Manufacturing & The Economy
In July, year-over-year growth in manufacturing production was 1.2 percent, the slowest pace of growth in output for the sector since January 2010. It was the culmination of weaknesses experienced among manufacturers since mid-2012 as global demand and domestic uncertainties weighed heavily on overall production, pushing it to disappointingly low levels. Since then, however, we have begun to see a pickup in new orders and overall sentiment. The year-over-year pace of manufacturing production was 3.3 percent in the Federal Reserve Board’s most recent industrial production report. Manufacturing output has risen 1.1 percent in just the past three months, with capacity utilization up from 75.7 percent to 76.2 percent over that time frame.
While there has been progress, some weaknesses persist for the sector. Nondurable goods production continues to lag behind durable goods, with year-over-year growth of 1.5 percent for nondurable goods firms relative to a much stronger 5.4 percent increase for durable goods. Moreover, manufactured goods exports remain slow, up 2.2 percent year-to-date through September relative to the same nine-month period in 2012. Nonetheless, this suggests some improvement from the 1.7 percent year-to-date rate that was observed through June, with declines in export levels to Europe lessening as the year progresses. Meanwhile, the overall U.S. trade deficit widened from $38.7 billion in August to $41.8 billion in September largely on higher goods imports.
Labor productivity in the manufacturing sector rose at a slower pace in the third quarter, up 0.4 percent versus the 2.7 percent gain in the second quarter. Output was higher in the third quarter, led by strong gains for durable goods businesses. Unit labor costs were down 0.4 percent for durable goods manufacturers, helping to make them more competitive globally. Unit labor costs have decreased a whopping 11.1 percent for the durable goods sector since the end of the recession. In contrast, the numbers for nondurable goods manufacturers were more challenging, with third-quarter output down 0.3 percent and unit labor costs up 3.4 percent.
The two sentiment surveys released last week were both lower. The National Federation of Independent Business’s (NFIB) Small Business Optimism Index dropped from 93.9 in September to 91.6 in October. Weaker sales growth and continuing political frustrations were key factors in the latest drop in attitudes.
Meanwhile, the Empire State Manufacturing Survey from the New York Federal Reserve Bank reported contracting activity levels in November for the first time since May, with reduced new orders and shipments and employment stalled. Despite reduced optimism about the current economic environment, manufacturers in the New York Federal Reserve district remain mostly upbeat about the next six months. Nearly half of the respondents anticipate increased new orders and shipments in the coming months, with one-third expecting to add new workers. The latter is a potentially hopeful sign, especially with so many manufacturers hesitant to hire of late. Indeed, 56.6 percent said they were not planning to change their employment levels.
This week, we will learn even more about current manufacturing activity, with new surveys from the Kansas City and Philadelphia Federal Reserve Banks. In addition, Markit will release Flash PMI survey data for the United States, China and the Eurozone. Financial markets will focus on the minutes of the Federal Open Market Committee’s meeting October 29–30, trying to glean additional insights about future monetary policy directions before the upcoming December 19–20 meeting. As such, this will build on last week’s confirmation hearing of Janet Yellen to be the next Federal Reserve Board chair, in which she mostly reiterated the need to continue the Federal Reserve’s accommodative policies. Other highlights will be new data on consumer and producer prices, existing home sales, homebuilder optimism, job postings, retail sales and state employment changes.
Chad Moutray is the chief economist, National Association of Manufacturers.