NAM: Monday Economic Report

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The U.S. economy grew 2.9 percent at the annual rate in the third quarter, up from 1.4 percent in the second quarter and its fastest pace in two years. Consumer spending, net exports and inventory spending were bright spots in the latest report, with fixed investment data remaining soft. Consumer spending on goods increased 2.2 percent at the annual rate in the third quarter, boosted by strength in durable goods purchases including motor vehicles. At the same time, net exports made its largest contribution to real GDP growth since the fourth quarter of 2014, with goods exports jumping an annualized 14.5 percent. Meanwhile, while spending on structures rebounded in the third quarter, business investments in equipment contracted for the fourth straight quarter, and the residential segment was off for the second consecutive report. On the positive side, business inventory spending picked up following five straight quarters where it was a drag on real GDP activity.

Still, even with the stronger results in the third quarter, which were mostly in line with consensus estimates, real GDP has increased just 1.5 percent year-over-year. Indeed, the economy notched just 1.1 percent growth at the annual rate in the first half of 2016, with 1.6 percent growth expected for the year as a whole.

Looking more closely at manufacturing, reports out last week were mostly mixed. Encouragingly, the Markit Flash U.S. Manufacturing PMI rose to a 12-month high on relatively strong pickups in both new orders and production, even as hiring activity remained more subdued. In addition, the Markit Flash Eurozone Manufacturing PMI increased to its fastest pace since March 2014. As such, the continent continued to brush off post-Brexit worries, with activity accelerating in October at a modest pace led by improvements in both Germany and France. In a similar manner, manufacturing activity in the Kansas City Federal Reserve Bank’s district picked up for the second straight month, with its composite index increasing to its fastest pace of growth since December 2014. Indeed, manufacturers in the district have struggled over much of the past two years on global headwinds and reduced commodity prices, especially for crude oil; yet, the underlying data mostly reflected better growth in October.

In contrast, the Richmond Federal Reserve Bank reported that manufacturing activity in its district remained soft in October, contracting for the third straight month. Nonetheless, shipments and hiring expanded slightly during the month, suggesting a degree of stabilization from recent weaknesses, but new orders, capacity utilization and the average workweek each declined in the latest report. Moreover, new durable goods orders continue to disappoint, edging down 0.1 percent in September. On a year-over-year basis, sales have increased 1.6 percent since September 2015. However, volatility in the transportation equipment segment has skewed the data. In September, transportation equipment orders fell 0.8 percent, largely on reduced activity for defense aircraft and parts. Excluding transportation, new orders for durable goods increased 0.2 percent in September, but over the past 12 months, they were essentially unchanged, down 0.04 percent.

Meanwhile, it is clear that consumers remain anxious. Consumer sentiment from the University of Michigan and Thomson Reuters declined to its lowest level in 13 months. Political uncertainties and economic worries, especially for households with incomes below $75,000, have contributed to recent decreases in this measure. Separately, the Consumer Confidence Index pulled back somewhat in October after reaching a nine-year high in September, according to the Conference Board. In that analysis, however, Americans remain more upbeat than earlier in the year, providing a bit of a disparity between the two competing measures.

These surveys often swing on pocketbook issues, and on that topic, manufacturing employees did get some good news regarding earnings last week. Manufacturing compensation rose 0.6 percent in the third quarter and up 2.5 percent year-over-year. Private-sector manufacturing workers earned 2.8 percent more over the past 12 months in wages and salaries, with benefit costs up 2.1 percent year-over-year.

This will be another busy week for economic indicator releases. The largest headlines will come from the Federal Open Market Committee, which meets on November 1 and 2 but is unlikely to raise short-term rates until the following month, and the latest jobs numbers from the Bureau of Labor Statistics. On the latter, manufacturers have been cautious this year regarding employment growth, with the sector losing 58,000 workers on net so far in 2016. We will be looking for signs of stabilization for manufacturing job growth in October after declines in both August and September, with nonfarm payroll growth of around 160,000 for the month. We hope to see continued signs of expansion in the Institute for Supply Management’s Manufacturing PMI, building on renewed strength in its most recent survey. Other highlights include the latest data on construction spending, factory orders and shipments, personal income and spending and productivity.

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