Economic Report: May 11, 2015

Once again, there was evidence last week that significant headwinds have dampened activity in the manufacturing sector. The sector added just 1,000 net new workers in April, marking the third consecutive month with soft hiring. The data suggest that challenges from a strong dollar, slowing growth abroad, lower crude oil prices, residual effects from the West Coast ports slowdown, a cautious consumer and weather have combined to take their toll on the economy, at least for the time being.

Other data points also reflect this weaker trend. Labor productivity in the manufacturing sector fell 1.1 percent in the first quarter, declining for the second straight quarter. This was largely due to a 1.2 percent decrease in output in the sector, increasing unit labor costs by 2.7 percent. Similarly, the most recent factory orders release was disappointing despite a 2.1 percent increase in sales in March. New manufactured goods orders were unchanged for the month when you exclude transportation equipment, suggesting softness in the broader market. On the positive side, the report reflected rebounding motor vehicle sales and strong aircraft orders.

Meanwhile, the U.S. trade deficit widened substantially, jumping to its highest level in nearly six and a half years. The data continue to show a sharp reduction in goods exports over the past few months from the averages experienced last year, and lower crude oil prices have decreased both exports and imports of petroleum. Exchange rate challenges and sluggish international demand have been major obstacles for the sector, dampening export growth and serving as a drag on the overall economy. Year-to-date manufactured goods exports have declined 3.8 percent in 2015, according to TradeStats Express, relative to the first three months of 2014. As such, the worse-than-expected trade data could revise real GDP growth for the first quarter into negative territory, down from the original estimate of 0.2 percent growth.

There were some encouraging signs last week, notably in the labor market. Nonfarm payrolls rose 223,000 in April, and the unemployment rate fell to 5.4 percent. The U.S. economy has generated employment growth of at least 200,000 in 13 of the past 14 months, averaging 253,000 per month over that time frame. In addition, manufacturers have averaged 14,750 new workers per month since the end of 2013, even with weaker data over the past three months. We hope the better hiring data in the overall economy is a harbinger of a return to healthy employment gains (i.e., in the 15,000 per month range) in the manufacturing sector across the rest of this year.

Next week, the highlight from a manufacturing perspective will be the latest industrial production figures on Friday from the Federal Reserve. After softer data the past four months, we will be looking for any signs of a rebound. The Empire State Manufacturing Survey will also come out on that day, providing our first look at regional sentiment for May. Another report that will be closely watched will be April retail sales on Wednesday, with analysts looking to build on better data in March. Beyond these releases, other highlights include updates on consumer sentiment, job openings, producer prices and small business optimism.

Chad Moutray
Chief Economist
National Association of Manufacturers (NAM)

For more news from NAM, visit www.nam.org.