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NAM: Monday Economic Report

Associated Industries of Missouri is the sole official designated partner of the National Association of Manufacturers in Missouri.After some encouraging signs of economic progress in recent weeks, leading to a narrative that manufacturing was beginning to stabilize, data out last week served as another reminder that challenges persist. The Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers’ Index (PMI) unexpectedly contracted for the first time since February. The composite index dropped from 52.6 in July to 49.4 in August, with new orders and production downshifting from decent growth to decreased activity in this latest report. In contrast to the ISM data, the competing Markit U.S. Manufacturing PMI release remained modestly expansionary, albeit with some easing for the month. Yet, even that survey reflects substantial deceleration in activity over the past few years for the sector, with more sluggish demand and output than preferred. With that said, exports were a bright spot in both releases, which was perhaps surprising given the still-strong dollar.

In another sign that manufacturing in the United States remains weaker than desired despite some signs of recent progress, employment in the sector fell once again in August. Manufacturers hired 14,000 fewer workers on net in August, and the job gains for the prior two months were revised down by a combined 10,000. All in all, manufacturing employment has fallen by 39,000 year to date through August, suggesting continuing cautiousness among manufacturing business leaders to add workers in light of lingering weaknesses in the global economy. Meanwhile, the U.S. economy added 151,000 employees in August, which was below the consensus estimate of around 175,000. On the positive side, nonfarm payrolls have averaged a fairly decent pace of 232,333 workers per month over the past three months, or 181,500 each month year to date. The unemployment rate was unchanged at 4.9 percent. (For a discussion on Labor Day and the manufacturing workforce, see the latest ShopTalk podcast featuring Aric Newhouse, Senior Vice President for Policy and Government Relations, and me.)

The Federal Reserve is scrutinizing these data points closely as it assesses the best timing for making its next rate hike. There was growing chatter earlier last week about an increased probability for the Federal Open Market Committee (FOMC) to raise short-term rates at its next meeting on September 20 and 21, particularly in light of comments made in Jackson Hole, Wyo. That might still be the case, but the softness of job gains in August, especially for manufacturing, will likely give participants some pause. I have long felt that there was always a possibility of an increase in the federal funds rate in September, but rates are more likely to go up in December. At this point, a move in September might hinge on the strength of data released between now and the next FOMC meeting.

The economic news in other indicators released last week was mostly mixed, blending together some positive developments with underlying softness. For instance, new factory orders rebounded in July after falling in both May and June. With that said, new orders for manufactured goods have fallen across the past 12 months. This suggests broader softness for manufacturers in terms of demand, perhaps highlighting why business leaders in the sector continue to be so cautious. At the same time, manufacturers in the Dallas Federal Reserve Bank’s district have noted declining activity for 20 straight months, particularly as still-low crude oil prices and a strong U.S. dollar continue to challenge these firms. Yet, some of the data points were encouraging in August, with pickups in orders, production and shipments.

As noted earlier, there were positive developments for export sales cited in both the ISM and Markit surveys. For its part, the U.S. trade deficit narrowed to a three-month low on better goods exports and reduced goods imports. Nonetheless, growth in international demand remains a problem. Using non-seasonally adjusted data, U.S.-manufactured goods exports have fallen 7.5 percent since July 2015, with reduced exports to the top six markets. Indeed, global headwinds and economic anxieties have been contributing factors in helping to explain why manufacturing construction spending has declined 5.1 percent year-over-year. Pullbacks in the energy sector have also likely impacted this figure negatively, although over the longer term, increased investments in the chemical sector, which continues to benefit from cost advantages in the energy sector, have boosted manufacturing construction by 34.5 percent over the past 24 months. In July, construction spending in the sector increased 3.9 percent after softening in the prior three months.

One of the larger positives in the U.S. economy has been the consumer, and on that score, the headlines were quite favorable last week. The Conference Board reported that consumer confidence rose to its highest level in August since September 2015. More importantly, there were signs that Americans were continuing to open up their pocketbooks. Personal spending increased for the fourth straight month, and over the past 12 months, personal consumption expenditures have risen 3.8 percent, a relatively healthy pace. Personal incomes have also increased, up 0.4 percent in July and 3.3 percent year-over-year. The saving rate edged slightly higher, up from 5.5 percent in June to 5.7 percent in July. Nonetheless, the saving rate has dropped from 6.1 percent in the first quarter of 2016 to 5.7 percent over the past four months.

This week will be a slower one on the economic front. The Federal Reserve will provide its region-by-region breakdown of economic developments in its monthly Beige Book on Wednesday, with new data coming out on consumer credit, job openings and wholesale trade.

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