NAM: Monday Economic Report
There were encouraging signs of strength in the manufacturing sector last week, including the latest jobs numbers. Manufacturers added 36,000 workers in June, the industry’s fastest pace of job growth since December. More importantly, it was the ninth consecutive month with robust hiring growth in the sector, with an average 27,111 jobs added per month over that timeframe. As such, the latest jobs numbers confirm that the labor market has tightened significantly. Since the end of the Great Recession, manufacturing employment has risen by 1,260,000 workers, with 12,713,000 employees in the sector in this report. That is the highest level of manufacturing employment since December 2008. At the same time, average weekly earnings for production and nonsupervisory employees in the manufacturing sector were $902.16 in June, up 3.0 percent from one year ago.
Today’s report is more proof that the economy is still roaring following pro-growth tax and regulatory reform. Manufacturers have added 155,000 total jobs in just the six months since tax reform was enacted—a marked increase in the pace of job creation compared to previous years. To keep this robust growth going long-term, manufacturers need certainty, and that will depend heavily on having sound trade policy and making temporary portions of the new tax code permanent. These numbers also help to cement more Federal Reserve rate action, largely based on improvements in the overall economy and labor market, with two more federal funds rate hikes expected in 2018.
Meanwhile, nonfarm payrolls rose at a healthy pace, up 213,000 in June, extending the gain of 244,000 seen in May and better than the consensus estimate of around 185,000. In addition, the unemployment rate ticked up from 3.8 percent in May, its lowest level since April 2000, to 4.0 percent in June. The higher unemployment rate, though, was largely a function of an increased participation rate, up from 62.7 percent to 62.9 percent. This suggests that more Americans are entering the labor market, which is encouraging.
Beyond employment, there were other indications that manufacturing activity remained quite healthy. For instance, the ISM Manufacturing Purchasing Managers’ Index (PMI) rose from 58.7 in May to 60.2 in June, its highest level since February. Index readings over 50 indicate positive expansions in activity for the month on net, with data points over 60 consistent with very healthy gains. Along those lines, indices for new orders and production both exceeded 60 in June, with the new orders figure at 60 or greater for 14 straight months. The sample comments echoed that strength in the economy, even as respondents cited continuing trade worries. Yet, exports strengthened somewhat in June. With ever-stronger economic growth, manufacturers report accelerated input costs. Prices for raw material prices pulled back from a seven-year high in May, but remained highly elevated.
In addition, new factory orders rebounded in May, up 0.4 percent for the month after declining by 0.4 percent in April. This included a 7.0 percent decline in nondefense aircraft and parts sales, which can be highly volatile month to month, with orders bunched around key events. Excluding transportation equipment, new orders for manufactured goods increased by 0.7 percent in May, extending the 0.9 percent gain seen in April. Overall, new factory orders have trended sharply higher over the past year. Along those lines, sales of manufactured goods soared 9.2 percent since May 2017. Moreover, core capital goods—or nondefense capital goods excluding aircraft—rose by 2.1 percent and 0.3 percent in April and May, respectively. 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, with a solid gain of 6.5 percent over the past 12 months.
On the trade front, U.S.-manufactured goods exports totaled $478.73 billion through the first five months of 2018 using non-seasonally adjusted data, jumping 7.38 percent from the year-to-date total of $445.84 billion in 2017. This suggests that exports for manufacturers have continued to increase at a solid pace so far this year, extending the nice rebound seen last year. At the same time, the U.S. trade deficit fell to $43.05 billion in May, its lowest level since October 2016. More importantly, goods exports rose to a new all-time high, $144.89 billion. This was enough to offset a slight uptick in goods imports, up to $210.68 billion. In addition, the service-sector trade surplus increased to $22.74 billion, its second-highest reading after February 2015’s pace of $22.77 billion.
Of course, it was not all good news. Private manufacturing construction spending continued to lag behind, declining 2.4 percent in May, falling to its lowest level since September 2014. The value of construction put in place in the sector was $60.99 billion in May. This was off 11.0 percent from one year ago, with $68.54 billion in manufacturing construction spending in May 2017. More broadly, construction in the sector has drifted lower since achieving the all-time high of $82.13 billion in May 2015. Even with continued weakness in this measure, construction activity should rebound in the coming months, particularly given the strength in the overall outlook
This week, we will get more information on the employment market with the release of job openings figures for May. In April, job openings for nonfarm payroll businesses rose to a new all-time high, jumping to 6,698,000 in April and, more importantly, there were more Americans looking for work than there were positions available. This included in manufacturing, which had 451,000 job openings in April, the best reading since January 2001. This was consistent with our most recent outlook survey, which found that the inability to find talent was the top challenge cited by manufacturers. Other highlights this week include updates on consumer confidence, consumer credit, consumer and producer prices and small business optimism.
Chad Moutray, Ph.D., CBE
National Association of Manufacturers