by Chad Moutray
As we begin the second half of 2017, indicators continue to provide mixed messages about the current state of the U.S. economy. On the one hand, the labor market continues to show signs of strength, and the overall outlook for the international economy remains strong. The Federal Reserve has focused on those positive developments as it pursues normalization for monetary policy, both in interest rates and in the size of its balance sheet. Yet, other data points suggest that—even with notable progress over the past year—there is a lot of room for improvement for manufacturing activity. While business leaders remain upbeat about demand and output moving forward, that optimism has not always been matched by hard data in economic reports—at least not yet.
On the positive side, the Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers’ Index rose in June to its strongest reading since August 2014. Most of the key indicators increased sharply, bouncing back from some easing in the springtime months, including new orders, production, exports and employment. The pace of hiring in June grew to a 15-month high, and growth of export orders remained encouraging, especially given the strength of the U.S. dollar and a number of global challenges over the past two years. In addition, prices for raw materials continued to decelerate, pulling back from April’s pace, which was the quickest rate since May 2011, mirroring other data.
At the same time, job growth in the U.S. economy rebounded in June, with nonfarm payrolls up by 222,000 and the May data revised higher. In the first half of 2017, nonfarm payrolls have increased by nearly 180,000 on average each month—a decent pace, but off from the 193,167 average in the second half of 2016. The unemployment rate rose from 4.3 percent in May—a 10-year low—to 4.4 percent, with the participation rate inching up from 62.7 percent to 62.8 percent. The employment report was seen mostly in a promising light, with the labor market showing increased signs of job growth. However, manufacturing employment has been soft over the past two months, edging up by 1,000 in June after declining by 2,000 in May. It was the sixth increase in net hiring in the past seven months, with the sector adding 71,000 workers over that time frame. However, the May and June figures were underwhelming nonetheless, especially when compared to sentiment surveys, such as the ISM one discussed above.
Similarly, new factory orders declined for the second straight month, down 0.8 percent in May, pulling back once again from March’s fastest pace since November 2014. Much of the decline for durable goods stemmed largely from sharp decreases in defense and nondefense aircraft orders, which can often be quite volatile from month to month. Excluding transportation, manufactured goods orders declined 0.3 percent, but durable goods excluding transportation increased 0.3 percent. Despite the weaker data of late, new factory orders have trended largely in the right direction over the past 12 months, up 4.2 percent since May 2016. Excluding transportation, the gains were slightly larger, up 5.5 percent year-over-year. Moreover, core capital goods—or nondefense capital goods excluding aircraft—rose 0.2 percent in May, with a gain of 5.5 percent over the past 12 months.
Meanwhile, the Census Bureau reported that private manufacturing construction spending eased again in May, down 1.7 percent. The value of construction put in place in the sector declined to its slowest pace since December. While the long-term trend for manufacturing construction remains mostly positive, activity has moved lower since achieving the all-time high in May 2015. Nonetheless, we would expect a turnaround in construction activity in the coming months.
On the trade front, real goods exports (in 2009 dollars) increased in May to a new all-time high, and exports for manufacturers have moved in the right direction through the first five months of the year. This is a welcome development after a number of challenges over the past two years. Using non-seasonally adjusted data, U.S.-manufactured goods exports have risen 3.67 percent year to date relative to the same time period last year. This reflects better year-to-date figures in the top-six markets for U.S.-manufactured goods. In addition, the U.S. trade deficit narrowed somewhat in May on a slight increase in goods exports and a corresponding decline in goods imports. The trade deficit has trended somewhat higher so far in 2017, averaging $46.61 billion per month year to date relative to $42.07 billion for 2016 as a whole. At the same time, the service-sector surplus in May was $20.99 billion, its highest point since August.
After decreasing in two of the past three months, we will be looking this week for a rebound in manufacturing production in June. Output in the sector has improved significantly across the past year, up 1.4 percent since May 2016, even with a springtime lull in the data. It is hoped the better figures in recent surveys translate into stronger (and broad-based) gains in production moving forward. In a similar way, retail sales have also been disappointing in recent months, and manufacturers will be looking for indications in new data that consumer spending has improved this summer. Other highlights include updates on consumer confidence, consumer and producer prices, job openings and small business optimism.