering weaknesses in the global economy.

Looking more closely at the data, durable and nondurable goods firms shed 11,000 and 2,000 workers in September, respectively. The largest declines were in food manufacturing (down 4,300), transportation equipment (down 4,200, including a 3,100 decline for motor vehicles and parts), furniture and related products (down 1,700), wood products (down 1,600), computer and electronic products (down 1,500) and fabricated metal products (down 1,500). In contrast, there were employment gains in September for miscellaneous nondurable goods (up 1,300), nonmetallic mineral products (up 1,300) and textile product mills (up 1,200), among other sectors.

Despite the drop in hiring for the month, average weekly earnings in the manufacturing sector moved higher, up from $1,058.85 in August to $1,064.71 in September. On a year-over-year basis, average weekly earnings have increased from $1,031.65 in September 2015, up 3.2 percent for the 12-month period. Average weekly hours were also up slightly, rising from 40.6 to 40.7, with average overtime hours unchanged at 3.3.

Meanwhile, the U.S. economy added 156,000 employees in September, easing marginally from an increase of 167,000 in August. This was off somewhat from the consensus increase of around 170,000. So far in 2016, nonfarm payrolls have grown by 178,000 per month on average, slowing from the average gain of 229,000 per month in 2015 as a whole. At the same time, the unemployment rate edged up from 4.9 percent in August to 5.0 percent in September, its highest level since April. This was likely the result of an increased participation rate, up from 62.8 percent to 62.9 percent, a six-month high.

Overall, the U.S. economy continues to add jobs at a modest pace, but perhaps at a rate that remains less than desired and certainly slower than last year. This is especially the case for manufacturing, which continues to struggle on the hiring front.

Construction Spending
The Census Bureau reported that private manufacturing construction spending declined 1.4 percent in August after rebounding in July. The value of construction put in place in the sector fell from $75.57 billion in July to $74.49 billion in August. Activity in August, however, remained an improvement from June’s $72.81 billion pace, which was the slowest since January 2015. The bottom line of this data has been a mixed one, 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 28.2 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 0.4 percent in August, but with year-over-year growth of 4.2 percent. In this report, the largest monthly increases were in the office (up 2.3 percent), amusement and recreation (up 2.1 percent), lodging (up 1.5 percent) and educational (up 1.1 percent) sectors. In contrast, construction spending was lower in August for religious (down 3.2 percent), commercial (down 2.0 percent), power (down 1.5 percent), manufacturing (down 1.4 percent), communication (down 0.5 percent) and transportation (down 0.1 percent) projects. Over the past 12 months, the following segments experienced significant gains in manufacturing construction spending: office (up 28.0 percent), amusement and recreation (up 18.8 percent), lodging (up 17.7 percent) and educational (up 10.1 percent).

Meanwhile, private residential construction spending edged down 0.3 percent in August, with 1.4 percent growth over the past 12 months. For the month, single-family construction activity declined 0.9 percent, whereas multifamily activity rose 2.4 percent. At the same time, public construction spending fell 2.0 percent in August, declining 8.8 percent year-over-year.

Factory Orders and Shipments
The Census Bureau reported that new factory orders edged higher in August, up 0.2 percent, slowing from a gain of 1.4 percent in July. With that said, the July increase came mostly from a large jump in nondefense aircraft orders, and that figure dropped significantly in the August report. Excluding transportation equipment, factory orders were unchanged for the month. Moreover, new orders for manufactured goods have been quite weak over the past 12 months, with a year-over-year decline of 1.6 percent. A similar decline can be found for new factory orders excluding transportation, which have also fallen 1.6 percent since August 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 were up 0.1 percent and 0.2 percent, respectively. New orders for durable goods excluding transportation fell 0.2 percent. Looking specifically at durable goods sales activity in August, the underlying data were mixed. Demand was stronger for the month for furniture and related products (up 3.5 percent), transportation equipment (up 0.7 percent, including a 0.7 percent gain for motor vehicles and parts) and primary metals (up 0.4 percent). Yet, there were also segments that were weaker, including electrical equipment and appliances (down 2.3 percent), computers and electronic products (down 0.6 percent), machinery (down 0.4 percent) and fabricated metal products (down 0.3 percent).

Meanwhile, shipments of manufactured goods were flat in August. Increased shipments for nondurable goods (up 0.2 percent) offset softer data for durable goods (down 0.2 percent). Much like the new orders data discussed above, the value of manufactured goods shipments has fallen by 2.0 percent since August 2015, or down 1.7 percent excluding transportation equipment.

International Trade
The Bureau of Economic Analysis and the Census Bureau reported that the U.S. trade deficit edged up from $39.55 billion in July to $40.73 billion in August. The data have been quite volatile through the first eight months of 2016, averaging $41.34 billion but ranging from $36.93 billion (March) to $45.26 billion (February). The year-to-date average so far this year was marginally lower than the $41.70 billion average for 2015 as a whole. The higher figure in August’s report stemmed from an increase in goods imports (up from $184.45 billion to $185.59 billion), which was enough to offset a slight increase in goods exports (up from $124.12 billion to $125.31 billion). On the positive side, goods exports grew at the fastest pace since July 2015.

Looking more closely at the underlying data, goods exports were mixed in August. Increased exports for industrial supplies and materials (up $1.37 billion), automotive vehicles and parts (up $386 million) and consumer goods (up $104 million) offset declines for capital goods (down $705 million) and foods, feeds and beverages (down $339 million). At the same time, goods imports also varied. Capital goods (up $1.16 billion), foods, feeds and beverages (up $254 million) and automotive vehicles and parts (up $244 million) each had higher levels of imports in August, whereas industrial supplies and materials (down $839 million) and consumer goods (down $289 million) declined for the month.

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 $696.23 billion year-to-date in August, down 7.1 percent from $749.29 billion in August 2015.

Moreover, exports were lower to the top-six markets for U.S.-manufactured goods, including Canada (down from $189.75 billion to $177.97 billion), Mexico (down from $157.71 billion to $152.20 billion), China (down from $74.50 billion to $69.77 billion), Japan (down from $42.86 billion to $40.79 billion), the United Kingdom (down from $37.23 billion to $36.88 billion) and Germany (down from $32.86 billion to $32.53 billion).

ISM Manufacturing Purchasing Managers’ Index
The Institute for Supply Management’s Manufacturing Purchasing Managers’ Index rebounded in September after unexpectedly contracting in August. The composite index rose from 49.4 in August to 51.5 in September, expanding for the sixth time in the past seven months. This was encouraging news and a sign the August reading was a bit of an outlier. Indeed, new orders (up from 49.1 to 55.1) recovered strongly, with modest growth in production (up from 49.6 to 52.8) and exports (down from 52.5 to 52.0). Despite the easing in exports, international demand has expanded for seven consecutive months. The sample comments also tended to echo the better data in September, even as respondents continued to cite ongoing challenges.

Along those lines, manufacturers remain guarded overall—as seen in the most recent NAM Manufacturers’ Outlook Survey—even as they are cautiously optimistic about activity moving forward. This caution can mostly be seen in the labor market data. Employment stabilized somewhat in this report (up from 48.3 to 49.7), but hiring remained negative for the third straight month and the 10th time in the past 12 months. It speaks to the hesitance that many manufacturing business leaders have about adding new workers—at least for now. If demand and output continue to expand strongly, employment variables will likely improve.

Meanwhile, inventories contracted for the 15th consecutive month (up from 49.0 to 49.5). 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. 

Questions or Comments?

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

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