NAM’s Chad Moutray: Continued struggles in manufacturing sector; movement forward possible in next six months

There is a persistent drip, drip, drip of disappointing news in recent data showing continuing struggles in the manufacturing sector, including a number of economic releases out last week. For instance,manufacturing production declined 0.1 percent in September, with output in the sector falling in six of the past 10 months. On a year-over-year basis, manufacturing production increased 1.4 percent in September, down from 1.8 percent in August and off sharply from 4.3 percent in January. Such developments are quite disappointing, particularly when compared to the cautious optimism coming into this year. In addition, manufacturing activity continued to contract in both the New York and Philadelphia Federal Reserve Bank reports, and both surveys found weaker new orders, shipments and hiring data for October. Yet, there were signs of hope moving forward, with respondents to both surveys remaining cautiously upbeat about the next six months.

Manufacturing job openings pulled back slightly in August from the eight-year high in July. Despite the slight easing, the data have largely trended higher over the past year. This should continue to bode well for stronger hiring activity moving forward. Nonetheless, net hiring in the manufacturing sector returned to negative territory for the first time since April, with separations reaching their highest level since January 2010. The labor market data were also weaker in the latest National Federation of Independent Business survey. The net percentage increasing employment over the past three months declined from 10 percent to 5 percent, with expected hiring over the next three months down marginally from 13 percent to 12 percent. Overall, however, small business optimism edged higher for the third straight month, even as owners remain anxious about the economy and expected sales over the coming months.

Along those lines, soft retail sales numbers spooked financial markets last week, prompting at least one widely read media story to cast doubts on Federal Reserve action this year. Retail spending increased by 0.1 percent in September, improving only slightly from being unchanged in August. More importantly, sales declined by 0.3 percent, falling for the second straight month, when motor vehicle and parts data were excluded. This would indicate that Americans are hesitant to open their pocketbooks, particularly beyond auto purchases. At the same time, lower energy prices continue to skew the data, with gasoline station sales off by a whopping 19.7 percent over the past 12 months. Retail sales excluding gasoline station sales rose 4.9 percent year-over-year, a more encouraging number than the headline number might seem to indicate. In other consumer news, preliminary confidence numbers from the University of Michigan and Thomson Reuters were somewhat higher in October, even as sentiment has dipped across the year.

Producer prices for final demand goods were down 1.2 percent in September, falling for the third straight month. Goods prices were pulled lower once again by reduced energy costs, which decreased 5.9 percent for the month. Food costs were also lower, declining for the seventh time in the past 10 months. On a year-over-year basis, producer prices for final demand goods and services have declined 1.1 percent in September. We have seen negative year-over-year numbers each month so far this year. Core inflation, which excludes food and energy costs, was 0.8 percent in August. Data on consumer prices were similar, albeit with core inflation a bit higher, up 1.9 percent year-over-year. Yet, these reports find minimal pricing pressures overall—at least for now.

This week, there will be two economic highlights of note. First, we will get new housing starts datatomorrow, which will be closely watched for signs of renewed progress. Starts reached 1.2 million units at the annual rate in June but have pulled back somewhat since then, and yet, there is an overarching sense that residential activity continues to make slow-but-sure improvements over the longer term. The second highlight of the week will come on Friday with the release of new flash PMI data on manufacturing activity for the United States and the Eurozone. Both have been bright spots in an otherwise weak international economy but have also seen softer performance of late due to global headwinds. The Kansas City Federal Reserve Bank will release its manufacturing survey, with challenges related to lower crude oil prices and a stronger dollar expected to continue challenging that region’s businesses. Other economic reports to watch for this week include the latest numbers on leading indicators and state employment growth, among others.

Chad Moutray, Ph.D., CBE
Chief Economist
National Association of Manufacturers

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