Monday Economic Report - September 6, 2016

A Publication of the National Association of Manufacturers

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

After some encouraging signs of economic progress in recent weeks, leading to a narrative that manufacturing was beginning to stabilize, data out last week served as another reminder that challenges persist. The Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers’ Index (PMI) unexpectedly contracted for the first time since February. The composite index dropped from 52.6 in July to 49.4 in August, with new orders and production downshifting from decent growth to decreased activity in this latest report. In contrast to the ISM data, the competing Markit U.S. Manufacturing PMI release remained modestly expansionary, albeit with some easing for the month. Yet, even that survey reflects substantial deceleration in activity over the past few years for the sector, with more sluggish demand and output than preferred. With that said, exports were a bright spot in both releases, which was perhaps surprising given the still-strong dollar.

In another sign that manufacturing in the United States remains weaker than desired despite some signs of recent progress, employment in the sector fell once again in August. Manufacturers hired 14,000 fewer workers on net in August, and the job gains for the prior two months were revised down by a combined 10,000. All in all, manufacturing employment has fallen by 39,000 year to date through August, suggesting continuing cautiousness among manufacturing business leaders to add workers in light of lingering weaknesses in the global economy. Meanwhile, the U.S. economy added 151,000 employees in August, which was below the consensus estimate of around 175,000. On the positive side, nonfarm payrolls have averaged a fairly decent pace of 232,333 workers per month over the past three months, or 181,500 each month year to date. The unemployment rate was unchanged at 4.9 percent. (For a discussion on Labor Day and the manufacturing workforce, see the latest ShopTalk podcast featuring Aric Newhouse, Senior Vice President for Policy and Government Relations, and me.)

The Federal Reserve is scrutinizing these data points closely as it assesses the best timing for making its next rate hike. There was growing chatter earlier last week about an increased probability for the Federal Open Market Committee (FOMC) to raise short-term rates at its next meeting on September 20 and 21, particularly in light of comments made in Jackson Hole, Wyo. That might still be the case, but the softness of job gains in August, especially for manufacturing, will likely give participants some pause. I have long felt that there was always a possibility of an increase in the federal funds rate in September, but rates are more likely to go up in December. At this point, a move in September might hinge on the strength of data released between now and the next FOMC meeting.

The economic news in other indicators released last week was mostly mixed, blending together some positive developments with underlying softness. For instance, new factory orders rebounded in July after falling in both May and June. With that said, new orders for manufactured goods have fallen across the past 12 months. This suggests broader softness for manufacturers in terms of demand, perhaps highlighting why business leaders in the sector continue to be so cautious. At the same time, manufacturers in the Dallas Federal Reserve Bank’s district have noted declining activity for 20 straight months, particularly as still-low crude oil prices and a strong U.S. dollar continue to challenge these firms. Yet, some of the data points were encouraging in August, with pickups in orders, production and shipments.

As noted earlier, there were positive developments for export sales cited in both the ISM and Markit surveys. For its part, the U.S. trade deficit narrowed to a three-month low on better goods exports and reduced goods imports. Nonetheless, growth in international demand remains a problem. Using non-seasonally adjusted data, U.S.-manufactured goods exports have fallen 7.5 percent since July 2015, with reduced exports to the top six markets. Indeed, global headwinds and economic anxieties have been contributing factors in helping to explain why manufacturing construction spending has declined 5.1 percent year-over-year. Pullbacks in the energy sector have also likely impacted this figure negatively, although over the longer term, increased investments in the chemical sector, which continues to benefit from cost advantages in the energy sector, have boosted manufacturing construction by 34.5 percent over the past 24 months. In July, construction spending in the sector increased 3.9 percent after softening in the prior three months.

One of the larger positives in the U.S. economy has been the consumer, and on that score, the headlines were quite favorable last week. The Conference Board reported that consumer confidence rose to its highest level in August since September 2015. More importantly, there were signs that Americans were continuing to open up their pocketbooks. Personal spending increased for the fourth straight month, and over the past 12 months, personal consumption expenditures have risen 3.8 percent, a relatively healthy pace. Personal incomes have also increased, up 0.4 percent in July and 3.3 percent year-over-year. The saving rate edged slightly higher, up from 5.5 percent in June to 5.7 percent in July. Nonetheless, the saving rate has dropped from 6.1 percent in the first quarter of 2016 to 5.7 percent over the past four months.

This week will be a slower one on the economic front. The Federal Reserve will provide its region-by-region breakdown of economic developments in its monthly Beige Book on Wednesday, with new data coming out on consumer credit, 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, August 29
Dallas Fed Manufacturing Survey
Personal Income and Spending

Tuesday, August 30
Conference Board Consumer Confidence

Wednesday, August 31
ADP National Employment Report

Thursday, September 1
Construction Spending
ISM Manufacturing Purchasing Managers’ Index
Productivity and Costs (Revision)

Friday, September 2
BLS National Employment Report
Factory Orders and Shipments
International Trade

This Week's Indicators

Monday, September 5
LABOR DAY HOLIDAY

Tuesday, September 6
None

Wednesday, September 7
Federal Reserve Beige Book
Job Openings and Labor Turnover Survey

Thursday, September 8
Consumer Credit

Friday, September 9
Wholesale Trade

Summaries for Last Week's Economic Indicators

ADP National Employment Report
ADP reported that manufacturing employment was unchanged in August after rising in July for the first time in six months. Overall, hiring in the sector has been challenged so far this year, with employment down 33,000 workers through the first eight months of 2016. This suggests manufacturers have been wary about adding to their workforce in light of ongoing global headwinds and sluggish growth in demand and production. Recent data have suggested some improvements in activity for manufacturers in the United States, which we hope will translate into increased hiring moving forward for the sector.

Meanwhile, nonfarm payroll employment rose 177,000 in August, slowing somewhat from the 194,000 gain in July. This was mostly in line with consensus expectations. The year-to-date average is 184,000, easing somewhat from the average pace of 207,000 per month in all of 2015. In August, the largest job gains were in professional and business services (up 53,000), trade, transportation and utilities (up 26,000) and financial activities (up 15,000). Construction employment was lower for the third straight month, down 2,000 in August. Small and medium-sized businesses (i.e., those with fewer than 500 employees) accounted for more than 60 percent of all net new workers in the month.

BLS National Employment Report
In another sign that manufacturing in the United States remains weaker than desired despite some signs of recent progress, employment in the sector fell once again in August. Manufacturers hired 14,000 fewer workers on net in August, and the job gains for the prior two months were revised down by a combined 10,000. All in all, manufacturing employment has fallen by 39,000 year to date through August, suggesting continuing cautiousness among manufacturing business leaders to add workers in light of lingering weaknesses in the global economy. It is hard not to be disappointed by these numbers, particularly when combined with the latest ISM data (see below), which found that overall manufacturing activity contracted for the first time since February.

Durable goods firms shed 16,000 workers in August, with nondurable goods manufacturers adding 2,000 jobs for the month. Of the 19 major sectors in manufacturing, all but four had reduced employment in August. The largest declines were in transportation equipment (down 6,400, including a 5,600 decline for motor vehicles and parts), primary metals (down 2,500) and nonmetallic mineral products (down 1,400). In contrast, there were employment gains in August for food manufacturing (up 4,500), paper and paper products (up 700), machinery (up 500) and petroleum and coal products (up 400).

Average weekly earnings in the manufacturing sector edged somewhat lower, down from $1,061.62 in July to $1,056.82 in August. On a year-over-year basis, average weekly earnings have increased from $1,036.32, up 2.0 percent for the 12-month period. Average weekly hours were also reduced, down from 40.8 to 40.6, with average overtime hours unchanged at 3.3.

Meanwhile, the U.S. economy added 151,000 employees in August, which was below the consensus estimate of around 175,000. On the positive side, nonfarm payrolls have averaged a fairly decent pace of 232,333 workers per month over the past three months, or 181,500 each month year to date. The unemployment rate was unchanged at 4.9 percent.

Conference Board Consumer Confidence
The Conference Board reported that consumer sentiment rose to its highest level in August since September 2015. The Consumer Confidence Index increased from 96.7 in July to 101.1 in August, an 11-month high. Americans’ perceptions about current (up from 118.8 to 123.0) and future (up from 82.0 to 86.4) economic conditions improved, largely on better assessments in the labor market. This latest report marked the third consecutive increase in this measure, up from 92.4 in May, and a sign that the public mood has strengthened after weakening significantly earlier in the year.

As noted, the improved data in August coincided with better employment numbers. Along those lines, the percentage of respondents feeling jobs were plentiful rose from 23.0 percent in July to 26.0 percent in August. However, that does not mean labor market anxieties are gone as the percentage saying jobs were hard to get also increased, up from 22.1 percent to 23.4 percent. Still, the data remained encouraging. Those expecting higher incomes in the months ahead increased from 17.1 percent to 18.8 percent, with those anticipating declines easing from 11.0 percent to 10.7 percent. Both represented the best figures since January.

Construction Spending
The Census Bureau reported that private manufacturing construction spending increased 3.9 percent in July after softening in the prior three months. The value of construction put in place rose from $72.38 billion in June, a 17-month low, to $75.23 billion in July. Since achieving the all-time high of $82.15 billion in September 2015, construction activity in the manufacturing sector has pulled sharply lower. On a year-over-year basis, manufacturing construction spending has fallen 5.1 percent, down from $79.29 billion in July 2015. Yet, the longer-term 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 34.5 percent over the past 24 months.

As a whole, private nonresidential construction spending was also higher for the month, up 1.7 percent in July. The largest increases were in office (up 4.6 percent), manufacturing (up 3.9 percent), educational (up 1.6 percent), communication (up 1.2 percent) and power (up 1.1 percent) projects. Across the past 12 months, private nonresidential construction spending has risen 7.1 percent, led by increases in the office (up 30.3 percent), lodging (up 28.0 percent), amusement and recreation (up 15.4 percent) and commercial (up 13.5 percent) segments, among others.

Meanwhile, private residential construction spending edged up 0.3 percent in July, with 1.9 percent growth over the past 12 months. For the month, single-family (down 0.2 percent) and multifamily (down 0.6 percent) construction activity were both lower. Since June 2015, however, the housing market has been a bright spot, particularly multifamily units, growing 19.8 percent year-over-year. At the same time, public construction spending was down 3.1 percent in July, with declines of 6.5 percent year-over-year.

Dallas Fed Manufacturing Survey
The Dallas Federal Reserve Bank reported that manufacturing activity in the Texas district was mixed in August. The composite index of general business conditions pulled further lower, down from -1.3 in July to -6.2 to August. This measure has now contracted for 20 straight months, with low crude oil prices and a strong U.S. dollar continuing to challenge the region. With that said, several underlying data points were more encouraging, including new orders (up from -8.0 to 5.3), production (up from 0.4 to 4.5), capacity utilization (up from 0.3 to 0.9) and shipments (up from 0.1 to 9.9). Along those lines, the percentage of respondents saying their sales had increased for the month rose from 22.4 percent in July to 28.9 percent in August, with roughly 48 percent noting no change. 

Despite some positive movement, some areas of weakness persisted, particularly among the labor market and capital spending data. The indices for employment (down from -2.6 to -5.0), hours worked (down from -0.2 to -4.5) and capital expenditures (down from 4.8 to -5.7) all deteriorated in August, with the latter erasing some progress in July. This would indicate manufacturing leaders remain cautious even with better demand and output figures.

This caution can also be seen in the forward-looking measures, even as firms remain mostly optimistic about the next six months. The future-oriented composite index decreased from 18.4 in July to 7.0 in August. Other figures also eased for the month, including new orders (down from 42.8 to 38.6), production (down from 45.2 to 32.8), shipments (down from 38.0 to 30.0) and capital expenditures (down from 18.8 to 14.7). Even with these reductions, manufacturers continue to expect healthy gains moving forward, and hiring was seen picking up in the next six months (up from 18.8 to 21.7).

Factory Orders and Shipments
The Census Bureau reported that new factory orders rebounded in July, increasing 1.9 percent after falling 1.8 percent in June. The increase mainly came from a large jump in aircraft orders, which can experience wide swings from month to month. Excluding transportation equipment, factory orders slowly inched higher, up 0.2 percent in July. New orders for manufactured goods have been quite weak over the past 12 months, with a year-over-year decline of 3.5 percent. Excluding transportation, new factory orders were off 2.6 percent since July 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 goods decreased 4.4 percent in July, with demand for nondurable goods down 0.5 percent. New orders for durable goods excluding transportation were up 1.3 percent. Looking specifically at durable goods sales activity in July, orders were mostly higher. This included increased sales for electrical equipment and appliances (up 3.7 percent), computers and electronic products (up 3.4 percent), fabricated metal products (up 1.4 percent), machinery (up 1.4 percent), primary metals (up 0.8 percent) and furniture and related products (up 0.7 percent). Despite those gains, it was perhaps notable that orders for motor vehicles and parts, which has been one of the brighter spots in the economy in general, declined 0.5 percent.

Meanwhile, shipments of manufactured goods decreased 0.2 percent in July. Shipments of durable goods products edged up 0.1 percent, whereas nondurable goods shipments decreased 0.5 percent. Much like the new orders data discussed above, the value of manufactured goods shipments has fallen 3.0 percent since July 2015, or down 2.8 percent excluding transportation equipment.

International Trade
The Bureau of Economic Analysis and the Census Bureau reported that the U.S. trade deficit narrowed to a three-month low, down from $44.66 billion in June to $39.47 billion in July. The data have been quite volatile year to date, averaging $41.42 billion through the first seven months of 2016. That was somewhat lower than the $41.70 billion average for 2015 as a whole. The reduced deficit in July stemmed from an increase in goods exports (up from $120.61 billion to $124.05 billion) and lower goods imports (down from $186.24 billion to $184.39 billion). The petroleum trade deficit also narrowed, down from $5.32 billion to $4.98 billion. The service-sector trade surplus was off marginally, down from $20.98 billion to $20.87 billion.

Looking more closely at the underlying data, goods exports were mostly higher in July. There were increased exports for foods, feeds and beverages (up $3.73 billion, mainly from soybeans), industrial supplies and materials (up $445 million) and automotive vehicles and parts (up $365 million). At the same time, exports for capital goods (down $226 million) and consumer goods (down $15 million) were lower. Meanwhile, goods imports declined for consumer goods (down $1.49 billion), capital goods (down $722 million) and automotive vehicles and parts (down $67 million) but were higher for both industrial supplies and materials (up $388 million) and foods, feeds and beverages (up $201 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 $607.12 billion year-to-date in July, down 7.5 percent from $656.46 billion in July 2015.

Moreover, exports were lower to the top six markets for U.S.-manufactured goods, including Canada (down from $166.72 billion to $154.84 billion), Mexico (down from $138.17 billion to $131.92 billion), China (down from $65.33 billion to $60.38 billion), Japan (down from $37.42 billion to $35.32 billion), the United Kingdom (down from $32.80 billion to $32.22 billion) and Germany (down from $28.94 billion to $28.36 billion).

ISM Manufacturing Purchasing Managers' Index
The Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers’ Index (PMI) unexpectedly contracted in August for the first time since February. The composite index dropped from 52.6 in July to 49.4 in August. A few of the sample responses cited a “flat” business environment for the month. Indeed, new orders (down from 56.9 to 49.1) and production (down from 55.4 to 49.6) both shifted from decent growth in July to decreased activity in August, with employment remaining in negative territory for the second straight month (down from 49.4 to 48.3).

Overall, these are disappointing numbers, temporarily suspending the narrative that manufacturing was beginning to stabilize after weaknesses earlier in the year. Yet, more than anything, this report shows that the sector’s challenges continue to linger even as other data have been more promising. One positive takeaway was exports (unchanged at 52.5), which have expanded now for six straight months.

In contrast to the ISM data, the competing Markit U.S. Manufacturing PMI release remained expansionary, albeit with some easing for the month, down from 52.9 to 52.0. In this release, new orders slowed a bit (down from 54.2 to 52.7), and output continued to increase at a modest pace (unchanged at 53.8). Growth in exports accelerated to its fastest rate in nearly two years (up from 52.6 to 53.2), making it one of the brighter spots. Given the softness of international demand of late, especially with a stronger U.S. dollar, the strength of exports in each of these surveys is notable.

Both of these reports also indicate declining inventories. In the ISM release, inventories were negative for the 14th straight month (down from 49.5 to 49.0). 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.

Personal Income and Spending
The Bureau of Economic Analysis reported that personal spending increased 0.4 percent in July, extending the 0.3 percent gain in June. More importantly, personal consumption expenditures rose for the fourth straight month. This suggests Americans have begun to open their pocketbooks since the spring after being more cautious in their spending earlier in the year. Indeed, over the past 12 months, personal spending has increased 3.8 percent, a healthy pace that makes consumption one of the bright spots in the economy. The saving rate edged slightly higher, up from 5.5 percent in June to 5.7 percent in July. Nonetheless, the data have largely been consistent with the recent pickup in spending, with the saving rate dropping from 6.1 percent in the first quarter of 2016 to 5.7 percent over the past four months.

Meanwhile, personal income accelerated from 0.3 percent in June to 0.4 percent in July, rising for the fifth consecutive month. On a year-over-year basis, personal income has increased 3.3 percent. This continued to be a relatively decent year-over-year pace, albeit one that was down from 4.4 percent in July 2015. Total manufacturing wages and salaries were also higher, up from $824.7 billion in June to $831.6 billion in July. 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 personal consumption expenditure (PCE) deflator was unchanged in July following four straight months of gains, largely from higher energy costs. In this report, energy costs were lower, down 1.8 percent, holding down the headline number. Core inflation, which excludes food and energy, inched up 0.1 percent in July. The bottom line for this data point, which happens to be the Federal Reserve’s preferred measure of inflation, is that pricing pressures remain minimal for now. The PCE rose 0.8 percent year-over-year in July, and core inflation increased 1.6 percent over the past 12 months.

Productivity and Costs (Revision)
The Bureau of Labor Statistics reported that manufacturing labor productivity was revised lower in the second quarter. Labor productivity in the second quarter fell 0.4 percent, instead of the original estimate of a 0.2 percent decline. The reduction in labor productivity was largely the result of falling output in the second quarter, down 0.8 percent, with hours worked down 0.4 percent. Hourly compensation costs were 6.3 percent higher, pushing unit labor costs up 6.7 percent. Durable goods manufacturers fared better than their nondurable goods counterparts, with labor productivity up 2.4 percent in the former but down 4.4 percent in the latter. Along those lines, durable goods manufacturing output increased 0.7 percent in the second quarter, with output from nondurable goods firms down 2.6 percent.

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. 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 recent years, but the recent sluggishness in productivity and output growth has meant that unit labor costs have risen 9.0 percent since the end of 2011.

In the larger economy, nonfarm labor productivity fell 0.6 percent in both the first and second quarters of 2016, with the second quarter lower than the prior estimate of a 0.5 percent decrease. Nonfarm output increased 1.1 percent, with unit labor costs up 4.3 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. 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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