NAM: Monday Economic Report
The manufacturing sector continued to expand strongly in October, even with some easing in the underlying data, as seen in reports from both the Institute for Supply Management® and the Dallas Federal Reserve Bank. Trade uncertainties and rising prices remain top of mind for business leaders, but the outlook for growth in new orders, production and employment over the next six months remains solid.
Manufacturers added 32,000 workers in October, with 296,000 employees generated in the sector over the past 12 months. That translates into nearly 25,000 workers per month added in the manufacturing sector over the past year—a healthy pace that speaks to the strength in the economy and the overall outlook. In the larger economy, nonfarm payroll employment rose by 250,000 in October, well above the consensus estimate of around 180,000. The unemployment rate remained at 3.7 percent, the lowest since December 1969.
There were also signs that the tight labor market has been increasing wages. In the personal income data, manufacturing wages and salaries totaled $893.4 billion in September, up 4.7 percent over the past 12 months. At the same time, average weekly earnings for nonsupervisory and production workers in manufacturing have increased 3.2 percent year-over-year to $912.73, continuing an upward appreciation in wages in light of the tight labor market.
Consumer confidence jumped to the highest level since September 2000, with the headline index from the Conference Board up from 135.3 in September to 137.9 in October. Americans felt more upbeat about current and future economic conditions, largely on strength in the labor market.
Manufacturers produced $2.33 trillion in value-added output in the second quarter, another all-time high, with the sector accounting for 11.4 percent of real GDP. Adjusted for inflation (in 2012 dollars), real output also set a new record.
ADP National Employment Report: Manufacturers added 17,000 workers in October, according to ADP estimates, up from 10,000 in September and averaging roughly 18,000 per month over the past 12 months. As such, hiring remained solid in the sector. Meanwhile, total nonfarm private employment increased by 227,000 in October, stronger than expected and up from 218,000 workers added in September. The labor market has grown robustly overall, with nearly 208,000 employees generated per month on average over the past 12 months. Fifty-five percent of the net new jobs created in October came from small and medium-sized businesses.
BLS National Employment Report: Manufacturers added 32,000 workers in October, with 296,000 employees generated in the sector over the past 12 months. That translates into nearly 25,000 workers per month added in the manufacturing sector over the past year—a healthy pace that speaks to the strength in the economy and the overall outlook. Indeed, there were 12,785,000 manufacturing workers in October, with 1.33 million employees added since the end of the Great Recession. More importantly, average weekly earnings for nonsupervisory and production workers in manufacturing have increased 3.2 percent year-over-year to $912.73, continuing an upward appreciation in wages in light of the tight labor market.
At the same time, nonfarm payroll employment rose by 250,000 in October, well above the consensus estimate of around 180,000. The unemployment rate remained at 3.7 percent, the lowest since December 1969.
Conference Board Consumer Confidence: Consumer confidence jumped to the highest level since September 2000, with the headline index up from 135.3 in September to 137.9 in October. Americans felt more upbeat about current and future economic conditions, largely on strength in the labor market. The percentage of respondents saying jobs were “plentiful” rose from 44.1 percent to 45.9 percent, with just 13.2 percent saying jobs were “hard to get.” Income expectations also picked up. As a result, the percentage of respondents saying business conditions were “good” ticked up from 39.9 percent to 40.5 percent, with those suggesting conditions were “bad” declining from 9.6 percent to 9.2 percent.
Construction Spending: Private manufacturing construction spending increased for the fourth straight month, up 1.1 percent in September to $67.77 billion at the annual rate. After falling to the lowest level since September 2014 in May ($60.77 billion), construction activity has started to trend slightly higher, which is encouraging and largely consistent with strength in the overall outlook. The value of construction put in place in manufacturing has risen 4.4 percent from one year ago, with $64.89 billion in construction spending in the sector in September 2017. Nonetheless, construction in the sector remains well below the all-time high of $82.1 billion in May 2015.
Dallas Fed Manufacturing Survey: Manufacturing activity in Texas continued to expand strongly in October, albeit with some easing in many measures from September. This includes slower growth for production, capacity utilization, shipments and hours worked. Yet, growth rates improved for new orders, employment and capital expenditures, which was encouraging. Along those lines, the composite index of general business conditions picked up from 28.1 in September to 29.4 in October, and more importantly, survey respondents remained very upbeat in their outlook for the next six months, with more than half expecting increased orders, shipments, production and wages.
Employment Cost Index: Private manufacturing wages and salaries increased 0.6 percent in the third quarter, the same pace as in the second quarter. That translated into 2.6 percent growth over the past 12 months. For all private-sector employees, wages and salaries rose 0.8 percent, with 3.1 percent year-over-year growth, the fastest pace since the second quarter of 2008. With that said, benefit costs eased in the third quarter, pulling total compensation costs down. Compensation for manufacturing employees rose 0.2 percent in the third quarter, the slowest rate in two years.
Gross Domestic Product by Industry: Real GDP grew 4.2 percent at the annual rate in the second quarter, boosted by strong consumer and business spending and net exports. According to new data from the Bureau of Economic Analysis, manufacturing added 0.26 percentage points to top-line growth in the second quarter. Overall, manufacturing gross output increased from $6.093 trillion in the first quarter to $6.202 trillion in the second quarter, a new all-time high.
Those findings closely mirrored the value-added data for manufacturing, which rose from $2.272 trillion in the first quarter to $2.329 trillion in the second quarter, also a new all-time high. The bottom line is that manufacturing accounted for 11.4 percent of real GDP in the second quarter, up from 11.3 percent in the prior report. Adjusting for inflation, a new all-time high also occurred for real value-added output in manufacturing, up from $2.114 trillion in the first quarter to $2.126 trillion in the second quarter. Those figures are in chained 2012 dollars.
International Trade Report: The U.S. trade deficit rose from $53.31 billion in August to $54.02 billion in September, which was the highest level since February, on a jump in goods imports that exceeded the increase in goods exports. The level of goods imports registered an all-time high, especially for capital goods, which set a new record. At the same time, the export of industrial supplies and materials also rose to a new high. On a more encouraging note, U.S.-manufactured goods exports have risen 6.6 percent so far in 2018 through the first nine months of 2018 relative to the pace in the first three quarters of 2017. That suggests that manufacturing exports have continued to build on the rebound in international demand started last year.
ISM® Manufacturing Purchasing Managers’ Index® : Manufacturing continued to expand strongly in October, but the rate of expansion slowed to a six-month low in the latest survey from the Institute for Supply Management (ISM®). The ISM® Manufacturing Purchasing Managers’ Index® declined from 59.8 in September to 57.7 in October, with new orders (down from 61.8 to 57.4), production (down from 63.9 to 59.9), employment (down from 58.8 to 56.8) and exports (down from 56.0 to 52.2) decelerating. The sample comments suggest that trade uncertainties and rising prices remain top-of-mind for manufacturers nationally. Regarding prices, the acceleration in raw material costs increased (up from 66.9 to 71.6), continuing to suggest highly elevated inflationary pressures for firms.
Personal Consumption Expenditures (PCE) Deflator: The PCE deflator—the Federal Reserve’s preferred inflation measure—inched up 0.1 percent in September for the fourth straight month. At the same time, core inflation, which excludes food and energy, increased 0.2 percent. On a year-over-year basis, the PCE deflator has risen 2.0 percent over the past 12 months, down from 2.2 percent in August and the lowest rate since April. Excluding food and energy, core PCE inflation remained at 2.0 percent year-over-year in September for the fifth consecutive month. As such, core inflation is at the Federal Reserve’s stated target, not only reflecting an appreciation of pricing pressures across the past year but also indicating some moderation over the past month.
Personal Income and Spending: PCEs rose 0.4 percent in September, slowing from 0.5 percent growth in August but remaining strong overall. Americans increased their purchases of durable and nondurable goods for the month, up 1.4 percent and 0.3 percent, respectively, with the former led by solid gains for motor vehicles and parts. More importantly, personal spending has risen a robust 5.0 percent over the past 12 months, easing from 5.5 percent in the prior report. The saving rate registered 6.2 percent in September, the lowest point so far in 2018.
Meanwhile, personal income rose 0.2 percent in September, with 4.4 percent year-over-year growth. Manufacturing wages and salaries totaled $893.4 billion in September, up 4.7 percent from $853.6 billion one year ago.
Productivity and Costs: Manufacturing labor productivity grew just 0.5 percent in the third quarter, slowing from a gain of 1.2 percent in the second quarter. Encouragingly, manufacturing output rose 3.4 percent in the third quarter, the fastest pace so far in 2018. Labor productivity for durable goods firms increased 1.5 percent in the third quarter, but productivity edged down 0.1 percent for nondurable goods manufacturers.
Manufacturing labor productivity in the sector has increased 1.3 percent over the past four quarters. While that was better than the 0.1 percent annual growth rate on average from 2013 to 2017 (and the 0.7 percent increase last year), it remains less than desired. The average growth rate for manufacturing labor productivity registered 3.9 percent and 4.6 percent in the 1990–2000 and 2002–2008 time frames, respectively, or the two prior economic recoveries.Chad Moutray, Ph.D., CBE
National Association of Manufacturers