|There were some encouraging signs of stabilization in the manufacturing economy last week, even as growth remains subpar due to global headwinds and economic anxieties. For instance, the Institute for Supply Management’s Manufacturing Purchasing Managers’ Index continued to expand modestly in October, sustaining the rebound in September. The composite index edged up from 51.5 in September to 51.9 in October, growing for the second straight month. Production and exports both accelerated in October, and employment expanded for only the second time year to date in the report. In addition, new factory orders rose 0.3 percent in September, slowing slightly from the 0.4 percent gain in August. Still, on a year-over-year basis, new orders for manufactured goods remain quite soft. At the same time, activity in the Dallas Federal Reserve Bank’s district grew slightly in October even as current sentiment remained negative. As with other regional surveys, however, manufacturing leaders were mostly positive about the next six months.
Overall, manufacturers have been rather cautious so far in 2016. This can perhaps best be seen in the hiring data. Manufacturing employment declined by 9,000 in October, down for the third straight month. The sector has now lost 62,000 workers year to date. Despite the drop in hiring, average weekly earnings moved higher for the month and have jumped 3.5 percent year-over-year. In the larger economy, nonfarm payrolls rose by 161,000 workers on net in October, slowing from the 191,000 gain in September. This was mostly in line with expectations, even as it reflects slower job growth this year than last. Through the first 10 months of 2016, nonfarm payrolls have averaged 181,000 per month, down from the 229,000 average for all of 2015. The unemployment rate declined from 5.0 percent in September to 4.9 percent in October.
For the most part, the jobs data in October continued trends seen in prior months—not too hot but not too cold for the larger economy despite more discouraging figures for manufacturing. With that in mind, the October employment report is not likely to change minds for either the general election or the decision to raise short-term interest rates in December. At the conclusion of its most recent Federal Open Market Committee meeting, participants hinted that a rate hike was forthcoming. Specifically, the Federal Reserve’s statement said, “The Committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of continued progress toward its objectives.”
Other data out last week were mixed. On the positive side, personal spending rebounded strongly, up 0.5 percent in September after falling 0.1 percent in August. Americans have been more willing to open their pocketbooks in recent months relative to a more cautious approach earlier in the year. Along those lines, personal consumption expenditures grew an annualized 3.0 percent in the third quarter, with the personal saving rate falling from 6.2 percent in March to 5.7 percent in September. Similarly, manufacturing labor productivity improved in the third quarter, bouncing back from a decline in the second quarter largely on better output data. Nonetheless, labor productivity in the sector has risen just 0.2 percent year-over-year, which has been frustrating. Manufacturers have benefited from being leaner in the past several years, but the recent sluggishness in productivity and output growth has meant that unit labor costs have risen 9.7 percent since the end of 2011.
Economic anxieties have also likely contributed to reduced private manufacturing construction spending, which edged lower for the second straight month in September. Activity in September has moved higher since June, when it grew at its slowest pace since January 2015, but the longer-term trend has remained a positive one, up 27.1 percent over the past 24 months. Meanwhile, the U.S. trade deficit declined to its lowest level since February 2015. The reduced headline number stemmed from increased goods exports, fewer goods imports and a higher service-sector trade surplus, with the latter number at its highest point so far this year. Nonetheless, manufacturers continue to struggle with international demand, particularly with a strong U.S. dollar and lingering economic challenges to key markets. Using non-seasonally adjusted data, U.S.-manufactured goods exports have fallen 6.75 percent since September 2015, with exports lower to our top four trading partners.
There will be fewer economic releases this week, which will mostly be dominated by news about the general election. Highlights will include the latest figures on consumer credit, consumer confidence, job openings and small business optimism.