Monday Economic Report - October 31, 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 2.9 percent at the annual rate in the third quarter, up from 1.4 percent in the second quarter and its fastest pace in two years. Consumer spending, net exports and inventory spending were bright spots in the latest report, with fixed investment data remaining soft. Consumer spending on goods increased 2.2 percent at the annual rate in the third quarter, boosted by strength in durable goods purchases including motor vehicles. At the same time, net exports made its largest contribution to real GDP growth since the fourth quarter of 2014, with goods exports jumping an annualized 14.5 percent. Meanwhile, while spending on structures rebounded in the third quarter, business investments in equipment contracted for the fourth straight quarter, and the residential segment was off for the second consecutive report. On the positive side, business inventory spending picked up following five straight quarters where it was a drag on real GDP activity.

Still, even with the stronger results in the third quarter, which were mostly in line with consensus estimates, real GDP has increased just 1.5 percent year-over-year. Indeed, the economy notched just 1.1 percent growth at the annual rate in the first half of 2016, with 1.6 percent growth expected for the year as a whole.

Looking more closely at manufacturing, reports out last week were mostly mixed. Encouragingly, the Markit Flash U.S. Manufacturing PMI rose to a 12-month high on relatively strong pickups in both new orders and production, even as hiring activity remained more subdued. In addition, the Markit Flash Eurozone Manufacturing PMI increased to its fastest pace since March 2014. As such, the continent continued to brush off post-Brexit worries, with activity accelerating in October at a modest pace led by improvements in both Germany and France. In a similar manner, manufacturing activity in the Kansas City Federal Reserve Bank’s district picked up for the second straight month, with its composite index increasing to its fastest pace of growth since December 2014. Indeed, manufacturers in the district have struggled over much of the past two years on global headwinds and reduced commodity prices, especially for crude oil; yet, the underlying data mostly reflected better growth in October.

In contrast, the Richmond Federal Reserve Bank reported that manufacturing activity in its district remained soft in October, contracting for the third straight month. Nonetheless, shipments and hiring expanded slightly during the month, suggesting a degree of stabilization from recent weaknesses, but new orders, capacity utilization and the average workweek each declined in the latest report. Moreover, new durable goods orders continue to disappoint, edging down 0.1 percent in September. On a year-over-year basis, sales have increased 1.6 percent since September 2015. However, volatility in the transportation equipment segment has skewed the data. In September, transportation equipment orders fell 0.8 percent, largely on reduced activity for defense aircraft and parts. Excluding transportation, new orders for durable goods increased 0.2 percent in September, but over the past 12 months, they were essentially unchanged, down 0.04 percent.

Meanwhile, it is clear that consumers remain anxious. Consumer sentiment from the University of Michigan and Thomson Reuters declined to its lowest level in 13 months. Political uncertainties and economic worries, especially for households with incomes below $75,000, have contributed to recent decreases in this measure. Separately, the Consumer Confidence Index pulled back somewhat in October after reaching a nine-year high in September, according to the Conference Board. In that analysis, however, Americans remain more upbeat than earlier in the year, providing a bit of a disparity between the two competing measures.

These surveys often swing on pocketbook issues, and on that topic, manufacturing employees did get some good news regarding earnings last week. Manufacturing compensation rose 0.6 percent in the third quarter and up 2.5 percent year-over-year. Private-sector manufacturing workers earned 2.8 percent more over the past 12 months in wages and salaries, with benefit costs up 2.1 percent year-over-year.

This will be another busy week for economic indicator releases. The largest headlines will come from the Federal Open Market Committee, which meets on November 1 and 2 but is unlikely to raise short-term rates until the following month, and the latest jobs numbers from the Bureau of Labor Statistics. On the latter, manufacturers have been cautious this year regarding employment growth, with the sector losing 58,000 workers on net so far in 2016. We will be looking for signs of stabilization for manufacturing job growth in October after declines in both August and September, with nonfarm payroll growth of around 160,000 for the month. We hope to see continued signs of expansion in the Institute for Supply Management’s Manufacturing PMI, building on renewed strength in its most recent survey. Other highlights include the latest data on construction spending, factory orders and shipments, personal income and spending and productivity.

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

Economic Indicators

Last Week's Indicators (Summaries Appear Below)

Monday, October 24
Chicago Fed National Activity Index
Markit Flash PMIs for the United States and Eurozone

Tuesday, October 25
Conference Board Consumer Confidence
Richmond Fed Manufacturing Survey

Wednesday, October 26
Census Advance Economic Indicators Report
New Home Sales

Thursday, October 27
Durable Goods Orders and Shipments
Kansas City Fed Manufacturing Survey

Friday, October 28
Employment Cost Index
Gross Domestic Product (Third Quarter)
University of Michigan Consumer Sentiment (Revision)

This Week's Indicators

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

Summaries for Last Week's Economic Indicators

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

  • International Trade in Goods: The goods trade deficit decreased from $59.15 billion in August to $56.08 billion in September in preliminary data. This was the result of an increase in goods exports (up from $124.57 billion to $125.65 billion) that corresponded with reduced goods imports (down from $183.71 billion to $181.73 billion). Final data will be released on November 4. Note that the U.S. trade deficit is also assisted by a surplus in service-sector activity, which was $19.56 billion in August.

    In September, the largest gains in goods exports came from capital goods (up $1.62 billion), industrial supplies (up $773 million) and consumer goods (up $713 million). Pushing back against those increases, there were fewer exports for foods, feeds and beverages (down $1.83 billion) and automotive vehicles (down $456 million) for the month. Meanwhile, goods imports were mostly lower, including declines for capital goods (down $1.82 billion), consumer goods (down $860 million) and industrial supplies (down $555 million). At the same time, imports for automotive vehicles rose by $1.22 billion in September.
  • Wholesale and Retail Inventories: Wholesale inventories rose 0.2 percent, up from $589.46 billion in August to $590.69 billion in September. Stockpiles for nondurable goods products increased, up from $233.38 billion to $235.56 billion; however, wholesale inventories for durable goods dropped from $356.08 billion to $355.13 billion. Meanwhile, retail trade inventories grew 0.3 percent in September, up from $605.83 billion to $607.65 billion, boosted by strong gains at motor vehicles and parts dealers, up 0.7 percent from $212.66 billion to $214.06 billion. Excluding motor vehicles and parts, retail trade inventories edged up 0.1 percent. Final numbers will be released on November 9.

Chicago Fed National Activity Index
The Chicago Federal Reserve Bank reported that the U.S. economy stabilized somewhat in September after weakening significantly in August. The National Activity Index (NAI) increased from -0.72 in August—its lowest level since January 2014—to -0.14 in September. Index readings below zero suggest the economy is growing below its historical trend, with positive readings indicating the opposite. As such, this report continues to reflect overall economic conditions that are subpar relative to the trend. For its part, manufacturing subtracted 0.01 from the headline number in September, which was better than the 0.39 drag in August. Other negative contributors included employment growth and housing.

Meanwhile, the three-month moving average edged down from -0.14 in August to -0.21 in September. The three-month moving average has been negative for 20 consecutive months, illustrating the sluggishness in the U.S. economy since the beginning of 2015. However, the three-month moving average has yet to cross -0.70, the threshold at which the NAI would start to indicate an increased recession risk.

Conference Board Consumer Confidence
After reaching a nine-year high in September, the Conference Board reported that consumer sentiment pulled back somewhat in October. The Consumer Confidence Index declined from 103.5 in September to 98.6 in October. Even with some easing, this represented a significant improvement in Americans’ assessments of the economy since May’s dismal 92.4 reading. The underlying data points decelerated in this report, including perceptions about current (down from 127.9 to 120.6) and future (down from 87.2 to 83.9) conditions, but each has improved over the past five months. Overall, this survey has been quite volatile over the past few years, with large swings from month to month on economic anxieties and lingering doubts about income and labor market growth.

Reflecting the current caution seen among consumers, 26.2 percent of those responding said business conditions were good, off from 27.7 percent in the prior survey. Nonetheless, that was still better than the percentage feeling conditions were bad, which rose from 15.8 percent to 17.7 percent.

Along those lines, the percentage of respondents saying jobs were plentiful declined from 27.6 percent in September to 24.3 percent in October. Fortunately, those feeling jobs were hard to get changed little, down from 22.3 percent to 22.1 percent. More positively, the percentage expecting their incomes to decrease dropped from 10.4 percent to 9.8 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. At the same time, the percentage anticipating higher incomes was unchanged at 17.5 percent in October.

Durable Goods Orders and Shipments
The Census Bureau reported that new durable goods orders continue to disappoint in September. New orders fell 0.1 percent, edging down from $227.6 billion to $227.3 billion. On a year-over-year basis, sales have increased 1.6 percent since September 2015, up from $223.7 billion. However, volatility in the transportation equipment segment has skewed the data. In September, transportation equipment orders fell 0.8 percent, largely on reduced activity for defense aircraft and parts. Excluding transportation, new orders for durable goods increased 0.2 percent in September, but over the past 12 months, they were essentially unchanged, down 0.04 percent.

As such, the broader demand for durable goods over the past year remained weak, highlighting ongoing challenges in the sector. Along those lines, core capital goods orders (or nondefense capital goods excluding aircraft) declined 1.2 percent in September, with a year-over-year decrease of 4.1 percent.

Looking more closely at the various durable goods sectors, the data were mixed in September. On the positive side of the ledger, new orders were higher in this report for electrical equipment and appliances (up 1.5 percent), machinery (up 1.2 percent), motor vehicles and parts (up 1.2 percent) and other durable goods (up 0.7 percent). In contrast, computers and electronic products (down 1.0 percent), fabricated metal products (down 0.4 percent) and primary metals (down 0.3 percent) each reported lower demand for the month.

Meanwhile, durable goods shipments rebounded, up 0.8 percent in September, after being unchanged in August, buoyed by stronger automotive and nondefense aircraft sales. Excluding transportation equipment, shipments of durable goods inched up 0.1 percent. Since September 2015, durable goods shipments have fallen 1.1 percent, matching the decline seen when excluding transportation equipment.

In September, increased shipments for nondefense aircraft and parts (up 9.1 percent), motor vehicles and parts (up 1.2 percent), other durable goods (up 0.7 percent), electrical equipment and appliances (up 0.6 percent) and primary metals (up 0.2 percent) were enough to offset declines for defense aircraft and parts (down 8.2 percent), computers and electronic products (down 0.5 percent), fabricated metal products (down 0.2 percent) and machinery (down 0.1 percent).

Employment Cost Index
The Bureau of Labor Statistics reported that manufacturing compensation rose 0.6 percent in the third quarter, the same pace as the second quarter. On a year-over-year basis, compensation in the sector grew 2.5 percent. Manufacturing wages and salaries were up 0.7 percent in the third quarter, with benefits up 0.4 percent. Private-sector manufacturing workers earned 2.8 percent more over the past 12 months in wages and salaries, with benefit costs up 2.1 percent year-over-year. The Bureau of Labor Statistics does not break out various benefit costs, including health insurance, in its quarterly releases.

Overall, the employment cost index for private-sector workers increased 0.5 percent in the third quarter. Private-sector wages and salaries and benefits both rose 0.5 percent in this report. Over the past 12 months, total compensation for private-sector workers increased 2.2 percent, with wages and salaries and benefits up 2.4 percent and 1.8 percent, respectively.

Gross Domestic Product (Third Quarter)
The Bureau of Economic Analysis reported that the U.S. economy grew 2.9 percent at the annual rate in the third quarter, up from 1.4 percent in the second quarter and its fastest pace in two years. Consumer spending, net exports and inventory spending were bright spots in the latest report, with fixed investment data remaining soft. Still, even with the stronger results in the third quarter, which were mostly in line with consensus estimates, real GDP has increased just 1.5 percent year-over-year. Indeed, the economy notched just 1.1 percent growth at the annual rate in the first half of 2016, with 1.6 percent growth expected for the year as a whole.

Looking more closely at the underlying data, consumer spending continued to grow modestly in the third quarter, even as it slowed a little from the second quarter. Consumer spending on goods increased 2.2 percent at the annual rate in the third quarter, boosted by strength in durable goods purchases including motor vehicles. Yet, nondurable goods spending was lower in this release. Overall, personal consumption expenditures added 1.47 percentage points to real GDP in the third quarter, with 0.99 percent coming from services and 0.48 percent stemming from goods spending.

Net exports contributed another 0.83 percentage points to headline growth, its largest contribution since the fourth quarter of 2014. In the third quarter, goods exports jumped an annualized 14.5 percent, with goods imports edging up 0.9 percent. This was notable, especially given the challenges many manufacturers have had in growing export sales in light of dollar and global headwinds. On a year-over-year basis, goods exports have risen 2.7 percent.

Meanwhile, business spending remained weaker than desired, mirroring recent cautiousness in other economic indicators. Nonresidential fixed investment grew 1.2 percent at the annual rate in the third quarter, only slightly better than the 1.0 percent pace in the second quarter. Spending on structures rebounded (up 5.4 percent), but investments in equipment contracted for the fourth straight quarter (down 2.7 percent in the third quarter). At the same time, residential investment declined for the second consecutive quarter, down 6.2 percent. In total, fixed investment was off 0.6 percent in the third quarter, subtracting 0.09 percentage points from headline GDP growth. On the positive side, business inventory spending picked up, adding 0.61 percentage points. That followed five straight quarters where inventory spending was a drag on real GDP activity.

Kansas City Fed Manufacturing Survey
The Kansas City Federal Reserve Bank reported continued expansion of manufacturing activity in October, improving for the second straight month. The composite index of general business conditions was unchanged at 6 in October, its fastest pace of growth since December 2014. Indeed, manufacturers in the district have struggled over much of the past two years on global headwinds and reduced commodity prices, especially for crude oil. The underlying data in October reflected better growth for several key indicators, including new orders (up from 12 to 14), production (up from 15 to 18) and shipments (up from 16 to 20). Exports were also slightly positive (up from -4 to 3), increasing for the first time since January.

The labor market data were also somewhat encouraging. The index for employment expanded for the first time since December 2014 (up from -3 to 7), and the average workweek widened for the fifth consecutive month (up from 5 to 8). Sample comments tended to highlight challenges with attracting new talent, highlighting the skills gap in the sector.

Meanwhile, manufacturers continue to be somewhat upbeat about the next six months. The forward-looking composite index rose from 10 to 18, which matched the rate last seen in December 2014. It has now been positive in each month since April. Nearly half of respondents expect higher rates of production and shipments in the months ahead, with 39 percent hopeful for more hiring and one-quarter seeing additional capital spending. Still, exports are not anticipated to change much over the next six months (down from 6 to 1), showing how cautious business leaders are right now.

Markit Flash PMIs for the United States and Eurozone
The Markit Flash Eurozone Manufacturing PMI increased from 52.6 in September to 53.3 in October, its fastest pace since March 2014. As such, the continent continued to brush off post-Brexit worries, with activity accelerating in October at a modest pace. Overall, the headline PMI has trended higher since bottoming out at 51.2 in February. The underlying indices were mostly higher, including new orders (up from 53.4 to 53.6), output (up from 53.8 to 54.4) and employment (up from 52.1 to 53.7). The only weakness was exports, which pulled back slightly but remained a fairly decent pace of expansion (down from 53.3 to 53.0).

Improvements in both Germany (up from 54.3 to 55.1) and France (up from 49.7 to 51.3) buoyed the stronger Eurozone data. It was the first time since February that manufacturers in France reported positive growth, expanding at its fastest pace year to date. At the same time, the German data closely mirrored the Eurozone report, with the headline number and output both at their highest points since early 2014.

Meanwhile, the Markit Flash U.S. Manufacturing PMI rose from 51.5 to 53.2, a 12-month high. Through the first 10 months of 2016, this measure has averaged 51.8, and October’s data reflected relatively strong pickups in both new orders (up from 51.1 to 54.7) and production (up from 52.5 to 55.5). Exports shifted from barely contracting in September to a slight expansion in October (up from 49.8 to 50.9). Beyond those positive indicators, hiring remained cautious (down from 52.5 to 51.6), even as employment growth continued to expand modestly.

New Home Sales
The Census Bureau and the U.S. Department of Housing and Urban Development reported that new single-family home sales rose 3.1 percent, up from 575,000 at the annual rate in August to 593,000 in September. This continues a steady, upward trend for new home sales, which have risen from 457,000 in September 2015, an increase of 29.8 percent. The September sales data were higher in every region of the country except the West, with the biggest jump in the Northeast.

Inventories of new homes for sale remained tight, down from 4.9 months of supply on the market in August to 4.8 months in September. Six months ago, that figure was 5.5 months of supply, illustrating the notable decline in supply since then. The median sales price was $313,500 in September, up from $293,800 in the prior report.

Richmond Fed Manufacturing Survey
The Richmond Federal Reserve Bank reported that manufacturing activity in its district remained soft in October. The composite index of general business activity increased from -8 in September to -4 in October but contracted for the third straight month. The underlying data were mixed. On the positive side, shipments (up from -4 to 2) and hiring (up from -13 to 3) expanded slightly in October, suggesting a degree of stabilization from recent weaknesses. Yet, several other indicators contracted, including new orders (down from -7 to -12), capacity utilization (up from -11 to -5) and the average workweek (down from 1 to -3). Overall, these findings show that manufacturers in the region continue to struggle from global headwinds and economic uncertainty.

Nonetheless, respondents were cautiously upbeat about the next six months in their outlook. Forward-looking indices remained strong in October, including new orders (up from 29 to 32), shipments (up from 26 to 35), capacity utilization (up from 22 to 28), employment (up from 3 to 20) and capital expenditures (up from 13 to 19). At the same time, respondents predicted the average workweek to grow more slowly in the months ahead (down from 10 to 6).

Meanwhile, inflationary pressures remained largely under control. Manufacturers in the district said prices paid for raw materials increased from 1.10 percent at the annual rate in September to 1.17 percent in October. Raw material prices are expected to continue to rise modestly, growing 1.51 percent at the annual rate six months from now, up from 1.42 percent in the previous report.

University of Michigan Consumer Sentiment (Revision)
The University of Michigan and Thomson Reuters reported that the Index of Consumer Sentiment fell from 91.2 in September to 87.2 in October, its lowest level in 13 months. This final figure was down from its original estimate of 87.9. When that number was released two weeks prior, Richard Curtin, the survey’s chief economist, attributed the latest weaknesses to political uncertainties and economic worries for those households with incomes below $75,000. In this report, he said, “Prospects for renewed spending gains will depend on continued growth in jobs and wages as well as low inflation and interest rates.” Overall, the data are largely consistent with real personal spending growth of 2.5 percent through mid-2017, according to the University of Michigan.

In the October data, respondents were less upbeat about both current (down from 104.2 to 103.2) and future economic expectations (down from 82.7 to 76.8), with the latter measure falling to a two-year low. The Current Economic Conditions Index had originally improved in the preliminary estimate but weakenedin the final release.

Questions or Comments?

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

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