Monday Economic Report - February 6, 2017

A Publication of the National Association of Manufacturers

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

The Institute for Supply Management’s Manufacturing Purchasing Managers’ Index continued to grow rather strongly, accelerating to its fastest pace since November 2014. The composite index rose from 54.5 in December to 56.0 in January, marking the fifth straight monthly expansion in the headline number. New orders and production grew strongly in January. Similarly, the Dallas Federal Reserve Bank reported that manufacturing activity expanded in January at its fastest rate since April 2010, with leaders very positive about the next six months. Indeed, the forward-looking outlook measure jumped to a level not seen in more than 12 years.

With rising sentiment as the backdrop, manufacturing employment rose for the second straight month in January, beginning the new year on an encouraging note. The sector added 5,000 workers in January, building off of a gain of 11,000 workers in December. Average weekly earnings in manufacturing have risen 3.2 percent over the past year, up to $1,075.49. We hope this is a sign that manufacturers are starting to accelerate their hiring in light of a stronger demand and production outlook, and it stands in contrast to the more cautious approach throughout much of the past year. Along those lines, there were 46,000 fewer manufacturing workers today than one year ago, as global headwinds and economic uncertainties continued to take their toll on manufacturing activity.

In the larger economy, nonfarm payrolls increased by 227,000 in January, which was better than the consensus estimate of around 175,000. It was the strongest monthly gain since September, with the latest figure representing a pickup from the 186,833 monthly average in 2016. Meanwhile, the unemployment rate inched up from 4.7 percent in December to 4.8 percent in January. The increase stemmed largely from a higher participation rate, which ticked up from 62.7 percent to 62.9 percent. That suggests that more Americans are seeking employment—another signal of possible renewed health in the U.S. economy.

More encouraging jobs growth should put additional pressure on the Federal Reserve as it weighs the timing of its next move. While the Federal Open Market Committee chose not to raise short-term rates at its most recent meeting earlier last week, it will likely take a hard look at doing so at its March 14–15 meeting, especially if economic data continue to reflect building strength in output and employment and if pricing pressures continue to pick up (albeit at still acceptable levels for now).

Nonetheless, other economic indicators out last week were mixed. On the positive side, while consumer confidence pulled back slightly in January after soaring to a 15-year high in December in the aftermath of the election, it remained elevated. In a similar vein, personal spending accelerated at year’s end, rising 0.5 percent in December. This was its fastest monthly pace since September, boosted by strong growth in durable goods purchasing, which increased 1.4 percent in December. In general, Americans have been more willing to open their pocketbooks in recent months relative to a more cautious approach earlier last year. Along those lines, personal consumption expenditures grew 4.5 percent year-over-year in December, up from 2.9 percent in March and its highest level in two years. With the pickup in spending, the saving rate edged lower, down from 5.6 percent in November to 5.4 percent in December, its lowest rate since March 2014.

On the other hand, we also continue to get reminders of ongoing challenges in the manufacturing sector. For instance, private manufacturing construction spending remained weak in December, falling to a two-year low. While manufacturing construction has largely trended higher over the past few years, activity has stalled more recently as the sector has grappled with sluggish growth and economic and political anxieties. Over the past 12 months, manufacturing construction spending has fallen 5.9 percent. In addition, manufacturing labor productivity has averaged just 0.3 percent from 2013 to 2016. In comparison, output per worker in the sector averaged a more robust 5.2 percent annually from 2002 to 2008. Over the longer term, manufacturers have benefited from being leaner, but the recent sluggishness in productivity and output growth has meant that unit labor costs have risen 11.3 percent since the end of 2011. More positively, output per worker in manufacturing rebounded in the fourth quarter, up 0.7 percent.

After a busy few weeks for economic indicators, there will be only a handful of reports out this week. One of the highlights will be new data on job openings, which have remained somewhat elevated in recent months even as net hiring has been quite soft. This could suggest better employment growth moving forward if demand and production accelerate. Other reports this week include new figures for consumer sentiment, consumer credit, international trade and wholesale trade.

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

Economic Indicators

Last Week’s Indicators (Summaries Appear Below)

Monday, January 30
Dallas Fed Manufacturing Survey
Personal Income and Spending

Tuesday, January 31
Conference Board Consumer Confidence
Employment Cost Index
International Trade in Goods Report (Preliminary)

Wednesday, February 1
ADP National Employment Report
Construction Spending
Federal Reserve Monetary Policy Statement
ISM Manufacturing Purchasing Managers’ Index

Thursday, February 2
Productivity and Costs

Friday, February 3
BLS National Employment Report
Factory Orders and Shipments

This Week’s Indicators

Monday, February 6
None

Tuesday, February 7
Consumer Credit
International Trade
Job Openings and Labor Turnover Survey

Wednesday, February 8
None

Thursday, February 9
Wholesale Trade

Friday, February 10
University of Michigan Consumer Sentiment

Summaries for Last Week’s Economic Indicators

ADP National Employment Report
ADP reported that manufacturing employment growth picked up in January, with the sector hiring 15,000 workers for the month on net. It marked the fourth time in the past five months that manufacturers added workers, but firms in the sector lost 39,000 workers in 2016, according to ADP. Manufacturers had been wary about adding to their workforces over much of the past year due to global headwinds and economic uncertainties. We hope this latest release is the start of things turning around as we begin 2017 with improved signs of activity and business confidence. Indeed, job openings have remained elevated in recent months, suggesting that manufacturers are prepared to accelerate hiring and be less cautious with better demand and production figures.

Meanwhile, nonfarm payroll employment rose by 246,000 in January, much stronger than the consensus estimate of around 170,000. It was the strongest monthly gain since June and perhaps a sign that job growth might be accelerating from the 175,237 monthly average in 2016. In January, goods-producing employment was higher across the board, including construction (up 25,000) and mining (up 6,000) in addition to manufacturing. The largest job gains were in professional and business services (up 71,000), trade, transportation and utilities (up 63,000) and education and health services (up 47,000). Meanwhile, the information sector lost workers for the month, down 6,000. Small and medium-sized businesses (those with fewer than 500 employees) accounted for two-thirds of all net new workers in the month.

BLS National Employment Report
The Bureau of Labor Statistics reported that manufacturing employment rose for the second straight month in January, beginning the new year on an encouraging note. The sector added 5,000 workers in January, building off of a gain of 11,000 workers in December. We hope this is a sign that manufacturers are starting to accelerate their hiring in light of a stronger demand and production outlook, and it stands in contrast to the more cautious approach throughout much of the past year. Along those lines, there were 46,000 fewer manufacturing workers today than one year ago, as global headwinds and economic uncertainties continued to take their toll on manufacturing activity.

Average weekly earnings in manufacturing also moved higher, up from $1,072.04 in December to $1,075.49 in January. On a year-over-year basis, average weekly earnings have increased from $1,042.33 in January 2016, up 3.2 percent for the 12-month period. Average weekly hours ticked up from 40.7 to 40.8, but average overtime hours edged down from 3.3 to 3.2.

In the larger economy, nonfarm payrolls increased by 227,000 in January, which was better than the consensus estimate of around 175,000. It was the strongest monthly gain since September, with the latest figure representing a pickup from the 186,833 monthly average in 2016. Meanwhile, the unemployment rate inched up from 4.7 percent in December to 4.8 percent in January. The increase stemmed largely from a higher participation rate, which ticked up from 62.7 percent to 62.9 percent. That suggests that more Americans are seeking employment—another signal of possible renewed health in the U.S. economy.

More encouraging jobs growth should put additional pressure on the Federal Reserve as it weighs the timing of its next move. While the Federal Open Market Committee chose not to raise short-term rates at its most recent meeting earlier last week, it will likely take a hard look at doing so at its March 14–15 meeting, especially if economic data continue to reflect building strength in output and employment and if pricing pressures continue to pick up (albeit at still acceptable levels for now).

Digging deeper into the latest release, durable goods firms added 6,000 workers in January; however, there were 1,000 fewer workers employed among nondurable goods manufacturers. The largest gains for the month were in food manufacturing (up 3,300), motor vehicles and parts (up 3,300), furniture and related products (up 2,400), nonmetallic mineral products (up 2,200) and machinery (up 2,000). In contrast, there were fewer employees in January in the following segments: computer and electronic products (down 2,800), fabricated metal products (down 2,200), apparel (down 2,000), printing and related support activities (down 1,600) and miscellaneous nondurable goods manufacturing (down 1,400), among others.

Conference Board Consumer Confidence
Consumer confidence pulled back slightly in January after soaring to a 15-year high in December in the aftermath of the election, but it remained elevated. The Consumer Confidence Index declined from 113.3 in December—its highest level since August 2001—to 111.8 in January. This continued to represent a mostly positive assessment of the economy relative to perceptions a few months ago. For instance, the index stood at 96.7 just six months ago. Americans’ view of current conditions improved in January (up from 123.5 to 129.7), whereas the easing in the headline number mirrored somewhat reduced opinions about the future (down from 106.4 to 99.8). Note that the future expectations measure has also trended higher despite slipping in January, as it was 82.0 just six months ago.

Indeed, consumers remain mostly positive in their outlook. Reflecting this optimism among consumers, 29.3 percent of respondents said business conditions were “good,” up from 28.6 percent in the prior survey. In addition, the percentage feeling conditions were “bad” declined from 17.8 percent to 16.1 percent. Along those lines, the percentage of respondents saying jobs were “plentiful” improved from 26.0 percent to 27.4 percent, with those feeling jobs were “hard to get” decreased from 22.7 percent to 21.5 percent.

On the other hand, some data also pointed to lingering anxieties. The percentage expecting their incomes to increase dropped from 21.5 percent to 18.0 percent, and those predicting reduced incomes rose from 8.6 percent to 9.6 percent. More positively, income expectations remain encouraging over the longer term, with the percentage expecting decreased income down from 11.0 percent just six months ago.

Construction Spending
The Census Bureau reported that private manufacturing construction spending remained weak in December, falling to a two-year low. The value of construction put in place in the sector declined from $70.54 billion in November to $68.10 billion in December, down 3.5 percent for the month. While manufacturing construction has largely trended higher over the past few years, activity has stalled more recently as the sector has grappled with sluggish growth and economic and political anxieties. Along those lines, construction activity in the manufacturing sector has pulled sharply lower since achieving the all-time high of $82.15 billion in September 2015. Over the past 12 months, manufacturing construction spending has fallen 5.9 percent.

In contrast, private nonresidential construction spending was unchanged in December, with year-over-year growth of 9.2 percent. Segments with the largest gains in December included communication (up 5.2 percent), office (up 2.0 percent), power (up 1.6 percent), health care (up 1.2 percent), amusement and recreation (up 0.7 percent) and commercial (up 0.7 percent). In addition to reduced spending for manufacturers, other areas with declines included religious (down 6.5 percent), lodging (down 4.4 percent), transportation (down 3.0 percent) and educational (down 2.1 percent).

Since December 2015, there were notably strong gains in private nonresidential construction spending in the following sectors: office (up 35.3 percent), amusement and recreation (up 25.5 percent), lodging (up 20.8 percent), educational (up 18.9 percent) and commercial (up 12.3 percent).

Meanwhile, private residential construction spending increased 0.5 percent in December, with 3.7 percent growth over the past 12 months. For the month, single-family construction and multifamily activity rose 0.5 percent and 2.8 percent, respectively. Similarly, the year-over-year growth stemmed mostly from the multifamily segment, up 11.7 percent since December 2015, with single-family construction up 0.3 percent over that time frame. At the same time, public construction spending fell 1.7 percent in December, with a 1.8 percent decline year-over-year.

Dallas Fed Manufacturing Survey
The Dallas Federal Reserve Bank reported that manufacturing activity expanded in January at its fastest rate since April 2010. The composite index of general business conditions increased from 17.7 in December to 22.1 in January, expanding for the fourth consecutive month after contracting for 21 straight months. The recent gains in business confidence can largely be attributed to better energy commodity prices and from a post-election boost in optimism, especially as it relates to expectations regarding pro-growth policies. Along those lines, key measures of activity were mostly higher in January, including new orders (up from 10.1 to 15.7), shipments (up from 5.8 to 15.8), employment (up from -3.4 to 6.1), hours worked (up from 3.1 to 9.1) and capital expenditures (up from 6.7 to 16.3). In addition, production (down from 14.8 to 11.9) and capacity utilization (down from 15.6 to 9.1) have also notched improvements in recent months despite some easing in the latest data.

Moving forward, manufacturing leaders were very positive about the next six months. The forward-looking measure jumped from 42.5 to 43.7, a level not seen in more than 12 years (December 2004). Indeed, nearly 62 percent of respondents expect increased levels of production and new orders in the months ahead, with 46.4 percent and 35.2 percent predicting higher employment and capital spending, respectively.

Employment Cost Index
The Bureau of Labor Statistics reported that manufacturing compensation rose 0.5 percent in the fourth quarter, easing a bit from 0.6 percent growth in the third quarter. On a year-over-year basis, compensation in the sector grew 2.2 percent. Manufacturing wages and salaries increased 0.6 percent in the third quarter, with benefits up 0.2 percent. Private-sector manufacturing workers earned 2.6 percent more over the past 12 months in wages and salaries, with benefit costs up 1.5 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 also increased 0.5 percent in the fourth quarter. Private-sector wages and salaries grew 0.5 percent in this report, with benefits rising 0.4 percent. Over the past 12 months, total compensation for private-sector workers increased 2.2 percent, with wages and salaries and benefits up 2.3 percent and 1.8 percent, respectively.

ISM Manufacturing Purchasing Managers' Index
The Institute for Supply Management’s Manufacturing Purchasing Managers’ Index continued to grow rather strongly, accelerating to its fastest pace since November 2014. The composite index rose from 54.5 in December to 56.0 in January, marking the fifth straight monthly expansion in the headline number. New orders (up from 60.3 to 60.4) and production (up from 59.4 to 61.4) expanded strongly in January. Along those lines, the sample comments all point to healthier conditions and stronger demand in the manufacturing sector, which is very encouraging. In addition, employment also picked up the pace (up from 52.8 to 56.1), suggesting that manufacturers have begun to move past the more cautious approach to hiring seen just a few months ago.

On the other hand, exports slowed a little (down from 56.0 to 54.5), even as international sales growth remained somewhat modest. In contrast, imports were stagnant for the month (down from 50.5 to 50.0).

Meanwhile, inventories contracted for the 19th consecutive month (up from 47.0 to 48.5). With reduced stockpiles available, manufacturers will need to increase production to meet additional demand. In addition, input prices rose significantly in January (up from 65.5 to 69.0), with the index exceeding 60 for the second consecutive month. This mirrors other data indicating accelerating pricing pressures in the economy.

Personal Income and Spending
The Bureau of Economic Analysis reported that personal spending accelerated at year’s end, rising 0.5 percent in December. This was its fastest monthly pace since September, boosted by strong growth in durable goods purchasing, which increased 1.4 percent in December. In contrast, nondurable goods spending was slightly higher but essentially flat. In general, Americans have been more willing to open their pocketbooks in recent months relative to a more cautious approach earlier last year. Along those lines, personal consumption expenditures (PCEs) grew 4.5 percent year-over-year in December, up from 2.9 percent in March and its highest level in two years.

With the pickup in spending, the saving rate edged lower, down from 5.6 percent in November to 5.4 percent in December. This was the lowest rate since March 2014, and it was down from 6.1 percent one year ago. Therefore, the saving rate remained consistent with the narrative of better spending data as the year progressed.

Meanwhile, personal income rose 0.3 percent in December, up from 0.1 percent growth in November. On a year-over-year basis, personal incomes have continued to increase modestly, up 3.5 percent since December 2015. At the same time, total manufacturing wages and salaries increased from $836.2 billion in November to $843.0 billion in December. In 2016, manufacturing wages and salaries averaged $828.3 billion, up 2.7 percent from the $806.7 billion average in 2015. As such, compensation in the sector has largely trended in the right direction.

In other news, the PCE deflator increased 0.2 percent in December, up from 0.1 percent in November. Higher energy costs were enough to outpace slightly lower food costs. Core inflation, which excludes food and energy, inched up 0.1 percent in December. While pricing pressures remain minimal for now, they are continuing to pick up. The PCE increased 1.6 percent year-over-year in December, up from 0.9 percent six months ago. Core inflation has risen 1.7 percent over the past 12 months.

Productivity and Costs
The Bureau of Labor Statistics reported that manufacturing labor productivity rebounded in the fourth quarter after being flat in the third quarter. Output per worker in the sector increased 0.7 percent in the fourth quarter, continuing a trend of soft productivity growth since the Great Recession. Indeed, manufacturing labor productivity averaged just 0.3 percent from 2013 to 2016. In comparison, output per worker in the sector averaged a more robust 5.2 percent annually from 2002 to 2008. Over the longer term, manufacturers have benefited from being leaner, but the recent sluggishness in productivity and output growth has meant that unit labor costs have risen 11.3 percent since the end of 2011.

Looking specifically at the fourth quarter data, manufacturing output rose 0.8 percent, with durable and nondurable goods activity up 0.7 percent and 0.8 percent, respectively. Yet, nondurable goods manufacturers fared better in terms of labor productivity growth than their durable goods counterparts, with output per worker up 1.8 percent and 0.1 percent, respectively. The difference between the two centered on hours worked. Nondurable goods firms worked 1.0 percent less hours in the fourth quarter, whereas durable goods firms experienced 0.7 percent more hours. Unit labor costs jumped 3.3 percent in the fourth quarter, or 3.8 percent and 2.4 percent for durable and nondurable goods businesses, respectively.

In the larger economy, nonfarm labor productivity rose 1.3 percent in the fourth quarter, decelerating from the 3.5 percent figure in the third quarter. Nonfarm output increased 2.2 percent, with unit labor costs up 1.7 percent. Similar to the manufacturing data described above, nonfarm labor productivity has slowed considerably since the Great Recession, averaging 0.5 percent per year from 2011 to 2016. It was up by only 0.2 percent in 2016. 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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