Economic Report: December 7, 2015

The overall November jobs numbers were widely interpreted as a positive for the U.S. economy—a sign that the labor market in general is moving in the right direction. Nonfarm payrolls rose by 211,000 workers in November, and the unemployment rate was unchanged at 5.0 percent. One of the larger exceptions to that is manufacturing, which continues to struggle. The sector lost 1,000 employees in November, with zero growth on net since January. Manufacturers remain mired by global headwinds and lower commodity prices. These challenges have dampened demand and production for manufacturers, and as a result, hiring has slowed to a standstill. We hope we will begin to see better employment growth in the sector moving forward, but that will hinge on better sales and output, particularly for exports.

Along those lines, the Institute for Supply Management’s Manufacturing Purchasing Managers’ Index contracted for the first time in three years. The composite index fell from 50.1 in October to 48.6 in November, the first negative number since October 2012 and the lowest level since June 2009. This is one more piece of evidence that manufacturers continue to struggle in the face of a strong dollar, lower commodity prices and difficulties in growing international demand. Indeed, the index for new orders decreased from 52.9 to 48.9, representing a sharp decline from the more robust pace of 63.0 in November 2014. Much like the headline figure, the new orders measure was the lowest since August 2012. Behind this number, exports (unchanged at 47.5) have declined in eight of the 10 months year-to-date.

Other data released last week continued to reflect softness in the manufacturing sector. On the positive side,new factory orders increased 1.5 percent in October, rebounding from declines in August and September. Yet, much of that growth stemmed from strong nondefense aircraft sales. Excluding transportation equipment, new orders rose more modestly, and more troubling, demand and shipments have both fallen by at least 4.5 percent year-over-year. At the same time, there were some signs of stabilization for production in the Dallas Federal Reserve Bank’s monthly survey, which was somewhat encouraging. Nonetheless, sentiment remained negative overall, with new orders contracting in 10 of the past 11 months. The sample comments tend to echo those findings, as many focus on difficulties in the oil and gas sectors, challenges in growing export sales and staff reductions. Indeed, the U.S. trade deficit widened slightly in October, with manufactured goods exports down more than 6 percent year-to-date, using non-seasonally adjusted data.

On the bright side, private manufacturing construction increased to another all-time high in October. The value of construction put in place rose from $87.46 billion at the annual rate in September to $90.08 billion in October. Manufacturing construction has increased substantially over much of the past year, up 40.5 percent from the $64.13 billion annual rate in October 2014. The large increases in manufacturing construction spending show that leaders remain confident enough in their outlook to warrant additional investments, which is encouraging. Much of that gain stemmed from investments made in the chemical sector, which continues to benefit from cost advantages in the energy sector.

However, the larger trend remains the significant softness in manufacturing production, output and hiring, as noted earlier. This is not likely to be enough to prevent the Federal Open Market Committee from raising short-term rates at its next meeting, particularly as it seeks to begin the process of normalizing rates by year’s end, which was once again reiterated in a speech and testimony from Federal Reserve Chair Janet Yellen. In her congressional testimony, she tried to steer the debate over rate increases away from the timing of the first one (likely December) to the longer-term path of rate increases and the degree of accommodation after that.

This week, we will release the fourth quarter results of the NAM Manufacturers’ Outlook Survey. This survey will show what our members are thinking right now about the economy, especially in light of recent headwinds. Beyond manufacturing, financial markets will closely watch new data on consumer confidence and retail spending. Coming into the holiday season, the data were soft, and the latest sentiment numbers expressed quite a bit of economic anxiety. Other highlights for the week include the most recent data on consumer credit, job openings, producer prices and small business optimism.

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

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