Monday Economic Report - October 3, 2016

A Publication of the National Association of Manufacturers

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

The U.S. economy grew 1.4 percent at the annual rate in the second quarter, up from 1.1 percent in the prior estimate, according to the latest revision from the Bureau of Economic Analysis. The revision stemmed largely from improved data for nonresidential fixed investment. Yet, even with this change, businesses spent less for both structures and equipment, and there continued to be large drags from private inventories. In contrast, personal consumption expenditures and net exports were positive contributors to real GDP. Consumers picked up the pace of spending in the second quarter, rebounding from more cautious activity in the first quarter. At the same time, net exports continued to grow at a sluggish pace, highlighting the difficulties in growing international demand in light of the strong U.S. dollar and economic challenges abroad, but modestly adding to economic growth in the second quarter for the first time in a year.

Along those lines, the U.S. economy increased just 1.1 percent in the first half of 2016, which remains a disappointing rate of growth for manufacturers. We would expect third quarter real GDP to grow around 2.5 percent, boosted by somewhat better—but still quite reserved—consumer spending and investment data. For the year as a whole, the U.S. economy should expand by 1.6 percent.

There was mixed news about consumers last week. On the positive side, consumer confidence jumped strongly in September, according to the Conference Board, increasing to its highest level since August 2007. Increased labor market and income expectations helped to buoy that report. In contrast, the competing survey from the University of Michigan and Thomson Reuters remained more subdued, even as sentiment increased for the month. It was this latter survey that more closely paralleled the latest personal spending data, which was unchanged in August. Durable and nondurable goods were both lower in this report, with service-sector spending marginally higher. This would suggest a pullback in spending in August, which mirrored softness in many other indicators, including retail sales.

With that said, Americans have largely continued to grow their purchases over the past 12 months, up 3.6 percent since August 2015. That year-over-year pace was off from 3.8 percent in July, but up from 2.9 percent in March. That longer-term trend illustrates an increased willingness for the public to open their pocketbooks than earlier in the year, even if the August numbers were more disappointing. Along those lines, the saving rate has decreased from 6.2 percent in March to 5.7 percent in August. Keep in mind what was stated in the first paragraph—consumer spending has largely been a bright spot in the U.S. economy, even if the pace of growth suggests that some consumers are holding back from larger spending due to economic uncertainties.

Meanwhile, reports continue to show challenges in the manufacturing sector. New durable goods orders were unchanged in August, continuing a weak trend over the past year or so. On a year-over-year basis, sales have decreased 1.3 percent since August 2015. One positive in this latest report was “core” capital goods orders (or nondefense capital goods excluding aircraft), which were up 0.6 percent in August. That might be more encouraging, however, if demand for core capital goods did not decline 3.1 percent over the past 12 months. Moreover, surveys from the Dallas and Richmond Federal Reserve Banks reflected negative sentiment in September, with the former having contracted now for 21 straight months. Despite the negative headline figure, however, most of the underlying data points in the Dallas Federal Reserve release indicated strengthening levels of growth in September, and manufacturing leaders in both surveys were mostly positive about the next six months.

Turning to this week, the September labor market numbers will be closely watched, particularly after disappointing job growth in August. Manufacturing employment has declined by 39,000 workers on net year-to-date, even as job openings in the sector have soared to an all-time high. We hope the September figures will begin to show a rebound in manufacturing job growth. We will also be looking for stronger manufacturing activity in the new report from the Institute for Supply Management, which indicated a contraction in its prior release. Other highlights this week include new data for construction spending, factory orders and shipments and international trade. Advance statistics, released last week, suggest that the U.S. trade deficit edged down slightly in August, with an increase in goods exports outpacing a slight gain in goods imports.

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

Economic Indicators

Last Week's Indicators (Summaries Appear Below)

Monday, September 26
Dallas Fed Manufacturing Survey
New Home Sales

Tuesday, September 27
Conference Board Consumer Confidence
Richmond Fed Manufacturing Survey

Wednesday, September 28
Durable Goods Orders and Shipments

Thursday, September 29
Census Advance Economic Indicators Report
Gross Domestic Product (Second Revision)

Friday, September 30
Personal Income and Spending
University of Michigan Consumer Sentiment (Revision)

This Week's Indicators

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

Summaries for Last Week's Economic Indicators

Census Advance Economic Indicators Report
The Census Bureau released the following advance statistics for August:

  • International Trade in Goods: The goods trade deficit edged down from $58.78 billion in July to $58.40 billion in August in preliminary data. This was largely the result of an increase in goods exports for the month, up from $123.71 billion to $124.61 billion, which slightly outpaced growth in goods imports, up from $182.49 billion to $183.01 billion. Final data will be released on October 5. Note that the U.S. trade deficit is also assisted by a surplus in service-sector activity, which was $20.87 billion in July.  
  • Exports were mostly higher, except for capital goods (down $643 million). Industrial supplies (up $1.52 billion), automotive vehicles (up $403 million), consumer goods (up $112 million) and other goods (up $21 million) each had increased exports for the month. Meanwhile, growth in goods imports for capital goods (up $1.11 billion), other goods (up $323 million), foods, feeds and beverages (up $237 million) and automotive vehicles (up $234 million) were enough to offset declines for industrial supplies (down $871 million) and consumer goods (down $514 million).
  • Wholesale and Retail Inventories: Wholesale inventories were off 0.1 percent, down from $590.19 billion in July to $589.31 billion in August. Stockpiles for durable goods products were somewhat higher, up from $355.94 billion to $356.44 billion; however, wholesale inventories for nondurable goods dropped from $234.25 billion to $232.87 billion. At the same time, retail trade inventories grew 0.5 percent in August, up from $601.95 billion to $605.16 billion, boosted by strong gains at motor vehicles and parts dealers, up 1.0 percent from $209.81 billion to $211.96 billion. Excluding motor vehicles and parts, retail trade inventories were up 0.3 percent. Final numbers will be released on October 7.

Conference Board Consumer Confidence
The Conference Board reported that consumer sentiment jumped strongly in September. The Consumer Confidence Index rose from 101.8 in August to 104.1 in September, its highest level since August 2007. This represented a significant improvement in Americans’ assessments of the economy since May’s dismal 92.4 reading. The strong gains in the headline number were buoyed by better perceptions about current (up from 125.3 to 128.5) and future (up from 86.1 to 87.8) conditions. With that said, this measure has been extremely volatile over the past two years, with the current reading surpassing the prior post-recession high of 103.8 in January 2015. That peak was soon followed by lingering doubts about economic growth, and this survey still reflects some of those persistent anxieties despite notable improvements.

Along those lines, the percentage of respondents saying jobs were hard to get dropped from 22.8 percent in August to 21.6 percent in September. In contrast, those saying jobs were plentiful rose from 26.8 percent to 27.9 percent. Regarding expected income growth, respondents were somewhat less upbeat about increased income growth moving forward, down from 18.5 percent to 17.1 percent, but the percentage predicting reduced income in the months ahead also fell, down from 11.0 percent to 10.3 percent.

In a similar fashion, 27.4 percent said business conditions were good, off from 30.3 percent in the prior survey. Nonetheless, that was still better than the percentage feeling conditions were bad, which dropped from 18.2 percent to 16.2 percent.

Dallas Fed Manufacturing Survey
The Dallas Federal Reserve Bank reported that manufacturing activity in its district improved in September, even as sentiment has now contracted for 21 straight months. The composite index of general business conditions increased from -6.2 in August to -3.7 in September, bringing this measure closer to neutral territory. Despite the negative figure in the composite measure, most of the underlying data points reflected strengthening levels of growth in September, including production (up from 4.5 to 16.7), shipments (up from 9.9 to 20.1) and capacity utilization (up from 0.9 to 13.5). On the other hand, new orders shrank once again in September (down from 5.3 to -2.9), falling for the eighth time in the past 10 months.

With that in mind, it should not be a surprise that manufacturers in the region remain cautious in their outlook. As one computer and electronic products respondent put it, “We continue to bump along in a low-growth environment. We don’t see that changing at any point in the future. Things are not bad, but are not good.” On the positive side, hiring (up from -5.0 to 2.3) and capital spending (up from -5.7 to 3.1) both rebounded in September, with each expanding slightly after contracting in August. Along those lines, a few of the sample comments noted difficulties in attracting and retaining skilled talent.

Moving forward, manufacturing leaders were mostly positive about the next six months, but with some easing in perceptions from the prior release. Expected indices for new orders (down from 38.6 to 29.1), production (down from 32.8 to 30.5), shipments (down from 30.0 to 26.1), employment (down from 21.7 to 14.5) and capital expenditures (down from 14.7 to 13.5) moved lower but continued to reflect sizable growth ahead. The forward-looking composite index rose from 7.0 to 9.3, expanding for the fourth straight month. At the same time, these figures also indicate a more mixed environment than seen at first glance. Just more than half of respondents anticipated orders to be unchanged over the next six months, with 39.2 percent predicting gains.

Durable Goods Orders and Shipments
The Census Bureau reported that new durable goods orders remained weak in August, continuing a trend over the past year or so. New orders dropped from $227.0 billion in July to $226.9 billion in August, essentially unchanged for the month. Moreover, on a year-over-year basis, sales have decreased 1.3 percent since August 2015. This highlights the ongoing challenges in the sector, including global headwinds and economic anxieties.

With that said, the headline number received a bit of a boost from transportation equipment orders in August, which were up 0.6 percent largely on stronger demand for autos and defense aircraft. Excluding transportation equipment, new orders for durable goods were down 0.4 percent in August and 1.1 percent year-over-year. This speaks to broader softness outside of transportation among durable goods manufacturers. So-called “core” capital goods orders (or nondefense capital goods excluding aircraft) were up 0.6 percent in August. That might be more encouraging, however, if demand for core capital goods did not decline 3.1 percent year-over-year.

Looking more closely at the various durable goods sectors, the data were mixed in August. On the positive side, new orders were higher for communications equipment (up 1.8 percent), motor vehicles and parts (up 0.7 percent), primary metals (up 0.2 percent) and other durable goods (up 0.1 percent). In contrast, computers and related products (down 5.8 percent), electrical equipment and appliances (down 2.5 percent), fabricated metal products (down 0.5 percent) and machinery (down 0.5 percent) each reported lower demand for the month.

Meanwhile, durable goods shipments decreased 0.4 percent in August. Transportation equipment shipments, which were off 1.1 percent in this report due to weaker nondefense aircraft activity, were a large part of that decline. Excluding transportation, durable goods shipments were flat in August. Increased shipments for machinery (up 0.5 percent), motor vehicles and parts (up 0.5 percent), fabricated metal products (up 0.3 percent) and electrical equipment and appliances (up 0.1 percent) were essentially offset by declines for nondefense aircraft and parts (down 7.8 percent), computers and related products (down 5.3 percent), primary metals (down 0.9 percent) and other durable goods (down 0.2 percent). Since August 2015, durable goods shipments have fallen 2.2 percent, with a decline of 1.4 percent when excluding transportation equipment.

Gross Domestic Product (Second Revision)
The U.S. economy grew 1.4 percent at the annual rate in the second quarter, up from 1.1 percent in the prior estimate, according to the latest revision from the Bureau of Economic Analysis. The revision stemmed largely from improved data for nonresidential fixed investment, up an annualized 1.0 percent for the quarter instead of a decline of 0.9 percent as noted in the previous release. However, there were still challenges related to nonresidential fixed investment, with businesses spending less for both structures (down 2.1 percent) and equipment (down 2.9 percent). In addition, there were large drags on headline growth from private inventories and residential activity, with the latter softer than desired after being a bright spot over much of the past two years. Gross private fixed investment alone subtracted 1.34 percentage points from real GDP growth in the second quarter.

In contrast, personal consumption expenditures and net exports were both positive contributors to real GDP in this report, adding 2.88 and 0.21 percentage points, respectively, to headline growth. Consumers picked up the pace of spending in the second quarter (up 4.3 percent), rebounding from more cautious activity in the first quarter (up 1.6 percent). Most notably, durable goods spending jumped from a decrease of 0.6 percent in the first quarter to a gain of 9.8 percent in the second quarter. At the same time, net exports added to real GDP growth for the first time since the same time period in 2015, with modest growth in goods exports (up 1.7 percent) coinciding with flat activity for goods imports. Still, that growth rate continues to suggest a sluggish pace, highlighting the difficulties in growing international demand in light of the strong U.S. dollar and economic challenges abroad.

Along those lines, the U.S. economy increased just 1.1 percent in the first half of 2016, which remains a disappointing rate of growth for manufacturers. We would expect third quarter real GDP to grow around 2.5 percent, boosted by somewhat better—but still quite reserved—consumer spending and investment data. For the year as a whole, the U.S. economy should expand by 1.6 percent.

New Home Sales
The Census Bureau and the U.S. Department of Housing and Urban Development reported that sales of new single-family homes dropped 7.6 percent in August. New home sales decreased from 659,000 units at the annual rate in July to 609,000 units in August. While sales were somewhat higher in the West, other regions were lower in the report, with the largest declines in the South. Despite the easing in August, single-family home sales have jumped 20.6 percent year-over-year, up from 505,000 in August 2015. In addition, activity in July and August (which averaged 634,000) continued to represent progress from the first half of 2016 (which averaged 550,500).

With sales dipping slightly in this report, the number of months of supply ticked higher, up from 4.2 in July to 4.6 in August. Yet, inventories of new homes for sale have dropped overall, down from 5.5 months of supply as recently as March. The median sales price in August was $284,000, off from $293,100 in July.

Personal Income and Spending
Personal spending stagnated in August, mirroring softness in earlier retail sales figures. Personal consumption expenditures were unchanged in August, notably slowing from 0.4 percent growth in the prior release. Durable and nondurable goods were both lower in this report, down 1.3 percent and 0.3 percent, respectively, with service-sector spending marginally higher, up 0.1 percent. With that said, Americans have largely continued to grow their purchases over the past 12 months, up 3.6 percent since August 2015. That year-over-year pace was off from 3.8 percent in July, but up from 2.9 percent in March. That longer-term trend illustrates an increased willingness for the public to open their pocketbooks than earlier in the year, even if the August numbers were more disappointing. Along those lines, the saving rate has decreased from 6.2 percent in March to 5.7 percent in August.

Meanwhile, personal income increased 0.2 percent in August, down from a gain of 0.4 percent in July. On a year-over-year basis, incomes have risen 3.1 percent. This continued to be a relatively decent year-over-year pace, albeit one that was down from 4.2 percent in August 2015. At the same time, total manufacturing wages and salaries edged down slightly from $830.5 billion in July to $826.8 billion in August. Despite the decline, wages and salaries in the sector have grown steadily over the past few years, up from the $780.0 billion and $806.7 billion averages of 2014 and 2015, respectively.

In other news, the personal consumption expenditure (PCE) deflator rose 0.1 percent in August, up from being unchanged in July. Energy and food costs were slight drags on prices, with core PCE growth, which excludes those two categories, up 0.2 percent. The PCE increased 1.0 percent year-over-year in August, and core inflation increased 1.7 percent over the past 12 months. The larger story in the data, however, is that pricing pressures remain mostly under control—at least for now. That is important because the PCE deflator is the Federal Reserve’s preferred measure of inflation.

Richmond Fed Manufacturing Survey
The Richmond Federal Reserve Bank reported that manufacturing activity in its district remained weak in September. The composite index of general business activity increased from -11 in August to -8 in September but contracted for the second straight month. Several of the underlying data points eased in the rate of decline in this report, including new orders (up from -20 to -7), shipments (up from -14 to -4) and capacity utilization (up from -19 to -11). At the same time, the labor market data were mixed. Hiring (down from 7 to -13) turned negative for the first time in three years, whereas the average workweek expanded ever so slightly in this release after narrowing in August (up from -4 to 1). These findings show that manufacturers in the region continue to struggle from global headwinds and economic uncertainty.

Yet, respondents were cautiously upbeat about the next six months in their outlook, albeit with less confidence than in the prior survey. Forward-looking indices remained strong but pulled back somewhat in September, including new orders (down from 33 to 29), shipments (down from 41 to 26), capacity utilization (down from 29 to 22), the average workweek (down from 14 to 10) and capital expenditures (down from 15 to 13). At the same time, hiring was expected to stay soft moving ahead (down from 14 to 3).

Meanwhile, inflationary pressures remained largely under control. Manufacturers in the district said prices paid for raw materials increased from 0.96 percent at the annual rate in August to 1.10 percent in September. Raw material prices are expected to continue to grow modestly, increasing 1.42 percent at the annual rate six months from now. This was up from 0.96 percent in the previous report.

University of Michigan Consumer Sentiment (Revision)
Final data for the Index of Consumer Sentiment from the University of Michigan and Thomson Reuters were more upbeat than preliminary results released two weeks prior. The headline index rose from 89.8 in August to 91.2 in September, which was an improvement from being unchanged in the previous estimate. This suggests Americans’ assessments about overall economic conditions have strengthened in the past two weeks. To be fair, consumer confidence remains much lower than we would prefer, down from 94.7 in May and off from its post-recessionary peak of 98.1 in January 2015. As such, the University of Michigan’s report stands in contrast to the more upbeat perceptions found in the competing Conference Board analysis (see above).

The underlying data were varied. Assessments about the current economic environment softened somewhat (down from 107.0 to 104.2), but the public anticipated better data moving forward (up from 78.7 to 82.7), albeit at levels that perhaps remain somewhat soft. Nonetheless, Richard Curtin, the survey’s chief economist, noted that the data were consistent with real consumer spending growth of 2.7 percent through mid-2017.

Questions or Comments?

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

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