A Publication of the National Association of Manufacturers
MONDAY ECONOMIC REPORT
September 8, 2014
NAM/IndustryWeek Survey of Manufactures Business Outlook by Quarter, 2012-2014

The U.S. economy added 142,000 nonfarm payroll workers in August, a disappointing figure given signs of a rebound in many other indicators lately. The consensus expectation had been for nonfarm payroll growth to exceed 200,000 jobs for the seventh consecutive month, as was observed in the estimates provided by ADP the day before. Manufacturing employment was flat for the month, which was also a disappointment. It ended a 12-month streak of job gains for the sector, a period in which manufacturers added 168,000 net new workers. Hopefully, the August jobs report was just a brief pause in what otherwise had been positive news on the labor front.

The Institute for Supply Management's (ISM) purchasing managers' index (PMI) data provides much encouragement that manufacturing activity is moving in the right direction heading into the autumn months. The headline PMI figure rose from 57.1 in July to 59.0 in August, its highest level since March 2011, and it reflected a robust recovery from weaknesses earlier in the year. Indeed, new orders and production expanded at healthy paces. These findings mirror the latest NAM/IndustryWeek Survey of Manufacturers, which is being released this morning, showing respondents mostly upbeat about their own company's outlook, with sales, capital spending and hiring expectations at two-year highs. Indeed, 87.3 percent of those taking the survey were either somewhat or very positive in their outlook, up from 85.9 percent three months ago. The data are largely consistent with 3.1 percent growth in manufacturing production over the next two quarters.

Manufacturers spent 4.4 percent more on construction projects in July, also providing some reassuring news. The sector has devoted 23.9 percent more to construction projects over the past 12 months, an indication that the increase in demand and output observed over that time frame has resulted in a jump in new investments. Meanwhile, new factory orders data provided mixed news. While orders increased by a whopping 10.5 percent in July, much of that stemmed from highly volatile nondefense aircraft sales. Excluding transportation orders, new factory orders declined 0.8 percent for the month, a finding that we had noted in the earlier release of preliminary durable goods data. Still, factory orders excluding transportation have risen 2.7 percent over the past six months (since weather-related declines in January), which mostly mirrors the more positive data in other releases.

Looking at exports, the U.S. trade deficit narrowed ever-so-slightly in July, with an increase in goods exports marginally offsetting an increase in goods imports. Yet, manufactured goods exports have risen only slightly year-to-date, up just 0.8 percent so far in 2014 using non-seasonally adjusted data. On the other hand, these same figures show that exports to our top five exports markets were higher through the first seven months of this year relative to last year. Regardless, manufacturers hope that the pace of export growth accelerates, with sluggish sales frustrating business leaders and net export growth providing a drag on real GDP over the past two quarters.

This week, we will get new data on consumer confidence, job openings, retail sales and small business optimism. Markets will also continue to digest Friday's employment numbers, trying to decipher if they were an aberration or a sign of larger weaknesses. In particular, this discussion centers on how the Federal Reserve will interpret such things, with a debate already ongoing as to when the Federal Open Market Committee will begin to increase short-term interest rates. Conventional wisdom holds that short-term interest rates will rise sometime in 2015, but whether that occurs earlier or later in the year is up for debate between those who are more hawkish or dovish on inflation. In the Beige Book, which was released last Wednesday, the Fed mostly observed progress in the economy in recent months, including in manufacturing. Yet, as long as the Fed continues to see "slack" in the labor market, it might be less willing to normalize rates.

Chad Moutray
Chief Economist
National Association of Manufacturers
Economic Indicators
Last Week's Indicators:
(Summaries Appear Below)

Monday, September 1
LABOR DAY HOLIDAY

Tuesday, September 2
Construction Spending
ISM Purchasing Managers' Index

Wednesday, September 3
Beige Book
Factory Orders and Shipments

Thursday, September 4
ADP National Employment Report
International Trade Report
Productivity and Costs (Second Quarter Revision)

Friday, September 5
BLS National Employment Report

This Week's Indicators:


Monday, September 8

Consumer Credit
NAM/IndustryWeek Survey of Manufacturers

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

Wednesday, September 10
Wholesale Trade

Thursday, September 11
None

Friday, September 12
Friday, September 12 Retail Sales
University of Michigan Consumer Sentiment

Summaries for Last Week`s Economic Indicators
ADP National Employment Report
ADP said that manufacturers added 23,000 workers in August, the sector’s largest monthly gain since December 2012. It was also the seventh straight increase in net hiring for the manufacturing sector, rebounding from a weather-related decline in January. Over the past 12 months, manufacturers have expanded employment by 115,000, averaging slightly more than 12,000 new employees per month. Note that this is somewhat lower than the average seen in Bureau of Labor Statistics (BLS) figures since last August.

In the larger economy, nonfarm private businesses added 204,000 employees in August, averaging 218,000 since January and 206,000 over the past year. These trends are largely consistent with official government data, which also have reflected healthy gains in employment.

In August, the largest job gains were seen in the professional and business services (up 51,000), trade, transportation and utilities (up 28,000), construction (up 15,000) and financial activities (up 5,000). Small and medium-sized businesses (i.e., those with fewer than 500 employees) contributed three quarters of the net new jobs.

BLS National Employment Report
The Bureau of Labor Statistics (BLS) said that manufacturing employment was unchanged in August, ending a 12-month streak of job gains in the sector. Over the past year, manufacturers have added 168,000 net new workers, averaging 13,538 new jobs per month over that time. Still, it is hard not to be disappointed with the August results. Other recent indicators have reflected a pickup in activity this summer. ADP’s estimate showed 23,000 additional workers hired in August, and the expectation had been for strong growth in hiring in August in the BLS numbers as well. Hopefully, predictions of increased demand and output will lead to more hiring in the coming months, with August’s figures just being a pause in an otherwise upward trend.

On a sector-by-sector basis, the August manufacturing jobs figures were mixed, with a gain of 2,000 workers in durable goods industries offset by a 2,000-employee decline among nondurable goods firms. The largest employment gains were in nonmetallic mineral products (up 2,900), machinery (up 2,500), wood products (up 1,700), food manufacturing (up 1,500) and chemicals (up 1,500). Transportation equipment employment fell substantially, down 9,200, with motor vehicles and parts alone dropping 4,600. Other sectors with declining employment included miscellaneous nondurable goods (down 3,100), plastics and rubber products (down 1,100), paper and paper products (down 900) and apparel (down 500).

Despite the underwhelming job gains, average weekly earnings in the sector were slightly higher, up from $1,017.59 in July to $1,022.13 in August. Over the course of the past 12 months, average weekly earnings have risen 2.3 percent. The average number of hours worked, however, was up only marginally, increasing from 40.9 hours to 41.0 hours with overtime unchanged at 3.4 hours.

Nonfarm payroll growth was also disappointing, up just 142,000 in August. Total job gains were expected to exceed 200,000 for the seventh straight month, mirroring ADP’s estimate of an increase of 204,000. Nonetheless, the unemployment rate decreased to 6.1 percent in August, down from 6.2 percent in July but returning to the rate observed in June. The participation rate also returned to its June level of 62.8 percent, keeping it near 30-year lows.

Overall, today’s jobs numbers were frustrating, particularly given the strength seen in a host of other data points. Perhaps hiring activity took a holiday in August. My view is that hiring will pick up in the coming months, with accelerated levels of new orders and production leading to more employment growth. As such, manufacturers should revert to average job gains of 12,500 to 15,000 per month for the rest of this year.

Construction Spending
The Census Bureau reported a 4.4 percent increase in manufacturing construction in July after softness in June. So far this year, manufacturers have spent 13.7 percent more on construction projects, with a 23.9 percent growth in spending over the past 12 months. This suggests that the increase in demand and production seen in the sector since the third quarter of 2013 has resulted in a jump in new construction investment spending—definitely an encouraging sign.

Total construction spending in July rose by 1.8 percent, more than enough to offset June’s 0.8 percent decrease. After a relatively weak first quarter of activity, overall construction has increased 3.6 percent since March, up from $947.3 billion to $981.3 billion. Gains in construction spending were fairly broad-based in July across the major categories. Private residential construction was 1.4 percent higher for the month, with private nonresidential activity up 0.7 percent. In the public sector, construction rose 3.0 percent in July.

Still, private nonresidential spending was more mixed when you break it down by type of business. In addition to manufacturing, other entities with higher dollar levels for construction in July included power (up 7.5 percent), lodging (up 2.8 percent) and health care (up 2.1 percent). In contrast, there were declines in construction spending for the month among religious (down 5.0 percent), amusement and recreation (down 4.5 percent), educational (down 3.8 percent), commercial (down 2.5 percent), transportation (down 1.5 percent), commercial (down 1.3 percent) and communication (down 1.0 percent) projects.

Factory Orders and Shipments
The Census Bureau said that new factory orders jumped 10.5 percent in July. Much of that increase stemmed from nondefense aircraft orders (up from $16.8 billion in June to $70.3 billion in July), as noted in the previous release of preliminary sales figures of durable goods. Commercial airplane orders are choppy, with sales usually announced in batches. Motor vehicle sales were also stronger in July, up 7.3 percent.

Excluding transportation, new factory orders declined 0.8 percent, suggesting softness in the broader market. Durable goods orders excluding transportation fell 0.7 percent, with nondurable goods sales off 0.9 percent. Despite the decline in July, demand has largely been higher since January’s winter-related decreases, and new manufacturing orders excluding transportation have risen 2.7 percent over the past six months. Hopefully, the July numbers are just a pause in an otherwise positive trend this year.

As for new durable goods orders in July, the data were mostly lower. This included electrical equipment and appliances (down 4.8 percent), computers and electronic products (down 1.7 percent), furniture and related products (down 1.2 percent), machinery (down 1.2 percent) and primary metals (down 0.3 percent). Outside of transportation, the only other major sector with higher sales in July was fabricated metal products, up 0.1 percent.

Meanwhile, shipments of manufactured goods increased 1.2 percent, rising for the second straight month. Since January, shipments have increased 3.7 percent, illustrating the rebound seen over the past six months after weaknesses earlier in the year. Durable goods shipments rose 3.5 percent (or 1.5 percent excluding transportation); nondurable goods shipments fell 0.9 percent.

The largest increases were in transportation equipment (up 8.1 percent), machinery (up 3.0 percent), computers and electronic products (up 2.4 percent), nonmetallic mineral products (up 1.6 percent), textile mills (up 1.6 percent) and primary metals (up 1.4 percent). In contrast, shipments of petroleum and coal products (down 3.2 percent), textile products (down 2.1 percent) and chemical products (down 1.0 percent) declined in July.

International Trade Report
The Bureau of Economic Analysis and the Census Bureau said that the U.S. trade deficit narrowed ever so slightly, down from $40.81 billion in June to $40.55 billion in July. This is the smallest trade deficit since January’s $39.18 billion level. The smaller July figure stemmed from higher goods exports (up from $136.82 billion to $138.57 billion) that were enough to offset an increase in goods imports (up from $197.23 billion to $198.77 billion). The service-sector trade surplus also widened marginally (up from $19.60 billion to $19.65 billion).

The increases in goods exports and goods imports resulted from both petroleum and non-petroleum trade flows. For instance, petroleum exports increased $1.12 billion in July, and non-petroleum exports jumped $937 million. Similarly, petroleum imports rose by $915 million, and non-petroleum imports increased by $714 million.

Digging even deeper into the data, there were increased goods exports observed in the automotive vehicles and parts (up $1.66 billion), industrial products and materials (up $1.26 billion) and non-automotive capital goods (up $427 million) sectors. Most of the gain in industrial products and materials came from petroleum. Exports were lower for consumer goods (down $650 million) and foods, feeds and beverages (down $632 million).

Goods exports to our top five export markets for U.S.-manufactured goods were higher through the first seven months of this year relative to the same time frame last year. This included (using non-seasonally adjusted data):

  • Canada (up from $174.66 billion to $180.62 billion)
  • Mexico (up from $130.31 billion to $139.10 billion)
  • China (up from $63.69 billion to $67.96 billion)
  • Japan (up from $37.41 billion to $38.76 billion)
  • Germany (up from $27.38 billion to $29.41 billion)

That is encouraging news, particularly given recent weaknesses in growing export sales. Overall, manufactured goods exports have increased from $684.84 billion year-to-date in 2013 to $690.41 billion in 2014 (non-seasonally adjusted). This represents an increase of just 0.8 percent from last year, which would be a deceleration from last year’s 2.4 percent pace. Note, however, that seasonally adjusted data on Trade Stats Express show a somewhat better rate for the first half of 2014, with 1.7 percent growth through the first two quarters of the year.

ISM Purchasing Managers' Index
The ISM Manufacturing PMI rose very strongly, with the headline figure rising from 57.1 in July to 59.0 in August. This was the highest level since March 2011, and it reflected a robust recovery from weaknesses earlier in the year. Indeed, new orders (up from 63.4 to 66.7) and production (up from 61.2 to 64.5) appear to be expanding at quite healthy paces, with indices for both exceeding 60 once again. The production measure has been over 60 for three straight months; the new orders index grew at its fastest pace since April 2004. Export sales (up from 53.0 to 55.0) also improved.

The sample comments tend to echo these strong figures. As one electrical equipment manufacturer said, "Overall business is improving. Order backlog is increasing. Quotes are increasing. Much more positive outlook in our sector." This pretty much sums up the increase in demand noted in many of the other comments as well. Even so, those taking the ISM survey also noted some challenges, particularly the geopolitical risks and the ability to attract labor. The other concern noted in past surveys was pricing pressures, but that appears to have eased somewhat in August (down from 59.5 to 58.0).

The employment index was marginally lower (down from 58.2 to 58.1), but hiring growth has clearly picked up from recent months. The hiring index averaged 52.7, for instance, through the first six months of the year, further highlighting the acceleration in the July and August ISM jobs data.

Overall, this report shows that manufacturers are seeing strong growth in demand and output, which is definitely positive given the disappointing start to the year. Manufacturing leaders are mostly positive about the second half of 2014, even as they are keenly aware of possible risks on the horizon—geopolitical events, a cautious consumer and labor shortages, among other concerns. Still, it is nice to see the sector firing on all cylinders, and the outlook for strong growth over the coming months remains positive.

Productivity and Costs (Second Quarter Revision)
Manufacturing labor productivity increased by a relatively healthy 3.3 percent in the second quarter, although it was revised down from a prior estimate of 3.6 percent. Output jumped 6.9 percent in the second quarter, rebounding from slower growth in the first quarter (1.6 percent). Unit labor costs declined 1.6 percent, helping to make the sector more competitive globally. In fact, since the second quarter of 2009 (when the recession officially ended), unit labor costs for manufacturers have declined 5.1 percent.

Both durable and nondurable goods firms experienced stronger output gains in the second quarter, up 9.6 percent and 4.0 percent, respectively. Still, nondurable goods manufacturers had the larger quarterly increase in labor productivity, up 4.7 percent versus 3.4 percent for durable goods businesses. On a year-over-year basis, labor productivity for durable and nondurable goods firms has risen 2.9 percent and 1.7 percent, respectively. Unit labor costs declined 0.4 percent over the past year for durable goods, but increased 1.8 percent for nondurable goods.

In the larger economy, nonfarm businesses experienced labor productivity growth of 2.3 percent in the second quarter, recovering from the 4.5 percent decline in the first quarter. Output was up 5.0 percent, and unit labor costs fell by 0.1 percent.



Connect with the Manufacturers
Questions or comments?
Contact Chief Economist Chad Moutray at cmoutray@nam.org.