Monday Economic Report - April 10, 2017

A Publication of the National Association of Manufacturers

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

The Bureau of Labor Statistics reported that manufacturing employment increased for the fourth straight month, with the sector adding 11,000 workers in March. This was an encouraging sign that the recent uptick in optimism in the sector has begun to translate into better job growth, especially when contrasted with the employment declines seen as recently as last autumn. Indeed, manufacturers lost 16,000 workers on net in 2016 as a whole, the first annual decline since the Great Recession. In contrast to that, manufacturing employment has averaged 16,750 per month since December.

Meanwhile, the U.S. economy added 98,000 net new nonfarm payroll workers in March, well below the consensus estimate of around 185,000. The weaker-than-expected number stemmed from soft growth in the services sector, including reduced retail trade employment. Construction job gains were the slowest since August. This suggests that poor weather might have been a contributing factor. On the positive side, the unemployment rate fell from 4.7 percent in February to 4.5 percent in March, its lowest level since May 2007. Likewise, the so-called “real” unemployment rate declined from 9.2 percent to 8.9 percent, a level not seen since December 2007.

The stronger employment figures match the recent improvements in manufacturing activity seen in other data points, including the most recent NAM Manufacturers’ Outlook Survey, which found confidence rising to its highest point in the survey’s 20-year history. Along those lines, the Institute for Supply Management’s Manufacturing PMI expanded rather strongly in March despite a slight easing in the pace from February’s two-and-a-half-year-high reading. The composite index declined from 57.7 in February—its fastest rate since August 2014—to 57.2 in March. More importantly, it was the seventh straight monthly expansion in the headline number, recognizing definite progress after two years of notable challenges in the sector. Digging into the underlying data in the report, new orders continued to expand at a vigorous pace, with hiring and exports also rising in this release. On the negative side, pricing pressures continued to accelerate, with manufacturers paying more for raw materials as the economy has strengthened.

New factory orders were also encouraging, increasing for the third straight month in February and rising to its highest level since November 2014. A large percentage of that gain stemmed from a sizable increase in nondefense aircraft sales. More importantly, new factory orders, which have struggled mightily over the past few years, have begun to move in the right direction, up 7.3 percent since February 2016. Similarly, manufactured goods shipments rose 0.3 percent in February, mirroring the pace in January. The current shipments level was the best reading since December 2014. On a year-over-year basis, factory shipments have risen 5.9 percent, or 7.4 percent excluding transportation.

It is still too early in the year to say much about trade trends for 2017. Yet, so far, the manufactured goods exports picture has already reflected better data than what we saw over the past two years. Using non-seasonally adjusted data, U.S.-manufactured goods exports totaled $166.89 billion year to date in February, up 3.18 percent from $161.75 billion one year ago. This reflects better year-to-date figures to the following top-six markets for U.S.-manufactured goods. At the same time, the U.S. trade deficit fell from $48.17 billion in January—its highest level since March 2015—to $43.56 billion in February. The lower figure stemmed mainly from a drop in goods imports, with goods exports changing little in the release.

Meanwhile, private manufacturing construction spending fell to its lowest point since September 2014. The value of construction put in place in the sector declined from $67.91 billion in January to $66.77 billion in February. While manufacturing construction has largely trended higher over the past few years, activity has stalled since achieving the all-time high of $82.15 billion in September 2015. More than anything, this speaks to the numerous challenges in the sector since then, including global headwinds and economic uncertainties. Indeed, over the past 12 months, manufacturing construction has fallen 9.8 percent. With that said, sentiment has shifted in recent months with business leaders more upbeat in their outlook (see above). With manufacturers more positive about growth in demand and production, we would expect a turnaround in construction activity in the coming months.

This week, we will get some additional insights about retail spending. In general, recent surveys have reflected a huge surge in consumer confidence, with Americans more upbeat and more willing to open their pocketbooks than at this time last year. Indeed, retail sales were up a rather robust 5.7 percent year-over-year in February. We will be looking for continued strength in the March retail sales data, with the University of Michigan and Thomson Reuters releasing preliminary figures for April sentiment. Other highlights this week include the latest updates for consumer and producer prices, job openings 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, April 3
Construction Spending
ISM Manufacturing PMI

Tuesday, April 4
Factory Orders and Shipments
International Trade Report

Wednesday, April 5
ADP National Employment Report

Thursday, April 6
None

Friday, April 7
BLS National Employment Report

This Week’s Indicators

Monday, April 10
None

Tuesday, April 11
Job Openings and Labor Turnover Survey
NFIB Small Business Survey

Wednesday, April 12
None

Thursday, April 13
Producer Price Index
University of Michigan Consumer Sentiment (Preliminary)

Friday, April 14
Consumer Price Index
Retail Sales

Summaries for Last Week’s Economic Indicators

ADP National Employment Report
ADP reported that manufacturing employment grew strongly in March, with the sector hiring 30,000 workers for the month on net. It was the fourth straight monthly gain in manufacturing employment, with the sector adding 93,000 workers on net so far in 2017. This was yet another sign that we have turned a corner in the labor market, with employers accelerating their hiring in light of stronger activity and sentiment. In contrast, hiring in 2016 was flat for the year as a whole. We are hopeful the trend of stronger job growth is one that continues in the coming months.

Meanwhile, the healthy job gains were not limited to manufacturing. Nonfarm payroll employment rose by 263,000 in March, well above the consensus estimate of around 185,000. Through the first three months of 2017, nonfarm payrolls have grown by 259,000 per month on average, which has been significantly higher than the 181,000 workers added each month in 2016 as a whole. Beyond manufacturing, the largest employment growth in March included professional and business services (up 57,000), leisure and hospitality (up 55,000), construction (up 49,000), trade, transportation and utilities (up 34,000), financial activities (up 25,000) and education and health services (up 13,000). Small and medium-sized businesses (i.e., those with fewer than 500 employees) accounted for 82.9 percent of all net new workers in the month.

BLS National Employment Report
The Bureau of Labor Statistics reported that manufacturing employment increased for the fourth straight month, with the sector adding 11,000 workers in March. This was an encouraging sign that the recent uptick in optimism in the sector has begun to translate into better job growth, especially when contrasted with the declines in employment seen as recently as last autumn. Indeed, manufacturers lost 16,000 workers on net in 2016 as a whole, the first annual decline since the Great Recession. In contrast to that, manufacturing employment has averaged 16,750 per month since December.

Even with recent progress, we would like to see more robust growth. Along those lines, the March gain of 11,000 workers came entirely from durable goods manufacturers, with nondurable goods job growth unchanged for the month. The largest monthly job gains included fabricated metal products (up 5,550), motor vehicles and parts (up 3,000), miscellaneous durable goods (up 2,000), miscellaneous nondurable goods (up 1,800), wood products (up 1,300), chemicals (up 1,200) and plastics and rubber products (up 1,000). At the same time, there were fewer employees in machinery (down 2,600), furniture and related products (down 1,500), food manufacturing (down 1,300) and apparel (down 1,000), among other sectors.

Despite the higher employment data, average weekly earnings for manufacturing employees declined from $1,075.49 in February to $1,070.62 in March. That continued to represent a 2.3 percent year-over-year increase in average weekly earnings, up from $1,046.80 in March 2016. In a similar way, average overtime hours edged down from 3.3 in February to 3.2 in March.

Meanwhile, the U.S. economy added 98,000 net new nonfarm payroll workers in March, well below the consensus estimate of around 185,000. The weaker-than-expected number stemmed from soft growth in the services sector, including reduced retail trade employment. Construction job gains were the slowest since August. This suggests that poor weather might have been a contributing factor. On the positive side, the unemployment rate fell from 4.7 percent in February to 4.5 percent in March, its lowest level since May 2007. Likewise, the so-called “real” unemployment rate declined from 9.2 percent to 8.9 percent, a level not seen since December 2007.

Construction Spending
The Census Bureau reported that private manufacturing construction spending fell to its lowest point since September 2014. The value of construction put in place in the sector declined from $67.91 billion in January to $66.77 billion in February. While manufacturing construction has largely trended higher over the past few years, activity has stalled since achieving the all-time high of $82.15 billion in September 2015. More than anything, this speaks to the numerous challenges in the sector since then, including global headwinds and economic uncertainties. Indeed, over the past 12 months, manufacturing construction has fallen 9.8 percent. With that said, sentiment has shifted in recent months with business leaders more upbeat in their outlook, including in the NAM’s latest survey. With manufacturers more positive about growth in demand and production, we would expect a turnaround in construction activity in the coming months.

Overall, private nonresidential construction spending edged down 0.3 percent in February, but it has risen 7.5 percent year-over-year. The segments with increased construction spending in February included amusement and recreation (up 3.5 percent), religious (up 3.2 percent), power (up 3.0 percent), educational (up 1.1 percent) and office (up 0.5 percent). In contrast, spending declined for communication (down 8.1 percent), transportation (down 4.2 percent), health care (down 2.2 percent), manufacturing (down 1.7 percent), commercial (down 0.8 percent) and lodging (down 0.6 percent).

Since February 2016, there were notably strong gains in private nonresidential construction spending in the following sectors: office (up 24.8 percent), educational (up 15.6 percent), lodging (up 14.9 percent), amusement and recreation (up 13.8 percent) and commercial (up 13.6 percent).

Meanwhile, private residential construction spending rose 1.8 percent in February, with 6.4 percent growth year-over-year. For the month, single-family construction and multifamily activity rose 1.2 percent and 2.0 percent, respectively. The year-over-year gain included a larger increase from the multifamily segment (up 10.6 percent) than for single-family activity (up 3.4 percent). In addition to those components, public construction spending increased 0.6 percent in February but with 8.0 percent less growth over the past 12 months.

Factory Orders and Shipments
The Census Bureau reported that new factory orders increased for the third straight month in February, up 1.0 percent. It was the highest level of new orders since November 2014. A large percentage of that gain stemmed from a sizable increase in nondefense aircraft sales, as noted in the earlier release of preliminary durable goods figures. Excluding transportation, manufactured goods orders increased 0.4 percent. More importantly, new factory orders, which have struggled mightily over the past few years, have begun to move in the right direction, up 7.3 percent since February 2016. Excluding transportation, the gains were slightly larger, up 7.5 percent year-over-year.

In this release, durable and nondurable goods orders increased 1.8 percent and 0.2 percent, respectively. New orders for durable goods excluding transportation rose 0.5 percent for the month but up 5.0 percent year-over-year. Looking specifically at durable goods activity in February, the data were mostly higher. Demand was stronger for the month for electrical equipment and appliances (up 1.9 percent), primary metals (up 1.6 percent), machinery (up 0.3 percent), motor vehicles and parts (up 0.3 percent), fabricated metal products (up 0.2 percent) and computers and electronic products (up 0.1 percent). In contrast, orders for furniture and related products fell in February (down 0.7 percent).

Meanwhile, manufactured goods shipments rose 0.3 percent in February, mirroring the pace in January. The current shipments level was the best reading since December 2014. Durable and nondurable goods shipments increased 0.3 percent and 0.2 percent, respectively, in this report. Much like the new orders data discussed above, growth in the value of manufactured goods shipments has stabilized from weaknesses over much of the past few years and has trended much higher in recent months. On a year-over-year basis, factory shipments have risen 5.9 percent, or 7.4 percent excluding transportation.

International Trade Report
The Bureau of Economic Analysis and the Census Bureau reported that the U.S. trade deficit fell from $48.17 billion in January—its highest level since March 2015—to $43.56 billion in February. The lower figure stemmed mainly from a drop in goods imports, down from $197.65 billion to $193.44 billion, with goods exports changing little, up from $128.11 billion to $128.46 billion. Goods exports increased at its fastest pace since April 2015. Meanwhile, the service-sector surplus edged slightly higher, up from $21.37 billion to $21.42 billion.

The underlying goods exports data were mixed. There were increased exports in February for consumer goods (up $665 million), industrial supplies and materials (up $411 million) and automotive vehicles and parts (up $196 million), but this was mostly offset by declining exports for foods, feeds and beverages (down $676 million) and capital goods, except automotive (down $623 million). In contrast, there were larger shifts for goods imports for the month, including substantial decreases for consumer goods (down $3.06 billion) and automotive vehicles and parts (down $2.65 billion). Nonetheless, industrial supplies and materials (up $1.39 billion), foods, feeds and beverages (up $263 million) and capital goods, except automotive (up $124 million) each experienced higher goods imports in February.

It is still too early in the year to say much about trade trends for 2017. Yet, so far, the manufactured goods exports picture has already reflected better data than what we saw over the past two years. Using non-seasonally adjusted data, U.S.-manufactured goods exports totaled $166.89 billion year to date in February, up 3.18 percent from $161.75 billion one year ago.

This reflects better year-to-date figures to the following top-six markets for U.S.-manufactured goods: Canada (up from $40.49 billion to $42.02 billion), Mexico (up from $36.29 billion to $37.68 billion), China (up from $16.26 billion to $19.87 billion), Japan (up from $9.68 billion to $10.23 billion), the United Kingdom (up from $8.107 billion to $8.110 billion) and Germany (up from $7.89 billion to $8.13 billion).

ISM Manufacturing PMI
The Institute for Supply Management’s Manufacturing PMI expanded rather strongly in March despite a slight easing in the pace from February’s two-and-a-half-year-high reading. The composite index declined from 57.7 in February—its fastest rate since August 2014—to 57.2 in March. More importantly, it was the seventh straight monthly expansion in the headline number, recognizing definite progress after two years of notable challenges in the sector. Indeed, sample comments tended to echo improvements in manufacturing activity, citing improved economic conditions and robust sales. This finding also mirrors the most recent NAM Manufacturers’ Outlook Survey, which found confidence rising to its highest point in the survey’s 20-year history.

Digging into the underlying data in the report, new orders continued to expand at a vigorous pace (down from 65.1 to 64.5), with that measure now exceeding 60 for the fourth consecutive month. Hiring (up from 54.2 to 58.9) and exports (up from 55.0 to 59.0) were also significant strengths in this release. The employment index was at levels not seen since June 2011, with exports at its highest point since November 2013. Both had been slower than desired of late, making the strong figures in the March survey even more encouraging. In addition, growth in production remained decent even with some deceleration in March (down from 62.9 to 57.6).

Pricing pressures continued to accelerate (up from 68.0 to 70.5), with manufacturers paying more for raw materials as the economy has strengthened. The index for prices was at its fastest rate since May 2011. Meanwhile, after shifting away from contraction for the first time since June 2015 in February, inventories returned to negative territory in March (down from 51.5 to 49.0). Of course, there continues to be a silver lining to reduced stockpiles over the past few years: the recent pickup in demand should necessitate strong growth in production moving forward.

Questions or Comments?

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

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