NAM: Monday Economic Report

NAM/IndustryWeek Survey of Manufactures Business
 Outlook by Quarter, 2012-2014
Manufacturers added 6,000 workers in April, marking the fifth straight month of job gains in the sector. The manufacturing sector has hired 14,200 additional workers on net over the past five months, a notable difference from the more cautious approach to hiring seen before that. Indeed, manufacturing lost 16,000 workers in 2016 as a whole, its first negative year since the Great Recession. The good news is that business leaders are more upbeat in their economic outlook so far in 2017, with demand and production expanding modestly once again. Meanwhile, the unemployment rate fell from 4.5 percent in March to 4.4 percent in April, the lowest level since May 2007. In addition, nonfarm payrolls rose by 211,000 in April, higher than the consensus estimate of around 180,000 and a relatively strong rebound after just 79,000 nonfarm workers hired in March.

The Institute for Supply Management’s (ISM) Manufacturing PMI slowed in April but continued to expand modestly. The composite index declined from 57.2 in March to 54.8 in April. As such, growth in the sector remained decent overall despite easing from February’s two-and-a-half-year high reading (57.7). Indeed, it was the eighth consecutive monthly expansion in the headline number, recognizing definite progress after two years of notable challenges in the sector. The ISM report mostly mirrors other sentiment surveys that have observed some pullbacks from multiyear highs post-election, even as they remain mostly encouraging.

Along those lines, the manufactured goods exports picture appears to have improved through the first three months of 2017. This is a welcome development after the declines in both 2015 and 2016. Using non-seasonally adjusted data, U.S.-manufactured goods exports totaled $263.83 billion year to date in March, up 3.67 percent from $254.49 billion in the same time period one year ago. This reflects better year-to-date figures in five of the top-six markets for U.S.-manufactured goods, with the exception being a slight decline in exports to the United Kingdom. Beyond those figures, the U.S. trade deficit edged marginally lower, down from $43.76 billion in February to $43.71 billion in March. Both goods exports and imports declined, essentially offsetting one another, with imports at their slowest pace since November.

At the same time, new factory orders increased for the fourth straight month even as the growth rate eased from 1.2 percent in February to 0.2 percent in March. With this increase, new orders were at their highest level since November 2014. Yet, much of the gain stemmed from higher defense and nondefense aircraft orders, as noted in the earlier release of preliminary durable goods figures. Excluding transportation, manufactured goods orders fell 0.3 percent, pulled lower by a decrease of 0.5 percent from nondurable goods firms. Durable goods orders rose 0.9 percent, but excluding transportation equipment, sales essentially stagnated. Nonetheless, new factory orders, which have struggled mightily over the past few years, have trended largely in the right direction more recently, up 5.8 percent since March 2016. With that in mind, it should not be a surprise that private manufacturing construction spending edged up in March, trending slightly higher in the first quarter after a recent lull in activity.

With that said, American consumers have been more cautious in recent months. Personal spendingremained flat in March, slowing from more robust purchasing at the end of 2016. In fact, personal consumption expenditures (PCEs) grew 0.9 percent at the annual rate in the first quarter, decelerating sharply from the 5.6 percent annual pace in the fourth quarter. In addition, the saving rate has moved higher with weaker spending activity, up from 5.2 percent in December to 5.9 percent in March. More than anything, that helps to explain the soft real GDP numbers for the first quarter of 2017, up just 0.7 percent. To be fair, we have seen improvements in personal spending over the longer term. For instance, PCEs have risen 4.7 percent since March 2016. Moreover, the saving rate was also slightly higher one year ago at 6.2 percent.

Building on those data points, we will be closely watching the retail sales figures for April, which are released this Friday. In the March release, spending edged down 0.2 percent, but year-over-year growth was still a quite respectable 5.2 percent. Other data highlights this week include updates on consumer and producer prices, job openings and small business optimism. The inflation numbers will be especially relevant in light of monetary policy, as firms have reported accelerating pricing pressures in recent months. The Federal Reserve, which opted not to raise rates at its May 1–2 meeting, continues to monitor the incoming data and will want to remain proactive if it appears that the U.S. economy is overheating and prices are rising faster than desired. We would expect at least two more increases in short-term rates this year, with the next one likely coming after the June 13–14 meeting of the Federal Open Market Committee.

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