Monday Economic Report - May 8, 2017

A Publication of the National Association of Manufacturers

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

Manufacturers added 6,000 workers in April, marking the fifth straight month of job gains in the sector. The manufacturing sector has hired 14,200 additional workers on net over the past five months, a notable difference from the more cautious approach to hiring seen before that. Indeed, manufacturing lost 16,000 workers in 2016 as a whole, its first negative year since the Great Recession. The good news is that business leaders are more upbeat in their economic outlook so far in 2017, with demand and production expanding modestly once again. Meanwhile, the unemployment rate fell from 4.5 percent in March to 4.4 percent in April, the lowest level since May 2007. In addition, nonfarm payrolls rose by 211,000 in April, higher than the consensus estimate of around 180,000 and a relatively strong rebound after just 79,000 nonfarm workers hired in March.

The Institute for Supply Management’s (ISM) Manufacturing PMI slowed in April but continued to expand modestly. The composite index declined from 57.2 in March to 54.8 in April. As such, growth in the sector remained decent overall despite easing from February’s two-and-a-half-year high reading (57.7). Indeed, it was the eighth consecutive monthly expansion in the headline number, recognizing definite progress after two years of notable challenges in the sector. The ISM report mostly mirrors other sentiment surveys that have observed some pullbacks from multiyear highs post-election, even as they remain mostly encouraging.

Along those lines, the manufactured goods exports picture appears to have improved through the first three months of 2017. This is a welcome development after the declines in both 2015 and 2016. Using non-seasonally adjusted data, U.S.-manufactured goods exports totaled $263.83 billion year to date in March, up 3.67 percent from $254.49 billion in the same time period one year ago. This reflects better year-to-date figures in five of the top-six markets for U.S.-manufactured goods, with the exception being a slight decline in exports to the United Kingdom. Beyond those figures, the U.S. trade deficit edged marginally lower, down from $43.76 billion in February to $43.71 billion in March. Both goods exports and imports declined, essentially offsetting one another, with imports at their slowest pace since November.

At the same time, new factory orders increased for the fourth straight month even as the growth rate eased from 1.2 percent in February to 0.2 percent in March. With this increase, new orders were at their highest level since November 2014. Yet, much of the gain stemmed from higher defense and nondefense aircraft orders, as noted in the earlier release of preliminary durable goods figures. Excluding transportation, manufactured goods orders fell 0.3 percent, pulled lower by a decrease of 0.5 percent from nondurable goods firms. Durable goods orders rose 0.9 percent, but excluding transportation equipment, sales essentially stagnated. Nonetheless, new factory orders, which have struggled mightily over the past few years, have trended largely in the right direction more recently, up 5.8 percent since March 2016. With that in mind, it should not be a surprise that private manufacturing construction spending edged up in March, trending slightly higher in the first quarter after a recent lull in activity. 

With that said, American consumers have been more cautious in recent months. Personal spending remained flat in March, slowing from more robust purchasing at the end of 2016. In fact, personal consumption expenditures (PCEs) grew 0.9 percent at the annual rate in the first quarter, decelerating sharply from the 5.6 percent annual pace in the fourth quarter. In addition, the saving rate has moved higher with weaker spending activity, up from 5.2 percent in December to 5.9 percent in March. More than anything, that helps to explain the soft real GDP numbers for the first quarter of 2017, up just 0.7 percent. To be fair, we have seen improvements in personal spending over the longer term. For instance, PCEs have risen 4.7 percent since March 2016. Moreover, the saving rate was also slightly higher one year ago at 6.2 percent.

Building on those data points, we will be closely watching the retail sales figures for April, which are released this Friday. In the March release, spending edged down 0.2 percent, but year-over-year growth was still a quite respectable 5.2 percent. Other data highlights this week include updates on consumer and producer prices, job openings and small business optimism. The inflation numbers will be especially relevant in light of monetary policy, as firms have reported accelerating pricing pressures in recent months. The Federal Reserve, which opted not to raise rates at its May 1–2 meeting, continues to monitor the incoming data and will want to remain proactive if it appears that the U.S. economy is overheating and prices are rising faster than desired. We would expect at least two more increases in short-term rates this year, with the next one likely coming after the June 13–14 meeting of the Federal Open Market Committee.

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

Economic Indicators

Last Week’s Indicators (Summaries Appear Below)

Monday, May 1
Construction Spending
ISM Manufacturing PMI
Personal Income and Spending

Tuesday, May 2
None

Wednesday, May 3
ADP National Employment Report
FOMC Monetary Policy Statement

Thursday, May 4
Factory Orders and Shipments
International Trade Report
Productivity and Costs

Friday, May 5
BLS National Employment Report

This Week’s Indicators

Monday, May 8
None

Tuesday, May 9
Job Openings and Labor Turnover Survey
NFIB Small Business Survey

Wednesday, May 10
None

Thursday, May 11
Producer Price Index

Friday, May 12
Consumer Price Index
Retail Sales

Summaries for Last Week’s Economic Indicators

ADP National Employment Report
ADP reported that manufacturing employment rose by 11,000 in April. While that was slower than the 31,000 hires made in the sector in March, it was the fifth consecutive monthly increase, with manufacturers adding 111,000 workers on net in that time frame. 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, total private employment increased by 177,000 in April, which was close to the consensus estimate of around 180,000. Nonetheless, it was the slowest pace of hiring since October, down from 255,000 in March. Year to date, nonfarm payrolls have risen by 237,331 per month on average, which is significantly higher than the 180,892 workers added each month in 2016 as a whole.

Beyond manufacturing, the largest employment growth in April included professional and business services (up 72,000), education and health services (up 41,000), leisure and hospitality (up 35,000) and trade, transportation and utilities (up 5,000), among others. Construction employment declined by 2,000 for the month. Small and medium-sized businesses (i.e., those with fewer than 500 employees) accounted for 78.5 percent of all net new workers in April.

BLS National Employment Report
The Bureau of Labor Statistics reported that manufacturers added 6,000 workers in April, marking the fifth straight month of job gains in the sector. The manufacturing sector has hired 14,200 additional workers on net over the past five months, a notable difference from the more cautious approach to hiring seen before that. Indeed, manufacturing lost 16,000 workers in 2016 as a whole, its first negative year since the Great Recession. The good news is that business leaders are more upbeat in their economic outlook so far in 2017, with demand and production expanding modestly once again. The data show that firms are increasing their hiring as a result. Note that the manufacturing sector has now added 943,000 workers since the end of the Great Recession, with nearly 12.4 million workers in this release.

Meanwhile, the unemployment rate fell from 4.5 percent in March to 4.4 percent in April, the lowest level since May 2007. In addition, nonfarm payrolls rose by 211,000 in April, higher than the consensus estimate of around 180,000 and a relatively strong rebound after just 79,000 nonfarm workers hired in March. Through the first four months of 2017, nonfarm payrolls have increased by 184,500 per month on average, but that was skewed by the weak March figure (likely impacted by poor weather). Without March, the average would have been 219,667 per month.

Looking more closely at the manufacturing sector in April, nondurable goods employment rose by 9,000 for the month, but durable goods hiring declined by 3,000. The strongest job gains included food manufacturing (up 9,100), motor vehicles and parts (up 2,800), machinery (up 2,200), chemicals (up 1,600) and primary metals (up 1,500), among other sectors. In contrast, there were fewer workers in April for fabricated metal products (down 3,500), computer and electronic products (down 1,700), printing and related support activities (down 1,500) and electrical equipment and appliances (down 1,100).

The stronger data included an increase in average weekly earnings for manufacturing workers, up from $1,071.43 in March to $1,081.40 in April. This represents a 2.7 percent jump in average weekly earnings from March 2016, suggesting a continued pickup in compensation for employees in the sector.

Construction Spending
The Census Bureau reported that private manufacturing construction spending edged higher in March, up 0.5 percent. The value of construction put in place in the sector rose from $68.58 billion in February to $68.90 billion in March. More importantly, the first quarter data—averaging $68.76 billion over the three-month period—has improved from December’s $67.87 billion pace, which was the slowest since September 2014. 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. Indeed, over the past 12 months, manufacturing construction has fallen 9.8 percent. Nonetheless, we would expect a turnaround in construction activity in the coming months, especially in light of better demand and production growth of late.

Overall, private nonresidential construction spending decreased 1.3 percent in March, but it has risen 6.4 percent year-over-year. In addition to manufacturing, health care (up 1.5 percent) and lodging (up 0.7 percent) also saw increased construction spending in March, but declines in other sectors offset these gains. The largest drags came from reduced construction spending for the educational (down 7.8 percent), commercial (down 3.2 percent), office (down 2.6 percent), religious (down 1.3 percent) and transportation (down 1.0 percent) segments, among others.

Since March 2016, there were notably strong gains in private nonresidential construction spending in the following sectors: communication (up 19.1 percent), office (up 17.7 percent), educational (up 15.3 percent), amusement and recreation (up 11.8 percent), lodging (up 8.6 percent) and power (up 8.2 percent).

Meanwhile, private residential construction spending rose 1.2 percent in March, with 7.5 percent growth year-over-year. For the month, single-family construction and multifamily activity increased 0.3 percent and 2.0 percent, respectively. The year-over-year gain included a larger increase from the multifamily segment (up 7.4 percent) than for single-family activity (up 4.7 percent). In addition to those components, public construction spending dropped 0.9 percent in March, with 6.5 percent less growth over the past 12 months.

Factory Orders and Shipments
The Census Bureau reported that new factory orders increased for the fourth straight month even as the growth rate eased from 1.2 percent in February to 0.2 percent in March. With this increase, new orders were at their highest level since November 2014. Yet, much of the gain stemmed from higher defense and nondefense aircraft orders, as noted in the earlier release of preliminary durable goods figures. Excluding transportation, manufactured goods orders fell 0.3 percent, pulled lower by a decrease of 0.5 percent from nondurable goods firms. Durable goods orders rose 0.9 percent, but excluding transportation equipment, sales essentially stagnated. Nonetheless, new factory orders, which have struggled mightily over the past few years, have trended largely in the right direction more recently, up 5.8 percent since March 2016. Excluding transportation, the gains were slightly larger, up 6.1 percent year-over-year.

Looking specifically at durable goods activity in March, the data were mixed beyond the aircraft figures. Demand was stronger for the month for electrical equipment and appliances (up 1.2 percent), primary metals (up 0.4 percent) and machinery (up 0.3 percent). In contrast, orders declined for furniture and related products (down 1.7 percent), motor vehicles and parts (down 1.7 percent), computers and electronic products (down 0.8 percent) and fabricated metal products (down 0.2 percent). Core capital goods—or nondefense capital goods excluding aircraft—rose 0.5 percent in March, with a gain of 3.3 percent over the past 12 months.

Meanwhile, shipments of manufactured goods edged down 0.1 percent in March, ending seven straight months of increases. As such, the current pace for shipments pulled back in March from February’s rate, which had been the fastest since December 2014. Even with the easing, shipments activity continue to reflect improvements in the sector, much like the new orders data discussed above. On a year-over-year basis, factory shipments have risen 5.3 percent since March 2016, or 6.0 percent excluding transportation.

International Trade Report
The Bureau of Economic Analysis and the Census Bureau reported that the U.S. trade deficit edged marginally lower, down from $43.76 billion in February to $43.71 billion in March. In the first quarter of 2017, the trade deficit averaged $45.21 billion, buoyed by January’s $48.17 billion figure, which had been the highest level in nearly five years. This was higher than the average deficit of $41.71 billion in 2016 as a whole. In March, goods exports (down from $128.34 billion to $126.28 billion) and goods imports (down from $193.49 billion to $191.79 billion) were both lower, essentially offsetting one another. Goods imports were at their slowest pace since November. In addition, the service-sector surplus rose somewhat from $21.39 billion to $21.80 billion.

The underlying goods exports data were mixed. Exports increased in March for capital goods, except automotive (up $696 million) and foods, feeds and beverages (up $290 million). However, declines in exports for industrial supplies and materials (down $1.78 billion), automotive vehicles, parts and engines (down $851 million) and consumer goods (down $588 million) counterbalanced those gains. Meanwhile, the goods imports data were mostly lower, including capital goods, except automotive (down $920 million), industrial supplies and materials (down $709 million), consumer goods (down $517 million) and foods, feeds and beverages (down $510 million). In contrast, imports for automotive vehicles, parts and engines rose by $1.15 billion for the month.

More importantly, the manufactured goods exports picture appears to have improved through the first three months of 2017. This is a welcome development after the declines in each of the past two years. Using non-seasonally adjusted data, U.S.-manufactured goods exports totaled $263.83 billion year to date in March up 3.67 percent from $254.49 billion in the same time period one year ago.

This reflects better year-to-date figures in five of the top-six markets for U.S.-manufactured goods: Canada (up from $63.62 billion to $66.93 billion), Mexico (up from $55.63 billion to $58.70 billion), China (up from $25.21 billion to $29.50 billion), Japan (up from $15.06 billion to $16.03 billion) and Germany (up from $12.31 billion to $12.95 billion). The exception was the United Kingdom—our fifth-largest trading partner—with year-to-date exports slipping from $13.38 billion to $13.08 billion.

ISM Manufacturing PMI
The Institute for Supply Management’s (ISM) Manufacturing PMI slowed in April but continued to expand modestly. The composite index declined from 57.2 in March to 54.8 in April. As such, growth in the sector remained decent overall despite easing from February’s two-and-a-half-year high reading (57.7). Indeed, it was the eighth consecutive monthly expansion in the headline number, recognizing definite progress after two years of notable challenges in the sector. The sample comments tend to echo those improvements, citing better economic conditions and a more favorable outlook. At the same time, respondents noted some lingering headwinds and increased pricing pressures. The ISM report mostly mirrors other sentiment surveys that have observed some pullbacks from multiyear highs post-election, even as they remain mostly encouraging.

Digging into the underlying data, production accelerated in April to a two-month high (up from 57.6 to 58.6). The output measure has averaged 60.0 over the past five months (December to April), a notable improvement from the 53.5 average in the prior five months (July to November). Exports rose at the fastest growth rate since November 2013 (up from 59.0 to 59.5). On the other hand, most of the other measures eased for the month, including new orders (down from 64.5 to 57.5), employment (down from 58.9 to 52.0) and supplier deliveries (down from 55.9 to 55.1). It was those decelerating figures that pulled the headline index lower, but still, each has expanded for at least seven months, providing some reassurance for the sector.

Prices for raw materials remained highly elevated despite some easing in April (down from 70.5 to 68.5), with input prices pulling back slightly from its quickest rate since May 2011. Meanwhile, inventories expanded in April for the second time in the past three months (up from 49.0 to 51.0). With stockpiles quite depleted from declines over the past few years, the recent pickup in demand should necessitate strong growth in production moving forward.

Personal Income and Spending
The Bureau of Economic Analysis reported that personal spending remained flat in March, slowing from more robust purchasing at the end of 2016. Personal consumption expenditures (PCEs) were unchanged in both February and March, down from gains of 0.6 percent and 0.2 percent in December and January, respectively. The data suggest that Americans have once again become more cautious in their spending. To illustrate this point, personal spending grew 0.9 percent at the annual rate in the first quarter, decelerating sharply from the 5.6 percent annual pace in the fourth quarter. More than anything, that helps to explain the soft real GDP numbers for the first quarter of 2017, up just 0.7 percent. In addition, the saving rate has moved higher with weaker spending activity, up from 5.2 percent in December to 5.9 percent in March.

To be fair, we have seen improvements in personal spending over the longer term. For instance, PCEs have risen 4.7 percent since March 2016. Moreover, the saving rate was also slightly higher one year ago at 6.2 percent.

Meanwhile, personal income increased 0.2 percent in March, easing from 0.3 percent in February and rising at its slowest rate since November. On a year-over-year basis, personal incomes have continued to increase at a decent clip, up 4.5 percent since March 2016. This was unchanged from the prior report and was nearly a two-year high. Despite the higher data overall, manufacturing wages and salaries edged down from $859.2 billion in February to $852.7 billion in March. Nonetheless, there has been a steady upward trend in manufacturing compensation in general, with wages and salaries in the sector averaging $806.7 billion and $829.4 billion in 2015 and 2016, respectively.

In other news, the PCE deflator decreased 0.2 percent in March, the first decline in one year. The lower figure in this report came mostly from reduced energy costs, down 3.4 percent. Excluding food and energy, core inflation also experienced weakness, down 0.1 percent. The PC deflator has risen 1.8 percent since March 2016, down from 2.1 percent in the prior release but up from 0.8 percent one year ago. Even with accelerated pressures in recent months, core price growth remains mostly under control for now, with core inflation up 1.6 percent over the past 12 months.

Productivity and Costs
The Bureau of Labor Statistics reported that manufacturing labor productivity rose 0.4 percent in the first quarter of 2017, slower than the 2.0 percent gain in the fourth quarter of 2016. Nonetheless, it was the second straight quarterly increase in productivity in the sector, with fourth quarter activity rebounding from declines in each of the two prior quarters. In this release, output per worker in manufacturing increased 2.8 percent, its fastest quarterly rate since the second quarter of 2014. Unit labor costs increased 2.1 percent. There were large sectoral differences in the data, with labor productivity for durable goods firms down 1.1 percent in the first quarter but up 3.2 percent for nondurable goods manufacturers. As a result, unit labor costs rose 2.5 percent and 1.3 percent for durable and nondurable goods businesses in the quarter, respectively.

Overall, since the Great Recession, the data continue a trend of lethargic growth in manufacturing productivity, which rose just 0.2 percent in 2016. For instance, manufacturing output per worker essentially stagnated from 2013 to 2016, down 0.05 percent per year on average, well below the 5.2 percent pace 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 12.9 percent since the end of 2011.

In the larger economy, nonfarm labor productivity declined 0.6 percent in the first quarter. This ended three consecutive quarterly increases, with a gain of 1.8 percent in the fourth quarter. Nonfarm output eased from 2.7 percent in the fourth quarter to 1.0 percent in the first quarter. 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 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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