Economic Report: October 5, 2015

We received two disappointing reports last week about the current health of the manufacturing sector. First, the Institute for Supply Management reported essentially stagnant levels of new orders and employment growth in September, with the Manufacturing Purchasing Managers’ Index at its lowest level since May 2013. Exports also contracted for the seventh time so far this year. This illustrates the struggles that manufacturers continue to face in light of economic headwinds from the stronger dollar, lower crude oil prices and sluggishness abroad. Such weakness was also seen in the latest survey results from the Dallas Federal Reserve Bank and in the most recent factory orders release. The Dallas report has reflected negative growth for nine straight months, and yet, on the bright side, the outlook for the next six months continued to be marginally positive.

The second discouraging report came on Friday with the release of lower-than-predicted labor market growth. Nonfarm payrolls increased by 142,000 workers in September, which was well below the consensus estimate of 200,000. Moreover, data for the prior two months were also revised downward, shedding another 59,000 nonfarm employees in total from the original estimates for July and August. At the same time, manufacturers lost 9,000 workers in September, extending the 18,000 decline in August. Since January (or over the past eight months), the manufacturing sector has netted zero net new jobs, with 27,000 workers lost in just the past two months. In the second half of 2014, manufacturers were hiring 20,667 workers per month on average, illustrating a significant pullback in employment growth year-to-date.

Overall, the weakness of these reports will likely diminish whatever chances there were for a short-term interest rate increase from the Federal Reserve at its October 27–28 meeting. Conventional wisdom still holds that the Federal Open Market Committee will begin the process of raising rates at its December 15–16 meeting, particularly given the Federal Reserve’s desire to act by year’s end. However, that decision will also hinge on seeing better data than what we have observed lately, including in this report. Perhaps we will get some additional insights on Thursday with the release of the minutes of the September 16–17 Federal Open Market Committee meeting.

To be fair, there were some bright spots to note in the economic data out last week. Consumer confidencerebounded strongly in September, according to the Conference Board, on improved perceptions about income and employment growth. Along those lines, personal spending increased by 0.4 percent in August, rising for the sixth consecutive month, with decent auto sales growth helping to buoy overall goods purchases during the past two months. On a year-over-year basis, personal spending has increased by 3.5 percent. In general, this suggests that Americans are increasing their spending modestly, but it also indicates a slower rate of purchasing than the more robust pace in late 2014. For instance, the year-over-year rate peaked at 5.0 percent in 2014 in August. Personal income was also up modestly in August, with total manufacturing wages and salaries rising from $794.4 billion in July to $796.3 billion in August.

Meanwhile, manufacturing construction spending rose by 1.5 percent in August, extending the 5.2 percent gain in July. This latest reading was another all-time high for the series, with the value of construction put in place for the manufacturing sector rising to $92.0 billion. Moreover, manufacturing construction totaled $58.1 billion in August 2014, representing a substantial increase of 58.4 percent year-over-year. Much of that gain stemmed from investments made in the chemical sector, which continues to benefit from cost advantages in the energy sector, as noted in my most recent column.

After a busy economic calendar this week, there are just a handful of reports being released next week. Manufacturers will closely watch the August trade data, which will come out on Tuesday, for signs of relief internationally. Manufactured goods exports have declined by more than 4 percent so far year-to-date, with significant headwinds for global demand due to a strong dollar and economic weaknesses overseas. Other releases of note include the latest data on consumer credit and wholesale trade.

Chad Moutray
Chief Economist
National Association of Manufacturers (NAM)

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