A Publication of the National Association of Manufacturers
December 9, 2013
The Federal Reserve Board’s Beige Book, released last week, suggested that the U.S. economy was expanding at a modest to moderate pace nationally. Other data were even more encouraging, including strong numbers for economic growth, manufacturing activity and overall hiring. For instance, the Bureau of Economic Analysis reported that real GDP increased by 3.6 percent during the third quarter, up from its previous estimate of 2.8 percent. This was the fastest pace of growth since the first quarter of 2012. One drawback in the report was that much of the increase stemmed from the restocking of inventories—something that will likely not be replicated in the current quarter. Yet, consumer and business spending also made significant contributions to the economy, with relatively healthy gains for goods exports and improvements in the financial positions of state and local governments.
The stronger domestic and global economy has helped buoy the manufacturing sector, with stronger sales and output seen since the beginning of the third quarter. The Institute for Supply Management’s (ISM) Purchasing Managers’ Index (PMI) has soared to 57.3, its highest point since April 2011. This was the fourth straight month with the new orders index greater than 60.0, indicating very robust growth in sales. More importantly, export orders also had healthy increases, up from 57.0 to 59.5. With manufactured goods exports up only 1.9 percent year-to-date, the fact that our overseas sales were beginning to pick up was welcome news. Overall, the ISM report—while much more optimistic than other sentiment surveys—mirrors the mostly upbeat outlook within the sector. Yet, sample comments also note downside risks associated with government uncertainty—a lingering issue that has dampened demand on and off over the past few years.
Friday’s jobs numbers were another boost for the U.S. economy. Manufacturers added 27,000 net new workers in November, the most in any month since March 2012. Moreover, it appears that businesses have begun to accelerate their hiring in recent months. The average monthly job gain over the past four months (August to November) was 16,500, a definite sign of progress from the average decline of 8,000 in the five months prior to that (March to July). A similar pattern exists for nonfarm payroll workers, with the average over the past four months jumping to 204,000. The unemployment rate fell to 7.0 percent in November, a rate not seen since November 2008. Yet, despite the strong employment gains, hiring plans remain mostly modest at best over the next year, and manufacturers have accounted for just 3.3 percent of the net new job gains over the past 12 months.
Consumers have seen their spirits lifted recently, particularly as we move further away from the government shutdown. Preliminary data from the University of Michigan and Thomson Reuters indicate that consumer confidence has returned to where it was before the budget impasse, even as lingering anxieties persist. (Sentiment remains lower than it was over the summer.) As their attitudes about the economy have improved, Americans have also opened their wallets, albeit somewhat tepidly. Personal spending rose modestly in October, with higher purchases for both durable and nondurable goods. Perhaps more timely, “Cyber Monday” retail sales set a new record, even as overall spending gains have been mixed for the holidays.
Today, we will release the results of the latest NAM/IndustryWeek Survey of Manufacturers. The report captures the mixed nature of the current economic landscape, which is both hopeful and cautious at the same time. The percentage of respondents who were positive about their own company’s outlook continued to edge higher, up from 76.1 percent in September to 78.1 percent in December. Yet, many subcomponents reflected some easing in activity expected over the next year. For example, respondents now anticipate sales growth of 3.0 percent in the next 12 months, down from 3.3 percent in September’s survey. Nonetheless, the report also found that manufacturing production should accelerate over the next two quarters, with the rising stock market and rebounding housing market helping to drive these estimates higher. The NAM/IndustryWeek survey also includes a number of special questions on the Affordable Care Act and the ongoing budget negotiations.
Other economic reports out this week include the latest numbers for job openings, producer prices, retail sales, small business confidence and wholesale trade.
ADP National Employment Report
There were an additional 18,000 net new manufacturing workers in November, the fastest pace since February 2012. Year-over-year growth in manufacturing employment was just 20,000 net new hires. This suggests continued hesitance to add new workers over much of the past year. Nonetheless, November’s hiring increase was a positive step, mirroring the recent pickup in manufacturing activity since the summer. Still, the hiring gains remain mostly modest at best.
Other sectors with significant employment increases in November were trade, transportation and utilities (up 45,000), professional and business services (up 38,000), construction (up 18,000) and financial activities (up 5,000). Small and medium-sized firms (those with fewer than 500 employees) accounted for 70 percent of the net new job creation during the month.
BLS National Employment Report
Manufacturing employment has topped the 12 million mark for the first time since April 2009, with 12,014,000 workers now employed by the sector. Since the end of 2009, manufacturers have added 543,000 new workers. Over the past 12 months, the manufacturing sector has hired an additional 76,000 workers, or 3.3 percent of the 2.3 million nonfarm payroll employees added over that time frame. While this suggests continued softness in hiring, the contribution from the manufacturing sector was up from the 1.7 percent and 2.4 percent paces observed in September and October, respectively—a sign of progress.
In November, both durable and nondurable goods firms added workers on net, up 17,000 and 10,000, respectively, from October. The following sectors saw the largest gains: food manufacturing (up 7,800), motor vehicles and parts (up 6,700), fabricated metal products (up 3,100), chemicals (up 2,200), nonmetallic mineral products (up 2,000), primary metals (up 1,700) and petroleum and coal products (up 1,600). Some sectors saw declines in activity, including miscellaneous nondurable goods (down 3,000), apparel (down 200) and textile mills (down 100).
Consistent with the pickup in hiring for the month, the average number of hours worked also edged up. Durable goods employees worked an average of 41.5 hours a week and 3.5 hours of overtime, up from 41.3 hours and 3.4 hours, respectively. Nondurable goods employees worked an average of 40.2 hours a week and 3.4 hours of overtime, with the average weekly hours unchanged and overtime up 0.1 hours from October. Average weekly earnings rose from $1,003.69 in October to $1,009.01, continuing an upward trend.
Meanwhile, the overall economy added 203,000 nonfarm payroll workers in November. Mirroring the analysis above, nonfarm payroll growth has accelerated of late as the economy has begun to improve somewhat. The average monthly gain in nonfarm payrolls over the past four months (August to November) was 204,000, up from the 155,600 average over the prior five months (March to July). Likewise, the unemployment rate fell to 7.0 percent in November, down from 7.3 percent in October. This was the lowest unemployment rate since November 2008.
Overall, these employment numbers were mostly positive and a sign that the U.S. economy has begun to make some progress after softness during the spring and summer. This was particularly true for manufacturing, which has seen disappointing job growth since the middle of last year. Despite these gains, however, hiring is expected to be modest for the sector moving forward until manufacturers sense that the economy is on firmer footing and/or demand warrants sufficient additional hiring.
With that in mind, policymakers should work to reduce marketplace uncertainties—particularly during the budget negotiations—and adopt pro-growth measures like those laid out in the NAM’s Growth Agenda that will keep the employment gains noted here continuing strongly in the coming months.
Manufacturing construction dollars have ranged this year from a low of $43.34 billion in June to a high of $50.52 billion in August. Over a longer time horizon, one can easily see the rebound in the sector, with construction spending up 12.3 percent and 37.9 percent over the past 24 and 36 months, respectively.
Total construction spending increased 0.8 percent in October, improving on September’s 0.3 percent decline. October’s higher number came mainly from the public sector, with construction funding by all government levels jumping 3.9 percent for the month. It had fallen 1.9 percent in September. On a year-over-year basis, the largest spending increases in public construction projects have been for power (up 10.8 percent), water supply (up 10.2 percent), highway and street (up 9.2 percent), transportation (up 6.9 percent) and sewage and waste disposal (up 6.2 percent).
In contrast, public dollars devoted to commercial (down 28.6 percent) and office (down 14.1 percent) spending projects have declined sharply over the past 12 months. Nonetheless, those two categories have seen improvements lately, up 3.5 percent and 8.8 percent, respectively, in October.
Private residential construction was off 0.5 percent in October, struggling for the most part since June. Over the past four months, residential activity declined 2.4 percent. Much of that decline can be attributed to the “sticker shock” of higher mortgage rates, albeit at levels that are still historically low. On the bright side, however, the housing market continues to reflect its recent rebound, with year-over-year increases in private residential construction of 17.8 percent.
Private nonresidential construction spending was also lower, down 0.5 percent in October. In addition to the increase in manufacturing activity, other sectors with higher construction spending included educational institutions (up 6.6 percent), commercial (up 2.8 percent) and transportation (up 2.2 percent), among others. However, the following sectors saw declines: communication (down 8.4 percent), power (down 5.7 percent) and amusement and recreation (down 2.3 percent).
Sales were mixed. Nondurable goods orders—something new in this report—were down 0.2 percent. Among durable goods, the largest monthly increases were in electrical equipment and appliances (up 3.1 percent), primary metals (up 1.0 percent), machinery (up 0.7 percent), computers and electronic products (up 0.6 percent) and motor vehicles and parts (up 0.4 percent). Sectors that saw declines included fabricated metal products (down 1.2 percent) and furniture and related products (down 0.8 percent), among others.
Meanwhile, manufactured goods shipments increased 0.1 percent in October, the same as September. Durable goods shipments rose 0.4 percent, with nondurable goods activity down 0.2 percent. Over the past year, manufactured goods shipments growth has been somewhat slow, up 1.5 percent in the past 12 months.
Sectors with the largest monthly increases in shipments included plastics and rubber products (up 1.1 percent), primary metals (up 1.1 percent), transportation equipment (up 1.1 percent) and machinery (up 0.8 percent). In contrast, sectors that saw declines included computers and electronic products (down 2.3 percent) and petroleum and coal products (down 1.4 percent).
Gross Domestic Product (Revision)
The earlier estimate showed that the change in private inventories contributed 0.81 percentage points to real GDP growth. With this revision, that contribution more than doubled to 1.68 percentage points. In other words, nearly 47 percent of economic growth in the third quarter can be attributed to the restocking of inventories. This suggests that fourth quarter real GDP growth will not benefit as much from inventories, probably resulting in output growth of just more than 2 percent for the current quarter.
The other data in the GDP report did not change much from the previous estimate, and if anything, the size of the individual contributions eased a bit. Most of the remaining gains in output stemmed from consumer spending (0.93 percentage points) and private-fixed investment (0.81 percentage points). Consumer goods spending rose an annualized 4.1 percent for the quarter, with larger increases for durable goods purchases. On the investment side, the bright spots were higher spending on residential and nonresidential structures and industrial equipment.
Net exports and government spending had very small positive contributions to real GDP for the quarter (0.07 and 0.09 percentage points, respectively). Both were off slightly from the earlier estimate. Goods exports rose 5.4 percent at the annual rate, outpacing the 2.7 percent pace for goods imports. While the federal government remained a drag on growth, these were offset by improvements at the state and local level.
In summary, the U.S. economy grew at its fastest pace in six quarters. After stalling at the end of 2012, real GDP has accelerated with each successive quarter in 2013. Yet, inventory replenishment fueled much of the increase in output in the third quarter. With stockpiles full, businesses will not need to restock as much in the fourth quarter. This suggests that the economy will grow more slowly in the current quarter, and for the year as a whole, I predict real GDP growth of around 2.3 percent.
Moving into 2014, the prospects for growth are more upbeat, with the possibility of annual growth of 3.0 percent or more. If this materializes, it would be the first year since 2005. At the same time, there continue to be downside risks to growth next year, much of that stemming from the government. Policymakers would be wise to reduce marketplace uncertainties and consider measures that will keep the overall manufacturing economy growing.
Petroleum was mostly a nonfactor in shifting October’s deficit, with the petroleum trade deficit narrowing modestly, down from $19.88 billion to $19.65 billion. Both petroleum exports and imports were higher for the month, but essentially offsetting one another. This suggests that nonpetroleum trade accounted for the bulk of the change in October’s overall trade deficit.
Looking specifically at goods exports by sector, the data were mostly positive. There were increased exports for industrial supplies and materials (up $1.5 billion), consumer goods (up $1.0 billion), foods, feeds and beverages (up $618 million) and nonautomotive capital goods (up $274 million). The lone decliner was automotive vehicles and parts, down $209 million for the month.
Similarly, on the goods imports side, automotive vehicles and parts imports were also lower, down $1.0 billion. All other major sectors were higher, including industrial supplies and materials (up $778 million), consumer goods (up $514 million), foods, feeds and beverages (up $278 million) and nonautomotive capital goods (up $264 million).
Despite the progress in the monthly trade deficit, we continue to see disappointing growth for manufactured goods exports. Through the first 10 months of 2013, manufactured goods exports were $986.53 billion (using non-seasonally adjusted data). This was up just 1.9 percent from the $968.38 billion over the same time period in 2012. As such, it indicates that growth in manufactured goods exports remains soft, decelerating from the 5.7 percent growth rate through all of last year. It is well below the 15 percent rate needed to double exports by 2015, as outlined in the President’s National Export Initiative.
We hope that stabilization in the global economy and cautious optimism for better worldwide growth rates in 2014 will produce improved manufactured goods exports moving forward.
ISM Purchasing Managers’ Index
New orders and production increases were both up strongly once again. The new orders index rose from 60.6 to 63.6. This was the fourth straight month with the sales index exceeding 60.0, indicating an extremely healthy pace of new orders. This increase included higher export sales, with the exports index up from 57.0 to 59.5. Given the jump in new orders over the past few months, production has also risen sharply, up from 60.8 to 62.8 for the month, with the pace now at its highest point since February 2012. With manufactured goods exports up only marginally so far in 2013, improved trade is positive news.
On the employment front, net hiring appears to be picking up, even if these gains continue to be somewhat modest. The employment index increased from 53.2 to 56.5, a level not seen in 19 months.
The sample comments tend to reflect the more upbeat nature of the underlying data. One chemical products manufacturer said, “Outlook for the remainder of the year and into 2014 is trending positive.” Others noted stronger sales, mirroring the increase in demand seen in the numbers above. Yet, these comments also noted some concern for the U.S. fiscal situation and its impact on the business climate. According to one machinery respondent, “Federal debt, deficit and inefficiency are causing a level of caution and uncertainty.” Another individual spoke of how sequestration was hurt his business.
The ISM data continue to reflect the acceleration in manufacturing activity that we have seen since the beginning of the third quarter, with manufacturers mostly positive in their outlook as we move into 2014. To the extent that there is caution in the marketplace, it is often attributed to government actions. We saw that in the recent government shutdown. With additional budget deadlines slated for early next year and Congress more divided than ever, there is some concern policymakers might fail to reach a deal once more.
Nonetheless, the overriding theme in this report is the strong increases in manufacturing orders and production over the past few months. It will be critical for policymakers to keep the momentum going by tackling our nation’s fiscal issues and considering pro-growth measures like those laid out in the NAM’s Growth Agenda that will allow the sector to flourish moving forward.
Personal Income and Spending
Looking specifically at October’s data, durable and nondurable goods spending was higher, up 0.6 percent and 0.3 percent, respectively.
Meanwhile, personal income fell 0.1 percent in October, the first decline since January. However, a sharp falloff in farm proprietors’ income contributed to much of that decrease. Wages and salaries rose 0.1 percent, and for manufacturers, total wages and salaries totaled $749.2 billion in October, up from $745.9 billion in September. This figure has gradually moved higher, up from averages of $707.1 billion in 2011 and $735.4 billion in 2012.
The year-over-year pace of personal income has also eased, down from 3.9 percent in September to 3.4 percent in October. Through the first 10 months of the year, the annual pace has averaged 3.3 percent, down from the 4.2 percent rate in all of 2012.
With personal spending outstripping personal income, the savings rate fell from 5.2 percent in September to 4.8 percent in October. Even with the slight decrease, the savings rate has edged higher in general as the year has progressed, with the year-to-date average at 4.6 percent. Nonetheless, the savings rate has generally been lower this year than last, when the savings rate averaged 5.3 percent from January to November 2012. (I omitted December due to accelerated payouts skewing the data in the lead-up to the fiscal cliff deal.)
University of Michigan Consumer Sentiment
Americans’ perceptions about the economy rose for both the current environment and future expectations. The index for the present economic climate increased from 88.0 in November to 97.9 in December, its highest level since July. At the same time, the forward-looking measure advanced from 66.8 to 72.7.
Even with the better data, overall consumer confidence remains lower than in July (85.1), which was a six-year high, and the data suggest at least some degree of cautiousness about the future. The expectations component, for instance, stood at 77.8 in June. This indicates there are some persistent anxieties.
While the economy saw some improvements in the third quarter, the pace of the recovery has been quite slow, and labor and income markets still face a number of challenges. Beyond that, the fiscal issues that led to the government shutdown were only dealt with temporarily, with new deadlines approaching early next year.
A final reading on consumer confidence for December from the University of Michigan and Thomson Reuters will be released on Monday, December 23. We will then get a competing read on consumer sentiment for the month from the Conference Board on Tuesday, December 31.
Questions or comments? Please contact Chad Moutray at firstname.lastname@example.org
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