Associated Industries of Missouri is the sole official designated partner of the National Association of Manufacturers in Missouri.
In the second quarter, spending on goods was one of the brighter spots in an otherwise disappointing real GDP report, with personal consumption expenditures up 4.2 percent at the annual rate. Last week, we learned that retail sales cooled as we began the third quarter. Retail spending was unchanged in July, with Americans pausing in their consumer spending growth after jumping 0.8 percent in June. This suggests that the public was more cautious in July, likely on uncertainties in the global economy and some soft economic data. However, consumers have increased their spending at a modest pace over the past 12 months, up 2.3 percent since July 2015 or, more positively, up 3.5 percent excluding gasoline station sales. Still, consumer confidence has remained muted, even as sentiment ticked marginally higher in August in preliminary data. Beyond global headwinds, the University of Michigan and Thomson Reuters cite political uncertainties as a concern for consumers.
Slowing productivity growth has also been a worry, with manufacturing labor productivity averaging just 0.6 percent annually from 2011 to 2015. In comparison, output per worker in the sector from 2002 to 2008 averaged a more robust 5.2 percent annually. Over the longer term, manufacturers have benefited from being leaner, but the recent sluggishness in productivity and output growth has meant that unit labor costs have risen 8.1 percent since the end of 2011. In the latest release, manufacturing labor productivity edged lower in the second quarter, down 0.2 percent, on reduced output. Manufacturing output fell 0.8 percent, and hours worked dropped 0.7 percent, but hourly compensation costs were 2.9 percent higher. As a result, unit labor costs jumped 3.1 percent.
Perhaps more encouraging for manufacturers, job openings in the sector accelerated in June after dipping in May. Net hiring also turned positive for the first time in five months. We hope this is the beginning of a new, positive trend, especially given the relative strength in the job openings data. However, growth in manufacturing employment remains quite soft. In other news, the Small Business Optimism Index from the National Federation of Independent Business rose marginally from 94.5 in June to 94.6 in July, its highest level since December. It marked some continued improvement from March’s two-year low in optimism, even as small firms continue to be concerned about the overall economic outlook. Small business owners cited regulatory burdens as their top challenge, followed by taxes, the quality of labor and poor sales.
This week, we will be looking for signs of a continued rebound in manufacturing production, which grew 0.4 percent in June. While this was good news, manufacturing output has increased by only that same rate in the past year, a sign of just how challenged the sector has been over that time. Surveys from the New York and Philadelphia Federal Reserve Banks will also be released, both of which pulled lower in their July releases. We hope the August survey shows a turnaround in that trend. The other big headline of the week will be the Federal Reserve, with the release of the minutes from the July 26–27 Federal Open Market Committee meeting. Analysts will be looking for clues about the timing of the next short-term rate hike, which economists now expect to be during the December 13–14 meeting. One thing that has helped this decision has been minimal inflation, including from producer prices, giving the Federal Reserve more flexibility in its timing.
Other highlights of note this week include the latest figures for consumer prices, housing starts and permits, leading indicators and state employment.
Chad Moutray, Ph.D., CBE
National Association of Manufacturers