NAM: Monday Economic Report

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Economic data on manufacturing activity were mixed last week, but for those who are optimists, there were also signs that demand, output and hiring might accelerate moving forward. Along those lines, the Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers’ Index accelerated to a two-year high in December. It was the second consecutive increase in the headline number, mirroring the jump in business confidence seen in other economic indicators since the election. Indeed, all of the sample comments provided by the ISM echoed the improvement in activity and outlook, noting strong business conditions, a tight labor market and a pickup in inflationary pressures. There were also encouraging data on new orders and production. It was the first time both of these measures have exceeded 60—signifying strong expansions—in 25 months, or since November 2014.

Likewise, manufacturing employment rose by 17,000 in December, its first monthly increase since July. Average weekly earnings in manufacturing also moved higher, up to $1,073.26 in December. On a year-over-year basis, average weekly earnings have increased from $1,035.71 in December 2015, up 3.6 percent for the 12-month period. We hope this is a sign of better hiring numbers moving forward. Nonetheless, it does not reverse the disappointing trend for 2016 as a whole, which saw manufacturing hiring down by 45,000 workers on net for the sector. Indeed, for most of last year, manufacturing leaders were quite cautious in their hiring. In the larger economy, nonfarm payroll employment increased by 156,000 in December.

Meanwhile, the unemployment rate inched up from 4.6 percent in November, its lowest level since August 2007, to 4.7 percent. This increase stemmed largely from a higher participation rate, which ticked up from 62.6 percent to 62.7 percent. At the same time, the so-called “real” unemployment rate, which includes those marginally attached to the labor force and those working part time for economic reasons, declined from 9.3 percent to 9.2 percent. Seven years ago, this number peaked at 17.1 percent in the aftermath of the Great Recession. December’s figure was the best since April 2008.

Despite such trends, there were also reminders that manufacturing activity has remained quite challenged over the past two years by global headwinds and economic uncertainties. The U.S. trade deficit rose to a nine-month high, up to $45.24 billion in November, on higher goods imports and reduced goods exports. More importantly, the data continue to reflect the difficulties in growing 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 fell 6.1 percent year to date in 2016 through November relative to the same time frame in 2015, and exports were lower to the top-six markets. With that said, the gaps appear to be narrowing in most of those markets, except for Canada, reflecting possible progress of late.

In a similar fashion, new factory orders fell 2.4 percent in November, declining for the first time since June. Yet, the decrease in November came largely from a drop in nondefense aircraft sales, which can be highly volatile from month to month. Excluding transportation equipment, new orders for manufactured goods edged up 0.1 percent. Over the longer term, new factory orders have started to stabilize on a year-over-year basis, improving from the solid negative declines in year-over-year growth seen in prior months. More positively, new factory orders excluding transportation have risen 1.4 percent over the past year in this report, only the second monthly year-over-year increase.

Finally, private manufacturing construction spending remained weak in November, down 1.1 percent for the month and falling to an 11-month low. While manufacturing construction has largely trended higher over the past few years, activity has stalled more recently. Along those lines, construction activity in the manufacturing sector has pulled sharply lower since achieving the all-time high of $82.15 billion in September 2015. Over the past 12 months, manufacturing construction spending has fallen 8.0 percent.

This week, we will get a better sense of consumer sentiment and activity. Consumer confidence has risen sharply in the past two months, and the University of Michigan and Thomson Reuters will report preliminary figures for January, which will determine if that positivity has continued into the new year. In addition, the Census Bureau will release December retail sales figures to see if the uplifting moods have translated into more purchases. To date, anecdotal evidence on holiday shopping has been spotty, making that report more interesting. Other highlights for the week include new data on job openings, producer prices and small business optimism.

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