Economic Report: April 6, 2015

This week marks the start of regular season baseball in the United States, an event I look forward to with anticipation every year. Somehow, the beginning of baseball seems to return life back to a normal, predicable cadence. Like the innings of a long game, we have seen a steady rise in nonfarm payrolls over the past year. This month, however, the labor market threw a curveball and upset the reliable recent progress in the labor market. Friday was not very good for the jobs market. Traders had the long weekend to contemplate the unpredicted Bureau of Labor Statistics jobs report before returning to work today.

The jobs report was the most important indicator of this week. It gives us a strong filter to the core of the economy and helps to clarify true economic direction after receiving contradictory signs during the week. Economists polled by Bloomberg were anticipating an increase of 245,000 jobs following the February increase of 295,000. Total nonfarm payroll employment increased by a mere 126,000 in March, a dramatic slowdown in hiring. The unemployment rate remained unchanged at 5.5 percent. Analysts have pointed to the poor late-winter weather in the Northeast and a decline in employment in oil-related industries as oil prices decline.

The previous 12 months have seen an increase of 200,000 jobs per month, making March’s report a particular disappointment. It is made worse by the fact that the decline was unexpected. The U.S. market has a large sensitivity to missed expectations. Contradictory indicators and a surprising jobs report shows the U.S. economy is not back to full speed.

Unfortunately, glum news is coming at us from all directions. Analysts this week appear to have run out of synonyms for “bad” and consulted the thesaurus for more options, describing the U.S. economic activity ascrumbling and jobs as being slaughtered. Momentary bright spots emerged in consumer confidence and new factory orders. However, those positive indicators were dampened at the end of the week with the March jobs report.

The Dallas Fed Manufacturing Outlook Survey released on March 30 showed pessimism, with forecast worsening in the General Business Activity Index to the lowest level since 2011. New order growth rates remained negative for the fifth month in a row.

Consumers obviously didn’t get the memo from the Dallas Fed. Published on Tuesday, the Confidence Board’s Consumer Confidence Index shows contrarian optimism this month after a dip in February. Ignoring the outlook for tepid business conditions, consumers felt more upbeat about employment and income prospects. This also ended up being a poor indicator for the jobs report later in the week.
Wednesday’s ISM Purchasing Managers Index fell for a fourth consecutive month to 51.5 percent, further pointing to languorous manufacturing activity in the United States. Index results under 50 percent indicate manufacturing contraction. If consumers had waited a day to read the ISM report, they might be much less glib, as the ISM wage and hiring indexes were not much better, showing little prospects for expansion.

Thursday continued last week’s roller coaster ride with the unexpected positive news of a 0.2 percent rise in the Department of Commerce report of new orders for manufactured goods. Economists, a notoriously skeptical bunch, had expected factory orders to slip 0.5 percent, as factory orders have been shellacked by the stronger dollar and weaker global demand. This month, orders excluding transportation rose 0.8 percent, the largest in eight months. Shipments of factory goods rose 0.7 percent after four straight months of declines as the effect of the West Coast port impasse dissipates.

Macro Trends in U.S. Manufacturing (chart)
Above we have a chart showing a view into the shifting macroeconomics in the manufacturing sector through the window of imports of goods into the United States. This chart represents the percentage of U.S. imports from several key countries from 1985 to 2014.

Several results are noteworthy from this chart:

• The percentage of U.S. imports originating in China continues to increase despite analysis from many economists, myself included, indicating manufacturing cost in China is near parity with the United States. After a recession dip in 2008–2010, recent data indicates China continues to increase penetration as the country of origin of U.S. imported manufactured goods. The growth can’t continue indefinitely and wage inflation is dampening the competitiveness of the Chinese Manufacturing Machine, however the powerhouse continues to grow.

• European Union imports have remained relatively flat since 1997, with a mild uptick in penetration in the past three years. This came as a surprise to me; intuitively I would have anticipated EU imports to be declining over time as other manufacturing economies expanded. This constant result shows a robust and enduring U.S. demand for European goods. I like to think I did my little part to prop up this curve with my recent trip to South Bay BMW.

• Japan is the mirror image of China, declining from 21 to 6 percent of U.S. imports. Two major factors have influenced this change over time. First, Japan has localized production of its largest export product in the United States: automobiles. Second, manufacturing of lower complexity products has shifted over time from Japan to China and other economies.

Mexico manufacturing has consistently gained a larger market share of U.S. imports. It held stagnant from 2000 to the 2008 recession, coinciding with the explosive increase in Chinese imports. Since then, Mexico manufacturing has been growing due to stable wage inflation and geographic proximity to the U.S. market. We anticipate Mexico’s percentage of U.S. imports to increase in the future.

Christopher Reed
Senior Economist
Honeywell Aerospace

Editor’s Note: Many thanks to Christopher Reed of Honeywell Aerospace for compiling this week’s Monday Economic Report.