Monday Economic Report

Manufacturers in the United States need the global economy to pick up, especially given the importance of international markets to manufacturing businesses. U.S. goods exports hit a record level in March, with increases across-the-board, including in Europe, due to strong sales of industrial supplies and capital goods. Yet, the growth of goods imports also rose to a record high, outpacing export growth and widening the overall trade deficit. The U.S. economy is growing modestly, but still fast enough to drive up our imports; meanwhile, economic growth elsewhere lagged.

Manufacturing job openings jumped significantly in March, as durable and nondurable goods sectors looked for more workers. Strong gains in manufacturing, along with  increased consumer spending, drove  demand for more workers. However, overall hiring did not pick up as rapidly as job postings. Manufacturers continue to struggle to find qualified workers, which suggests many jobs remain unfilled.  

Small businesses and consumers are more upbeat. While small business owners are still anxious about the economy and political environment, the National Federation of Independent Business’s (NFIB) Small Business Optimism Index rose two points in April, its highest point since the beginning of the recession. The University of Michigan and Thomson Reuters reported a stronger-than-expected gain in consumer confidence in May, with their index rising to 77.8, its highest point since the end of 2007. The NFIB survey noted that more firms, including small and medium-sized manufacturers, are more positive about hiring and expanding their operations in the next three months. The top concern, which had been “poor sales” for the past three and a half years, is now the regulatory environment.

This week will be a busy one on the data front. New industrial production figures and regional surveys from the New York and Philadelphia Federal Reserve Banks will provide the latest manufacturing activity information. This will be closely watched, especially after weaknesses last month. In addition, the latest housing starts data should report continued gradual improvements in the still-depressed sector. Seasonal factors, which helped to reduce starts in March (since warm weather pushed some projects to January and February), should start to wane. Finally, consumer inflation information should mirror the producer price data out last week, with energy prices pushing costs lower and keeping inflationary pressures modest.

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Consumer Credit
The Federal Reserve Board found that U.S. consumer credit was up 10.2 percent (at the annual rate) in March. Overall debt levels equal $2.54 trillion, up 7.7 percent in the first quarter. Both revolving and non-revolving debt increased significantly, up 7.8 percent and 11.3 percent, respectively. Revolving credit accounts now total $803.6 billion, which is where it stood at the end of 2011 after declining in January and February.

Non-revolving loans continue to grow steadily and now total $1.74 trillion. The largest increases  came from student loan balances, with $460.2 billion outstanding. This figure averaged $355.2 billion in the first quarter of 2011, illustrating how quickly it has grown. The largest holder of non-revolving loans, however, continued to be commercial banks, with $499.4 billion in loans outstanding.

These numbers reinforce the notion that consumers continue to spend, despite the risk of going further in debt.. Personal spending slowed somewhat in March, but Americans continued to grow their purchases. This is true even as sentiment surveys show increased anxieties to higher energy costs and other challenges.

Consumer spending grew 4 percent in the past year, and the U.S. savings rate dipped to 3.8 percent. The fact that revolving debt lines rose—after declining earlier this year—shows that consumers are less cautious and more willing to use their credit cards to finance their purchases.

International Trade
The Bureau of Economic Analysis and the Census Bureau reported that the U.S. trade deficit grew from $45.4 billion in February to $51.8 billion in March. While both exports and imports rose in the month, imports were up 5.2 percent, well offsetting the gains in exports. The March figures followed the narrowing of the trade gap in February.

Goods exports rose from $127.9 billion to $132.7 billion, a record level. Strength was seen across-the-board, with the largest increases in industrial supplies and materials ($2.4 billion) and capital goods ($1.2 billion). The trade deficit for goods widened for the month, with goods imports up from $189.0 billion to $200.3 billion, also a record. The biggest gains among goods imports were capital goods ($3.5 billion), consumer goods ($3.3 billion) and industrial supplies ($2.5 billion).

The trade deficit for petroleum increased from $27.6 billion to $28.6 billion, Non-petroleum sources widened the overall trade deficit the most. The non-petroleum goods deficit expanded from $32.8 billion to $38.0 billion.

Unlike last month’s figures, which showed slowing exports and imports on a country-by-country basis, both grew in March. This suggests some renewed—albeit very modest—growth globally, producing a more limited expansion in exports. As a result, the trade deficit grew in a host of countries, particularly in Europe and China. In each case, faster growth in imports offset the increases in exports. The trade deficits in China and Europe were $21.7 billion and $10.0 billion, respectively.

Job Openings and Labor Turnover Survey
The Bureau of Labor Statistics reported a sharp uptick in job openings in manufacturing in March, from 271,000 in February to 326,000 in March. The increase occurred among durable and nondurable goods manufacturers. This trend extends to the economy as a whole, with a net increase of 315,000 job openings overall. This accounts for 2.7 percent of the total workforce, up from 2.5 percent in February.

Despite the positive news on job postings, manufacturing hiring in March fell by 3,000 workers, from 260,000 to 257,000 for the month. (Part of this decline could be due to seasonal factors, as the level of hiring rose for both durable and nondurable goods industries when non-seasonally adjusted data are used.) Manufacturing separations also fell, from 235,000 to 225,000. These figures suggest a net hiring increase of 32,000 workers in March, up from 25,000 in February.

These numbers point to additional hiring in the months ahead, especially as hiring has not kept up with job postings. This is consistent with both a rise in manufacturing output as well as continued struggles among manufacturers to attract the right talent. The Manufacturing Institute estimated last year  that  600,000 jobs went unfilled due to the skills gap. This is something echoed by manufacturers across the country.

Hiring levels remained low overall, currently at 2.2 percent of the manufacturing workforce. Even with recent gains in manufacturing employment—167,000 in just the past five months—we still have a long way to go to make up for past losses.

NFIB Small Business Survey
Small business owners were more optimistic in April, according to the NFIB’s monthly survey. The NFIB Small Business Optimism Index rose from 92.5 in March to 94.5 in April, its highest level since December 2007 (the month that the recession officially started). Consistent with this improvement, measures for earnings, sales and capital expenditure plans were higher. Moreover, more small business owners planned to increase hiring in April compared to February and March, which is welcome news.

Despite the positive news, small business owners remained uncertain about the economy. Of those saying that the next three months are not a good time to expand, the economy remained first and foremost in their minds. Moreover, the net percentage of those wanting to expand in the next three months is still below its pre-recessionary levels.

Interestingly, the top concern is no longer “poor sales,” a proxy for economic woes. This is the first time since August 2008 that “poor sales” was not on top. It was replaced by “government regulations and red tape” with 20 percent. “Poor sales” was second with 19 percent, and “taxes” was third with 18 percent.

Producer Price Index
The Bureau of Labor Statistics reported that producer prices for finished goods were down 0.2 percent in April. They were unchanged in March following a run-up in energy prices that lifted them higher in January and February. With recent easing of petroleum prices, finished energy goods costs fell 1.0 percent in March and 1.4 percent in April. Core producer prices, which exclude food and energy, rose 0.2 percent in April, or 2.8 percent over the past year.

Producer prices within the manufacturing industry fell 0.1 percent, reversing the larger gains in the first three months of the year (including a 1.5 percent jump in March). Year-over-year producer price increases for manufacturers are modest—especially when compared to the numbers seen last spring—as they are up 2.4 percent since August 2011.

Sectors with the greatest producer price gains in April include leather and allied products (0.8 percent), plastics and rubber products (0.8 percent) and beverage and tobacco products (0.7 percent). Not surprisingly, petroleum and coal products manufacturers saw the largest monthly decline in producer prices, down 1.1 percent.

Intermediate and crude goods costs were also lower, down 0.5 percent and 4.4 percent, respectively. Energy costs were the main driver of pushing them lower in each case.

Producer prices have eased somewhat due to lower petroleum prices. This trend continued into May, with West Texas crude oil hovering around $96 a barrel. Manufacturers still remain very concerned about high energy prices.

University of Michigan Consumer Sentiment
Consumers were more optimistic in May, according to the Survey of Consumers from the University of Michigan and Thomson Reuters. The consumer sentiment index rose from 76.4 in April to 77.8 in May, a higher-than-expected gain. While Americans remain anxious about the overall state of the economy, there has been a marked improvement since last August, when the index stood at 55.7.

Inflationary expectations were lower this month, aided by reduced gasoline prices. Prices are now expected to rise by 3.1 percent over the course of the next year. This is well below the 3.9 percent prediction observed in March.

Wholesale Trade
The Census Bureau found that wholesale inventories rose 0.3 percent in March, the slowest pace since November. Beyond the larger number, though, inventories were mixed, with durable goods up 1 percent and nondurables down 0.6 percent. There was strong growth in inventories for farm products, lumber, drugs, machinery, miscellaneous durables, metals and professional equipment. Sectors with the largest declines in inventory included petroleum, paper, miscellaneous nondurables and alcohol.

Wholesale sales rose 0.5 percent in March, led by a 1.5 percent increase in nondurable goods sales. This is below February’s gain of 1.1 percent. Over the past year, the strongest wholesale sales were in automotive, machinery, lumber, miscellaneous nondurables and petroleum. Except for autos, these were among the top sales areas for March, as well.

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Questions or comments? Please contact Chad Moutray at cmoutray@nam.org

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