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NAM: Monday Economic Report from Chad Moutray

MONDAY ECONOMIC REPORT  July 5, 2016

A Publication of the National Association of Manufacturers

Associated Industries of Missouri is the sole official designated partner of the National Association of Manufacturers in Missouri.

There continues to be mixed news on the current state of the manufacturing sector, mirroring the varied reports on the overall economy as a whole. My own sense is that manufacturing has begun to stabilize, albeit with lingering challenges that refuse to go away. On the positive side, the Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers’ Index (PMI) reported that manufacturing activity grew at its fastest pace in 14 months. The composite index rose from 51.3 in May to 53.2 in June. Strong growth in new orders and production helped to boost the headline number by more than expected. Exports also improved in this report, which was encouraging given recent struggles in increasing demand abroad. More importantly, this was the fourth consecutive monthly expansion in manufacturing activity, a definite improvement following five months of contraction in the months prior to that.

Yet, the ISM report highlighted some ongoing challenges. While hiring turned slightly positive in June for the first time since November, it is clear that manufacturers remain cautious enough in their outlook when it comes to adding new workers, at least for now. Inventories also continued to decline, albeit at a slower pace than in the previous release. At the same time, the two regional Federal Reserve Bank surveys—Dallas and Richmond—out last week both noted contracting activity in their respective districts in June. The Texas region has now contracted for 18 straight months as manufacturers in the district have grappled with reduced energy prices and global headwinds. With that said, respondents to both surveys remain cautiously optimistic about the next six months even with current softness in the market.

In addition to those surveys, there were also other measures indicating weaknesses. For instance, privatemanufacturing construction spending declined once again in May, down 1.9 percent for the month and slipping to its lowest level since December. Since achieving the all-time high in September, construction activity in the manufacturing sector has ebbed somewhat, down 6.9 percent year-over-year. (The long-term trend remained positive, up 41.7 percent over the past 24 months largely on increased investments in the chemical sector.) At the same time, preliminary data suggest that the goods trade deficit widened in May to a three-month high. This was largely the result of an increase in goods imports, with goods exports slightly lower. Final data on international trade for May will be released on July 6.

Meanwhile, there were also positive signals in the economy to note, in addition to the ISM data discussed earlier. Real GDP grew 1.1 percent in the first quarter, improving from the prior estimate of 0.8 percent. The revision included better data on nonresidential fixed investment and exports than previously reported, but it also found that consumer spending on services did not grow as fast as once thought either. In addition, there were indications that Americans have begun to open their pocketbooks a little, improving from the more cautious data in the first quarter. The Conference Board reported that consumer confidence rebounded in June after falling to a six-month low in May, with respondents more upbeat in their assessment of the current and future economy. Moreover, the saving rate fell to 5.3 percent, its lowest rate so far in 2016 after peaking at 6.0 percent in March. Personal spending also continued to grow modestly, up 3.6 percent year-over-year, despite slowing in May from a significant gain in April.

The disappointing jobs report in May was one of the more significant factors in derailing the Federal Reserve’s plans to raise short-term interest rates at its June meeting. For their part, manufacturers lost 10,000 workers on net in May, with 35,000 fewer employees in the sector year-to-date. With that in mind, the June employment data will be closely watched for signs of a rebound on the hiring front. While the prospects of a July rate hike from the Federal Open Market Committee have now been lessened by the “Brexit” vote, a strong jobs number would likely improve the prospects for action later this year. Beyond employment figures, the other economic numbers to watch this week include the latest figures on factory orders and international trade.

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

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