NAM: Monday Economic Report

The Institute for Supply Management Manufacturing Purchasing Managers’ Index jumped from 58.1 in July to 61.3 in August, the best rate since May 2004, with solid growth in demand, output and hiring. Index readings greater than 50 indicate positive expansions in activity for the month on net, with data points greater than 60 consistent with very healthy gains. The index for new orders has now been 60 or greater for 16 straight months, which is encouraging, especially with sales being a proxy of future production activity. With ever-stronger economic growth, manufacturers report highly elevated pricing pressures. Prices for raw materials have pulled back from a seven-year high in May but continue to signal robust gains in costs. More than half of manufacturing respondents said their costs had risen in August, with just 6.8 percent suggesting they decreased.

While new factory orders fell 0.8 percent in July, most of the decrease stemmed from a decline in aircraft orders, which can be volatile from month to month. The June data were skewed higher by sales made at the Paris Air Show, for instance. Excluding transportation, new orders for manufactured goods edged up 0.2 percent in July. Overall, new factory orders have trended sharply higher over the past year. Along those lines, sales of manufactured goods have soared 9.0 percent since July 2017. Encouragingly, core capital goods—or nondefense capital goods excluding aircraft—rose 1.6 percent in July. These can be a proxy for capital spending in the U.S. economy, and as such, this suggests that capital investments have increased at a relatively healthy pace. Much like the headline numbers, there was a very solid gain of 8.8 percent over the past 12 months.

International trade has helped to boost this demand. Indeed, exports have increased strongly year to date in 2018, extending the nice rebound in 2017. U.S.-manufactured goods exports totaled $671.87 billion through the first seven months of 2018 using non-seasonally adjusted data, jumping 6.9 percent from the year-to-date total of $628.51 billion in 2017. In addition, U.S.-manufactured goods to our top-six trading partners also improved year to date this year relative to last year. Nonetheless, the U.S. trade deficit rose to $50.08 billion in July, a five-month high. On the positive side, petroleum exports grew to $15.77 billion, the highest level on record.

Meanwhile, private manufacturing construction spending rose for the second straight month, up 0.6 percent in July to $62.1 billion. After falling to the lowest level since September 2014 in May ($60.8 billion), it is encouraging to see some upward movement over the past two months. Yet, even with those increases, the value of construction put in place in manufacturing fell 4.4 percent from one year ago, with $64.9 billion in construction spending in the sector in July 2017. More broadly, construction in the sector has drifted lower since achieving the all-time high of $82.1 billion in May 2015. Looking ahead, construction activity should continue to rebound in the coming months, particularly given the overall strength in the outlook.

Despite the mostly positive manufacturing news last week, the latest monthly jobs data provided a bit of a letdown. Manufacturers lost 3,000 workers in August, the first decline in 13 months. Moreover, the robust gains of 33,000 and 37,000 in June and July were both revised lower, down to 21,000 and 18,000. Even with these pullbacks, the data reflect continued strength in the labor market, with the sector adding 254,000 workers over the past 12 months, or an average of 21,167 per month. That is consistent with healthy growth in the manufacturing sector, as described above. Since the end of the Great Recession, manufacturing employment has risen by 1,264,000 workers, with 12,717,000 employees currently in the sector. Turning to income growth, average weekly earnings for manufacturing rose from $1,107.82 in July to $1,110.28 in August, up 2.3 percent from $1,085.28 in August 2017.

At the same time, nonfarm payroll employment increased by 201,000 in August, up from 147,000 in July and somewhat better than the consensus estimate of 190,000. The unemployment rate remained at 3.9 percent, but the so-called “real” unemployment rate, which includes discouraged and other “marginally attached” workers in the labor force, edged down from 7.5 percent to 7.4 percent, the lowest rate since April 2001. That is an encouraging sign of progress and one that is consistent with recent tightness in the labor market.

In other news, manufacturing labor productivity grew 1.5 percent in the second quarter, an improvement from the earlier estimate of a 0.9 percent gain. It also improved from the decline of 0.8 percent in labor productivity in the sector in the first quarter. Output in the sector expanded 3.0 percent in the second quarter, with average hours worked up 1.5 percent and unit labor costs down 0.2 percent. Labor productivity for durable and nondurable goods firms rose 1.1 percent and 2.2 percent, respectively, in the second quarter, with output up 2.9 percent and 3.1 percent. Beyond manufacturing, the nonfarm labor productivity growth rate increased notably in the second quarter, up 2.9 percent, the best reading since the first quarter of 2015.

This week, new industrial production data for August will be released on Friday. In the July data, manufacturing production had increased 2.8 percent over the past 12 months, the best year-over-year rate since June 2012. Similarly, capacity utilization in the sector rose to 75.9 percent, the best reading since August 2015. The latest figures for August are expected to extend that expansion in output. Other highlights this week include updates on consumer sentiment, consumer credit, consumer and producer prices, job openings and retail sales.

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