NAM: Monday Economic Report

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The U.S. labor market continues to strengthen. Nonfarm payrolls rose by 235,000 employees in February, with manufacturers adding 28,000 workers. It was the third straight monthly gain for the sector, and over the past three months, manufacturing employment has increased by 57,000. These numbers are consistent with increased demand, production and sentiment in the past few months in the sector. Indeed, manufacturers are more optimistic in their economic outlook and significantly less cautious about hiring than this time last year. This view is further supported by a belief that the new administration will help to usher in pro-growth policies that will accelerate activity in the U.S. economy and help to improve overall global competitiveness.

A strong jobs report will also all but guarantee that the Federal Reserve will raise short-term interest rates at this week’s meeting—something that it has already implied. When the Federal Open Market Committee (FOMC) meets March 14–15, it will discuss accelerating growth in the U.S. economy, including a pickup in pricing pressures. Along those lines, average weekly earnings for manufacturing workers have risen 3.1 percent over the past 12 months. In addition, the unemployment rate continues to approach “full” employment, edging down once again to 4.7 percent. The so-called “real” unemployment rate, which includes those marginally attached to the workforce and those who are working part time for economic reasons, fell from 9.4 percent to 9.2 percent. That matched the level in December, which had been the lowest since April 2008.

Meanwhile, new factory orders increased for the second straight month in January, up 1.2 percent. This was the highest level of new orders since July 2015. A large percentage of that gain stemmed from sizable growth in defense and nondefense aircraft sales, as noted in the earlier release of preliminary durable goods figures. More importantly, new factory orders, which have struggled mightily over the past few years, have begun to move in the right direction, up 3.8 percent since January 2016. Excluding transportation, the gains were even larger, up 6.0 percent year-over-year. Similar data were seen for manufactured goods shipments, even though growth in the January data slowed from the prior month.

In addition, we learned that manufacturing labor productivity rose faster than originally estimated in the fourth quarter. Output per worker in the sector increased 2.0 percent in the fourth quarter, which was better than the 0.7 percent preliminary figure. It was the highest growth rate since the third quarter of 2015. Despite the better numbers in the fourth quarter, manufacturing productivity rose just 0.3 percent in 2016, continuing a trend of soft growth since the Great Recession. For instance, manufacturing output per worker increased a paltry 0.2 percent from 2013 to 2016, well below the 5.2 percent pace from 2002 to 2008. 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 11.2 percent since the end of 2011.

Beyond those measures, there were also reminders that progress can be slow at times. Along those lines, the U.S. trade deficit rose to its highest level since March 2012, increasing from $44.26 billion in December to $48.49 billion in January. The higher figure stemmed largely from a jump in goods imports, which rose to levels not seen since March 2015. Still, one could also put a positive spin on these figures, as both goods exports and imports rose in the latest data. This might suggest a pickup in total trade, which has lagged in the past few years. Moreover, U.S.-manufactured goods exports also improved, with January exports up 4.9 percent from January 2016 levels.

The consumer credit figures also provided a mixed message. U.S. consumer credit outstanding increased 2.8 percent in January, slowing from 4.7 percent growth in December. The slower growth rate in January stemmed largely from a pullback in revolving credit, down 4.6 percent for the month. It was the first decline in 11 months for revolving credit, which includes credit cards and other credit lines. As such, Americans appear to have taken a pause after the holidays in their willingness to use credit cards to make purchases. The longer-term trend, however, continues to support the view that the public has been more willing to use credit cards, especially relative to the more cautious approach to spending this time last year. On a year-over-year basis, revolving credit has risen by a relatively healthy 6.0 percent.

This week, the FOMC meeting will dominate economic headlines, as noted earlier, with a likely 25-basis-point rate hike in the federal funds rate. There were also be a number of key indicators to watch, including industrial production on Friday. We will be looking for manufacturing production to increase for the sixth consecutive month, further illustrating the improving economic environment for the sector. This should also be supported by expansions in activity in the New York and Philadelphia Federal Reserve Bank surveys and by stronger housing starts and retail sales numbers. Other highlights this week include new data on consumer confidence, consumer and producer prices, job openings, leading indicators, small business sentiment and state employment.

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