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NAM: Monday Economic Report

Reflecting recent improvements in the labor market, the unemployment rate fell to 4.2 percent, its lowest level since February 2001. At the same time, though, the U.S. economy lost 33,000 workers on net in September, its first decline in seven years. Again, that was mostly hurricane-related losses, and we would expect that hiring growth should bounce back in the coming months.

Coincidentally, the jobs numbers were released on Manufacturing Day. It is important to remember that the ability to attract and retain a quality workforce is in a virtual tie for first place as one of the top challenges, according to the latest NAM Manufacturers’ Outlook Survey. As the labor market has tightened, workforce development challenges have become more pressing for business leaders in the sector. In addition, we have also seen some upward pressure on wages. In this release, average weekly earnings for manufacturing workers rose from $1,080.99 in August to $1,085.88 in September, with that figure up 2 percent over the past 12 months.

One of the reasons that we remain upbeat about employment growth moving forward is the optimism seen in sentiment surveys. For instance, the Institute for Supply Management (ISM) said that manufacturing activity expanded robustly in September, expanding at its fastest pace since May 2004. The ISM Manufacturing Purchasing Managers’ Index (PMI) increased from 58.8 in August to 60.8 in September. In September, new orders and production both grew at rates not seen since February, and more importantly, hiring accelerated at its briskest pace since June 2011. The index for new orders has now exceeded 60—a measure consistent with strong expansions in activity—in eight of the past 10 months.

In addition, exports have expanded for 19 straight months in the ISM survey, highlighting how international sales have also turned a corner after serving as a drag for much of the past couple years. Along those lines, the U.S. trade deficit fell to its lowest level in 11 months, and we have seen U.S.-manufactured goods exports rise 4 percent year-to-date through August. That is a welcome development after export demand was challenged so markedly in each of the past two years. Beyond improvement in the global economy, we have also seen the U.S. dollar depreciate over the course of this year, down more than 8 percent year-to-date against major currencies. That has also provided a lift for manufacturing exports.

Moreover, new factory orders bounced back somewhat in August, up 1.2 percent in August after falling by 3.3 percent in July. New orders of manufactured goods increased from $466.2 billion in July to $471.7 billion in August. It was only the second increase over the past five months, illustrating some choppiness in the data since the spring. Much of that volatility has come from large swings from month to month in the nondefense aircraft and parts sector, but motor vehicle sales have also been quite soft year-to-date. Excluding transportation, new orders were up 0.4 percent from $392.4 billion to $394.1 billion in this report. Overall, new factory orders—which have struggled mightily over the past couple years—have largely trended in the right direction more recently, up 5.7 percent since August 2016. Excluding transportation, the gains were somewhat larger, up 6.2 percent year-over-year.

Meanwhile, private manufacturing construction spending has remained a weak spot in the economy, falling 4.3 percent in August. Recent hurricane activity likely negatively impacted the latest figures, but the data have been soft for some time. The value of construction put in place in the sector declined to nearly a three-year low in August. While manufacturing construction has largely trended higher over the past few years, activity has trended lower since achieving the all-time high of $82.13 billion in May 2015. Nonetheless, we would continue to expect a turnaround in construction activity in the coming months, especially in light of the improved outlook of late. Overall, private nonresidential construction spending increased by 0.5 percent in August, but it has dropped by 2.5 percent over the past 12 months.

This week, we will get further clues on the current thinking of the all-important consumer. Retail sales have been softer than desired in recent months. Yet, at the same time, consumer spending has continued to increase modestly on a year-over-year basis, up 3.2 percent in August. We would expect some strengthening in the pace of purchases in September, but there could also be some lingering impacts from hurricane damages seen in the data. Other highlights for the week include new figures on consumer and producer prices, job openings and small business optimism.

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