A Publication of the National Association of Manufacturers
March 10, 2014
The Federal Reserve Board’s Beige Book noted recent progress in the economy but also reported the negative impacts of weather in many of its districts. The Federal Reserve wrote, “The weather was cited to have caused utility outages, disrupted supply chains and production schedules and resulted in a slowing of sales to affected customers.” However, the slowdown in activity in these regions is temporary, and manufacturers across the country were generally “optimistic about the future and expect manufacturing activity to rise in the coming months.”
Economists have had to try to parse through the data to determine just how much of the recent softness has been due to the weather. This is not an easy task, but in my view, the various reports suggest the momentum we saw at the end of last year should return with warmer temperatures. The latest NAM/IndustryWeek Survey of Manufacturers, which will be released this morning, echoes this finding, with 86.1 percent of respondents being positive about their company’s outlook for the next 12 months, up from 78.1 percent three months ago. Sales, capital spending and hiring expectations were also higher; however, the smallest manufacturers continue to be less upbeat about the economy and their company’s future plans. The top business challenges were an unfavorable business climate due to taxes, regulations and government uncertainties (79.0 percent) and rising health care and insurance costs (77.1 percent), with the latter serving as a proxy for frustrations with the Affordable Care Act.
Purchasing Managers’ Index (PMI) data released last week suggest that manufacturing sentiment has already begun to rebound from weather-related weaknesses of the month before. The Institute for Supply Management’s (ISM) measure rose from 51.3 in January to 53.2 in February, with a faster pace of new orders. On the negative side, production contracted for the first time since May, and manufacturing activity remains below December’s levels. Yet, the improvement in domestic sales was a step in the right direction. Along these lines, the Markit U.S. Manufacturing PMI reflected an even larger rebound, up from 53.7 to 57.1, on much stronger growth in output and sales. As such, these reports give us hope that the declines in new factory orders in both December and January, particularly in the auto sector, will turn around in the coming months.
On the labor front, nonfarm payrolls increased 175,000 in February, somewhat higher than anticipated and better than the 84,000 and 129,000 observed in December and January, respectively. Still, hiring remains below the 194,250 additional workers created each month in 2013, reflecting the easing that we have seen recently. Manufacturing employment has also grown more slowly over the past three months, with just 6,000 new hires in February. Nonetheless, manufacturers have added new workers on net in each of the past seven months, consistent with the rebound in activity since the beginning of the third quarter of last year. Once weather-related weaknesses go away, we hope to see hiring in the sector pick up once again. Elsewhere in the jobs report, the unemployment rate increased from 6.6 percent to 6.7 percent with a slight increase in the size of the labor force. Still, the participation rate remains at levels not seen since the late 1970s.
In our first look at international trade data for the new year, the U.S. trade deficit widened ever so slightly, up from $38.98 billion to $39.10 billion. There was a significant jump in the petroleum trade deficit for the month, with weather impacts more than likely increasing demand and prices for crude oil rising. Manufactured goods exports increased modestly, up 1.2 percent in January relative to the same month last year. While our goods exports were somewhat lower to Canada for the month, the data suggest slight increases in many of our other major trading partners. We remain hopeful that improvements in the global economic landscape will yield better manufactured goods exports growth than the 2.4 percent growth rate in 2013. At the same time, any expansion would build on last year’s $1.38 trillion in manufactured goods exports, an all-time high.
This week will be a slower one for economic releases. Highlights will be new data on consumer confidence, job openings, producer prices, retail sales and small business optimism.
ADP National Employment Report
The good news is that weather challenges are temporary, and manufacturers continue to be mostly upbeat about growth moving forward. Moody’s Analytics Chief Economist Mark Zandi, the preparer of the ADP report, said, “Job growth is expected to improve with warmer temperatures.”
Looking at the overall figures, ADP reported that 139,000 net new private, nonfarm payroll workers were generated in February. Moreover, the data included some major revisions for last year, lowering nonfarm payroll growth by 128,000 from November to January. The bulk of that downward revision came in December, which was reduced by 100,000. Even with these changes, nonfarm payroll growth in January and February has been weak, with hiring below the 187,000 monthly averages in 2013.
In February, the largest job gains were in professional and business services (up 33,000), trade, transportation and utilities (up 31,000) and construction (up 14,000). Small and medium-sized businesses (those with fewer than 500 employees) contributed two-thirds of the net new jobs, with the smallest establishments (those with fewer than 50 employees) adding 59,000 workers for the month.
BLS National Employment Report
On the positive side, this was the seventh consecutive monthly expansion for manufacturing employment, with the sector rebounding starting in August after sluggishness in the spring and early summer of last year. From August to February, manufacturers have added nearly 12,000 additional workers on average each month, which stands in contrast to the net declines of roughly 6,250 per month from April to July. Since the end of the recession, the manufacturing sector has added 588,000 workers, with 100,000 of those coming during the past 14 months.
Looking specifically at February’s manufacturing data, durable goods employment rose by 6,000, with nondurable goods hiring unchanged on net. The largest gains were in transportation equipment (up 3,700, of which 3,400 stemmed from motor vehicles and parts), miscellaneous nondurable goods (up 1,800), machinery (up 1,600), plastics and rubber products (up 1,400), primary metals (up 1,300), textile mills (up 1,100) and miscellaneous durable goods (up 1,000).
At the same time, food manufacturing (down 1,900), nonmetallic mineral products (down 1,900), computer and electronic products (down 1,000), apparel (down 900) and paper and paper products (down 700) were among the sectors with the greatest job losses for the month.
Overall compensation edged slightly higher for the sector. Average weekly earnings in manufacturing rose from $1,003.26 in January to $1,006.10 in February. This was 1.9 percent more than 12 months ago, as earnings continue to move upward modestly. However, the average number of hours worked in February was unchanged at 40.7 hours, with average overtime down from 3.4 hours to 3.3 hours.
In the larger economy, nonfarm payroll growth was somewhat higher than anticipated, up 175,000 in February. The consensus expectation has been for around 150,000. This was the second consecutive increase in jobs growth, but these figures also show that hiring has been below average over the past three months, averaging 129,333 per month. This was below the average of 194,250 in 2013 as a whole.
As noted above with manufacturing, weather has been a factor. The silver lining with weather-related influences is that warmer temperatures should bring improved job growth, and the data appear to support that view. Other industries with positive job growth include professional and business services (up 79,000), education and health care (up 33,000), leisure and hospitality (up 25,000), construction (up 15,000) and government (up 13,000, primarily at the state and local level).
The unemployment rate rose from 6.6 percent in January to 6.7 percent in February, with a slight increase in the size of the labor force. Still, the participation rate remained unchanged at 63.0, keeping it at levels not seen since the late 1970s.
Overall construction activity was only marginally higher in January, up 0.1 percent. It would have been higher if it were not for a sharp 0.8 percent decline in public construction spending for the month. The strongest element in this report was private-sector residential construction, with a 1.1 percent increase in January and 14.6 percent year-over-year growth. In a sign of just how much the housing market has improved recently, private residential spending rose from $314.0 billion in January 2013 to $359.9 billion in January 2014, the highest level since May 2008.
Looking at private nonresidential construction, manufacturing’s increase was the exception for the month, with spending down 0.2 percent. The other sector to experience an increase in construction in January was communications (up 18.2 percent). Areas with the largest monthly declines were power (down 5.0 percent), religious (down 2.6 percent), commercial (down 2.2 percent), health care (down 1.6 percent), educational (down 1.3 percent), transportation (down 1.0 percent) and amusement and recreation (down 0.9 percent). On a year-over-year basis, the story was better, with a 9.7 percent increase over the past 12 months.
New durable and nondurable manufactured goods orders were both lower in January, down 1.0 percent and 0.4 percent, respectively. However, as noted above, durable goods excluding transportation rose 0.1 percent, indicating broader strength than the headline figure might suggest. Areas of strength in the durable goods sector included fabricated metal products (up 7.4 percent) and computers and electronics (up 3.7 percent). However, there were declines in new orders for furniture and related products (down 3.6 percent), electrical equipment and appliances (down 2.2 percent), primary metals (down 1.2 percent) and machinery (down 0.7 percent).
Meanwhile, manufactured goods shipments were also lower for the second consecutive month, with declines of 0.3 percent in both December and January. Durable goods shipments were off by 0.3 percent, with nondurable goods down 0.4 percent. Negative weather influences can be seen in the data, particularly to the extent that consumers were not able to get to the stores to make purchases.
Sectors with the largest declines in monthly shipments included textile products (down 11.4 percent), textile mills (down 3.8 percent), machinery (down 2.9 percent), automobiles (down 1.8 percent), apparel (down 1.0 percent) and chemical products (down 1.0 percent). In contrast, there were increased shipments in the following areas: electrical equipment and appliances (up 1.5 percent), nonmetallic mineral products (up 1.3 percent), food products (up 1.2 percent), computers and electronics (up 0.7 percent) and wood products (up 0.7 percent).
The petroleum trade deficit widened from $15.52 billion to $19.29 billion on increased imports and decreased exports. Weather could be one factor in explaining the higher petroleum deficit, but another could be the jump in crude oil costs, with the average price for West Texas Intermediate crude oil increasing from $95.14 per barrel at the beginning of January to $97.55 a barrel by the end of the month. Meanwhile, the nonpetroleum trade deficit narrowed from $41.89 billion to $39.21 billion, suggesting some improvements on net goods exports outside of oil.
Sectors with higher goods exports in February included industrial supplies and materials (up $1.2 billion), nonautomotive capital goods (up $402 million) and consumer goods (up $244 million). Areas with reduced exports for the month included foods, feeds and beverages (down $771 million) and automotive vehicles and parts (down $208 million).
Manufactured goods exports were up somewhat slowly last year, increasing 2.4 percent in 2013. As such, we will be following progress in 2014 closely, with optimism that improvements in the global economy should yield better export numbers. In January, manufacturers exported $92.89 billion (not seasonally adjusted), or 1.2 percent more than the $91.77 billion observed in January 2013. So, we are off to another slow start.
Looking at our top exporting partners, there were modest gains in most so far in January 2014 relative to January 2013. For instance, exports to Mexico (up from $17.95 billion to $19.15 billion), China (up from $9.39 billion to $10.36 billion), Japan (up from $5.14 billion to $5.55 billion) and the European Union (up from $20.24 billion to $21.50 billion) were all higher this year than last in the first month of the year. However, goods exports to Canada—our largest trading partner—were somewhat lower (down from $23.14 billion to $22.57 billion). However, the year is still early.
ISM Purchasing Managers’ Index
A few of the sample comments spoke to the negative impact of the weather. A petroleum and coal products respondent said, “Bad weather hampered logistics across the country.” Meanwhile, an apparel manufacturer commented about reduced orders due to winter storms, with “raw material disruptions” and “backups at the ports” cited by business leaders from the chemical industry.
Despite these challenges, the report also suggested that sentiment has begun to bounce back. The PMI rose from 51.3 to 53.2. While this remains below the 56.5 seen in December, it was a step in the right direction, giving manufacturers some hope. The pace of new orders picked up, increasing from 51.2 to 54.5. This improvement was in domestic sales, with exports easing slightly for the month (down from 54.5 to 53.5).
On the employment front, hiring was unchanged in February from January’s 52.3. This indicated modest growth, but it was below the stronger rate from August to December (which averaged 54.6). This could suggest a slight slowdown from modest manufacturing employment growth over the prior six months.
In short, weather has wreaked havoc for manufacturers this winter, negatively impacting sales, production and shipments. The ISM data confirm this, with output shrinking for the first time in nine months in February. Yet, this report also indicates that new orders have begun to accelerate, an encouraging sign. Manufacturing leaders continue to be cautiously optimistic about growth in 2014, particularly with the strong momentum at the end of 2013. We hope the recent softness will be temporary, particularly to the extent that it was weather related.
At the same time, the recent weakness also reminds us how difficult it is for strong growth to be maintained. The downgrade in real GDP was another reminder of this. For that reason, the NAM continues to push for pro-growth measures that will lift the economy and help to give additional momentum for manufacturers and the rest of the business community.
Personal Income and Spending
The increase in spending during January stemmed entirely from services, up 0.9 percent. In contrast, durable and nondurable goods spending were both lower, down 0.3 percent and 0.7 percent, respectively. It was the second consecutive monthly decline for durable goods spending, which declined 2.6 percent in December. It is likely that poor weather conditions negatively impacted these figures, with other releases showing weak spending for automobiles and other items over the two months.
Meanwhile, personal income increased 0.3 percent in January, an improvement from being unchanged in December. Total wage and salary disbursements were up 0.2 percent for the month, or 3.6 percent over the past 12 months. For manufacturers, wages and salaries have been essentially flat over the past three months, hovering around $758 billion. However, the figure has gradually moved higher over the longer term. Six months ago, wages and salaries in the sector were $742.5 billion, and they have moved up from averages of $707.1 billion and $735.4 billion in 2011 and 2012, respectively.
The savings rate remained at 4.3 percent in January for the second straight month, and we have generally seen this rate decelerate over much of the past year. For instance, the savings rate dropped from an average of 5.3 percent through the first 11 months of 2012 (omitting December because of accelerated payouts due to the fiscal cliff) to 4.5 percent in 2013.
Overall inflationary pressures remain minimal, with prices for core personal consumption expenditures up just 1.1 percent year-over-year. Energy prices were up 0.4 percent in January, or 3.5 percent over the past 12 months, as more Americans needed to heat their homes due to cold weather conditions. Nonetheless, inflation remains below the Federal Reserve’s 2 percent target rate, which frees up the Federal Reserve to pursue its highly accommodative policies.
Productivity and Costs (Revision)
Nondurable goods manufacturing was weaker than originally reported, with output up 2.4 percent instead of 4.1 percent. Labor productivity for nondurable goods decreased by 0.1 percent, with unit labor costs up 0.3 percent. On a year-over-year basis, productivity rose 1.0 percent, output increased 1.2 percent, and unit labor costs fell 0.2 percent.
In the durable goods sector, the news was quite positive, even with the latest revisions. Labor productivity increased a modest 3.0 percent on a huge jump in output of 7.5 percent. Unit labor costs declined 1.3 percent, helping to keep the sector more competitive globally. Speaking to the strengths of durables over the past year, output rose 4.6 percent over the past 12 months.
In the larger economy, labor productivity in the nonfarm business sector was also revised lower, down from the original estimate of 3.2 percent to 1.8 percent. Output increased 3.4 percent, and unit labor costs were marginally down by 0.1 percent.
Questions or comments? Please contact Chad Moutray at firstname.lastname@example.org
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