Overseas developments down, U.S. indicators good, says NAM’s Chad Moutray

Last week was mostly marked by events overseas, a trend that has become commonplace of late. In this case, it was the devaluation of the Chinese yuan that rocked financial markets around the world. Indeed, the yuan closed down 3.5 percent for the week on Friday. With the country continuing to experience decelerating growth, the Bank of China’s moves are designed to help stimulate its sagging economy. Beyond the easing in the overall economy, equity values have also fallen dramatically over the past two months. The Shanghai Stock Exchange Composite Index has fallen nearly 25 percent since June 12 despite government efforts to prop up stock values. (For more information on international trends, see the latest Global Manufacturing Economic Update, which was released on August 13.) The events in China continued to accentuate the strengthening of the U.S. dollar, and correspondingly, helped to push crude oil prices even lower. Along those lines, the price of West Texas Intermediate crude closed at $42.13 a barrel on August 14, trading at levels last seen in March 2009.

Notwithstanding these developments, there were also some encouraging signs that the manufacturing sector in the United States was starting the third quarter with improved activity. Manufacturing production rebounded strongly in July, up 0.8 percent, from declines in June and softer performance over much of the year so far. The increase in production stemmed largely from strong gains in the motor vehicle sector, but it went beyond that. In fact, 15 of the 19 major sectors experienced increased production for the month. However, it takes more than one month to make a recovery, and manufacturing production has increased just 1.4 percent year-over-year. Manufacturers will be looking for a much stronger pace of output growth in the coming months, even as headwinds from the strong U.S. dollar, lower crude oil prices and sluggish growth abroad continue to dampen demand. Fortunately, the sector should continue to benefit from minimal pricing pressures, as noted in last week’s release of producer price data for July.

Retail sales were also higher in July, up 0.6 percent for the month after being unchanged in June. The prior month’s weakness had been surprising, suggesting that persistent anxieties among the public have not really gone away. Indeed, the University of Michigan’s preliminary consumer sentiment data tend to confirm that notion, with Americans somewhat uncertain about the future even as they admit that the economy has improved relative to where it was at this point last year. Small business owners have largely had the same worries, albeit with a partial rebound in optimism. Nonetheless, the uptick in retail spending, which was led by increased purchases of automobiles, building supplies, home furnishings and items from nonstore retailers, was encouraging. When gasoline station sales are excluded from the analysis, the retail sales picture brightens even further, increasing 4.5 percent over the past 12 months.

The labor market has also shown signs of progress, with the manufacturing sector adding 15,000 workers on net in July, the fastest pace in six months. Job openings in the sector have also been stronger in the first half of 2015, even as postings eased a bit in June. The May pace had been the highest since July 2007, and there was an average of 326,000 manufacturing job openings through the first six months of the year, up from an average of 290,000 for all of 2014. That should bode well for stronger hiring moving forward. Meanwhile, manufacturing labor productivity also rebounded in the second quarter, up 2.5 percent after declining 0.6 percent in the first quarter. Much of that increase stemmed from better output data. The result was a decline in unit labor costs of 2.3 percent for manufacturers. This should help make the sector more competitive globally, and it was a step in the right direction, particularly as economists and policymakers grapple with reduced productivity growth in the overall economy.

The main headlines this week will come from the housing market. Housing starts and permits rose sharply in June on strong multifamily unit gains, and we will be looking to see if those increases can be sustained. More importantly, it will be important for residential construction growth to see single-family activity also increase. At the same time, manufacturers will also continue to monitor events abroad, with closely watched Markit PMI data out on Friday for China, Japan and the Eurozone. Other highlights include new manufacturing surveys from the New York and Philadelphia Federal Reserve Banks and the latest figures on consumer prices, leading indicators and state employment.

Chad Moutray

Chief Economist

National Association of Manufacturers

P.S.: If you have not already done so, please take a moment to complete the latest Manufacturers’ Outlook Survey from the National Association of Manufacturers (NAM). This 20-question survey helps us to gauge how manufacturing sentiment has changed since June’s survey. It also includes some special questions on monetary policy, capital spending plans and proposed overtime and ozone regulations. To complete the survey, click here. Responses are due by Friday, August 28. As always, all responses are anonymous.

Associated Industries of Missouri is the sole official designated partner of the National Association of Manufacturers in Missouri.