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NFIB: Small Business Optimism Edged a Little Lower in September

The National Federation of Independent Business (NFIB) said that small business sentiment edged lower in September. The Small Business Optimism Index dropped from 96.1 in August to 95.3 in September. Still, small business owners’ sentiment has largely improved after waning in the first quarter of 2014, when the index bottomed out at 91.4 in February. Nonetheless, after peaking at 96.6 in May (its highest level since September 2007), the index has eased somewhat. This suggests that small firms continue to have anxieties about economic growth despite recent progress. Moreover, the index remains below 100 – a level that would indicate health in the small business sector.

Indeed, many of the underlying data points were softer in September. For instance, the net percentage of respondents expecting sales to be higher in the next three months has fallen from 15 percent in May to 5 percent in September. Along those lines, the net percentage planning to hire more workers in the next three months has declined from 13 percent in July (a seven-year high) to 9 percent in September. In addition, capital spending plans over the next three to six months also dropped slightly, down from 27 percent in August to 22 percent in September.

Interestingly, the percentage of small business owners saying that the next three months were a “good time to expand” improved, up from 9 percent in August to 13 percent in September (its highest level since December 2007, the first month of the recession). As such, these data definitely have a nuanced perspective, showing both improvements in the economy and persistent challenges. Economic worries and the political climate were the main reasons noted for those suggesting that it was not a good time for expansion. Regulations were the “single most important problem,” cited by 22 percent of respondents. This was followed by taxes (21 percent) and poor sales (14 percent).

Chad Moutray is the chief economist, National Association of Manufacturers. 

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Monday Economic Report – October 14, 2014

Here is the summary for this week’s Monday Economic Report: 

Financial markets have been rocked by worries about slowing economic growth, particularly in Europe. The Dow Jones Industrial Average has fallen 4.2 percent so far this month, declining to 16,321.07 yesterday on Columbus Day. The concern started after the Federal Open Market Committee (FOMC) released the minutes from its September 16–17 meeting last Wednesday. Indeed, the participants discussed how softer economic activity and geopolitical events could risk U.S. economic progress.

Then, on Thursday, the International Monetary Fund (IMF) slightly downgraded its global outlook, with Asia, Europe and South America growing slower than expected three months ago. The IMF now expects world output to expand 3.3 percent and 3.8 percent in 2014 and 2015, respectively, down from 3.4 percent and 4.0 percent as estimated in its July report.

Interestingly, the IMF raised its forecast for the United States, with the estimate of real GDP growth for 2014 up from 1.7 percent to 2.2 percent. This reflects recent strength in the U.S. economy, particularly when compared to other nations. To be fair, the IMF had more optimistic expectations for growth coming into this year, projecting 2.8 percent growth in 2014 in its January report. After disappointing growth in the first quarter, however, it lowered its outlook projections, much like everyone else.

Otherwise, last week was light on economic indicators. Of the ones that were released, the data were mostly mixed. California manufacturers reported a slight easing in the pace of new orders and output, particularly for durable and high-tech industries. Nonetheless, the data still reflect relatively health gains in activity, and hiring in California ticked higher.

In contrast, net hiring in the sector slowed in August nationally. On the positive side, manufacturing job openings have risen steadily this year after bottoming out in February, rising to 297,000 postings in August. These gains were part of a larger upward trend, with total nonfarm job openings increasing to their highest level since January 2001.

Beyond those measures, we learned that wholesale sales were somewhat soft in August—not unlike a number of other indicators. In addition, consumers were less willing to take on credit card debt. At the same time, wholesale spending has increased 5.9 percent over the past 12 months, indicating decent growth, with consumer indebtedness rising 6.8 percent. As such, it is clear that Americans have continued to spend, even if the pace lessened somewhat in August.

After some unexpectedly soft data in August, we will be looking for better housing starts and industrial production figures for September, both of which come toward the end of this week. Industrial production is expected to increase around 0.3 percent, and housing starts should once again exceed an annualized 1 million units. There will also be manufacturing surveys from MAPI and the New York and Philadelphia Federal Reserve banks. Beyond those indicators, other highlights include the latest data on consumer and producer prices, consumer sentiment, retail sales and small business optimism.

Chad Moutray is the chief economist, National Association of Manufacturers. 

job openings - oct2014

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Global Manufacturing Economic Report – October 10, 2014

Here is the summary for this month’s Global Manufacturing Economic Update: 

The International Monetary Fund (IMF) slightly downgraded its global outlook earlier this week, with Asia, Europe and South America growing slower than expected three months ago. The IMF now expects world output to expand 3.3 percent and 3.8 percent in 2014 and 2015, respectively, down from 3.4 percent and 4.0 percent as estimated in its July report. One notable exception to this downward trend was the United States, with the IMF raising its 2014 forecast from 1.7 percent to 2.2 percent real GDP growth. This reflects recent strength in the U.S. economy, particularly when compared to other nations. To be fair, the IMF had more optimistic expectations for growth coming into this year, projecting 2.8 percent growth in 2014 in its January report. After disappointing growth in the first quarter, however, it lowered its outlook projections, much like everyone else.

One of the bigger challenges remains Europe. The Markit Eurozone Manufacturing Purchasing Managers’ Index (PMI) continued to decelerate in September, with activity just shy of being stagnant. New orders contracted for the first time since June 2013, when the Eurozone was emerging from its deep two-year recession. Indeed, the fear is that Europe will once again sink back into recession, with contracting levels of activity seen in four nations in September: Austria, France, Germany and Greece. Of particular note on this list was Germany, the largest economy in Europe. Real GDP was unchanged in the second quarter, down from 0.2 percent growth in the first quarter. Meanwhile, both industrial production and retail sales were higher in August. We will get new production data next week, and it is expected to be softer. For its part, the European Central Bank kept its monetary policies unchanged, but there is an expectation of further stimulus in the coming months.

Meanwhile, Brazil, Russia, India and China also continue to experience softness. Brazil shifted into its fifth contraction so far this year, but investors are cautiously optimistic about the upcoming runoff election between incumbent President Dilma Rousseff and Aécio Neves, who is favored by business leaders. Russia, India and China are growing, but just barely. China’s manufacturing sector has shown signs of stabilization, but stronger growth remains elusive. A number of key economic indicators in China have continued to decelerate this year, including industrial production, and it is likely that real GDP will decline from 7.5 percent growth in the second quarter to 7.3 percent in the third quarter. India’s PMI figure in September was at its lowest point this year, and Russian exports continue to fall. Nonetheless, it was not all bad news in the emerging markets. For instance, Indonesia, Turkey and Vietnam had their paces of new orders shift from negative to positive for the month, which bodes well for them.

The U.S. trade deficit narrowed marginally in August, although export growth remains sluggish so far this year. Looking at the top 10 markets for U.S.-manufactured goods, four countries (Brazil, Germany, Hong Kong and South Korea) experienced contracting levels of activity in September, which hampers our ability to sell products there. In addition, Canada, Japan and the United Kingdom also had marginally deteriorated demand and output in September, even as each continues to grow modestly. In contrast, manufacturing activity in Mexico and the Netherlands accelerated slightly in September.

U.S. trade negotiations in the Asia Pacific are moving forward with major meetings in Australia and China later this month and next. United States–European Union negotiations face increased controversy and new leadership at the EU Commission and Parliament. And, with the World Trade Organization’s Trade Facilitation Agreement facing a continued stalemate, there are efforts to move the information technology talks to a conclusion and engage in the detailed environmental goods talks. The U.S. Export-Import Bank was granted a nine-month extension, but manufacturers remain highly concerned that continued uncertainty will put U.S. exporters at a disadvantage in global markets. Efforts continue to move forward on a host of trade legislation, including Trade Promotion Authority, the Miscellaneous Tariff Bill, customs reauthorization and the Generalized System of Preferences.

Chad Moutray is the chief economist, National Association of Manufacturers. 

markit pmi for top 10 markets - oct2014

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Monday Economic Report – October 6, 2014

Here are the files for this week’s Monday Economic Report: 

Several recent indicators have shown marked improvements in the U.S. economy and for manufacturing activity, particularly when compared to earlier in the year. These range from the NAM/IndustryWeek Survey of Manufacturers to increased levels of demand and output. Last week, for instance, the Institute for Supply Management (ISM) reported that the pace of production (up from 64.5 to 64.6) was marginally higher in September, with the index exceeding 60—indicating strong growth—for four consecutive months. Likewise, the new orders index has measured 60 or higher for three straight months, even though it eased somewhat in September (down from 66.7 to 60.0). That was an encouraging sign, and it was consistent with a relatively upbeat outlook as noted by the National Association for Business Economics (NABE).

Yet, the headline ISM Purchasing Managers’ Index (PMI) for manufacturing unexpectedly dropped from 59.0 to 56.6. The prior month’s reading had been a three-year high, making the deceleration in sentiment a bit of a disappointment. The drop stemmed from slower paces of growth for domestic sales, exports (down from 55.0 to 53.5) and employment (down from 58.1 to 54.6). Along those lines, manufacturers added just 4,000 net new workers in September, with August’s employment number revised lower to reflect a decline of 4,000 employees for the sector. As such, we have had two straight months of disappointing manufacturing jobs numbers, which stand in stark contrast to the stronger hiring rates seen prior to August. We can hope for healthier job gains in the coming months, which would be more consistent with the mostly optimistic tone seen in other measures.

Indeed, the Dallas Federal Reserve Bank’s manufacturing survey noted robust pickups in production, capacity utilization and shipments in September, and respondents continue to expect stronger activity levels over the next six months. In addition, factory shipments have risen 2.1 percent year-to-date through August, or 3.1 percent over the past 12 months. The corresponding data on new factory orders reflected a sharp decline in August, but that was the result of very strong nondefense aircraft sales in July. While new manufactured goods sales remained soft when excluding transportation orders, the underlying data also reflect gains made since the winter months. Moreover, manufacturers have been confident enough in their outlook to increase construction spending, which rose 1.5 percent in August, increasing for the fifth straight month. Year-over-year growth in manufacturing construction spending was an impressive 14.9 percent.

At the consumer level, personal spending rebounded in August after holding steading in July. Since winter-related declines in January, personal spending has risen 2.7 percent, with 4.1 percent growth year-over-year. Strength in durable goods purchases boosted the August consumption figure. Still, Americans remain anxious, particularly about labor and income growth. The Conference Board’s Consumer Confidence Index declined from 93.4 in August to 86.0 in September, a notable and sizable decrease especially after the index had been at its highest point since October 2007 in August. It is possible that geopolitical events have put the public on edge, dampening enthusiasm. (The same could probably be said of the ISM report discussed above.) We have similar concerns in comparable data from the University of Michigan and Thomson Reuters, and the two releases support the notion that the consumer remains cautious despite recent improvements in sentiment.

Meanwhile, the U.S. trade deficit narrowed from $40.32 billion in July to $40.11 billion in August, its lowest level since January. In general, we have seen the trade deficit decline after peaking at $45.98 billion in April. Since then, goods exports have increased by $3.79 billion, and goods imports have declined by $1.99 billion, helping to explain the bulk of the shift over that four-month period. Much of that improvement can be explained by increased energy exports and reduced energy imports.

After a busy economic data release calendar last week, this week will be much lighter. The minutes of the September 16–17 Federal Open Market Committee meeting will be released on Wednesday, with market watchers looking for clues for when the Federal Reserve will start raising short-term rates. Other highlights include the latest data on consumer credit, job openings and wholesale trade.

Chad Moutray is the chief economist, National Association of Manufacturers. 

manufacturing construction - oct2014

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Manufacturing Job Growth Disappointed in September for the Second Straight Month

The Bureau of Labor Statistics said that manufacturers added 4,000 net new workers in September. As such, manufacturing job growth has disappointed for the second straight month, with August’s figure revised from being unchanged to being down by 4,000 employees. Prior to August, the sector had averaged 14,429 additional hires per month on net, and there was (and still is) an anticipation for that pace to continue moving forward.

Instead, job growth in the manufacturing sector was soft in August. Durable goods firms added 7,000 new employees, with nondurable goods businesses losing 3,000 workers. There was increased employment observed in the motor vehicles and parts (up 3,300), fabricated metal products (up 2,000), furniture and related products (up 1,400) and primary metals (up 1,100). Yet, these were partially offset by reduced hiring for electrical equipment and appliances (down 1,100), chemicals (down 900), computers and electronic products (down 400) and petroleum and coal products (down 400), among others.

Average weekly earnings were slightly lower, down from $1,018.41 in July to $1,015.14 in August, essentially returning to July’s numbers. This still reflects improved movement long term. In addition, the average number of hours manufacturers worked per week remained unchanged at 40.9, with the number of overtime hours edging up from 3.4 to 3.5.

Meanwhile, the larger economy generated 248,000 new nonfarm payroll workers in September. This means that 7 of the past 8 months have had net job gains exceeding 200,000 per month, averaging 226,667 per month over the first three quarters of 2014. This reflects overall job growth that has improved from last year’s 194,000 average.

In addition, the unemployment rate fell from 6.1 percent to 5.9 percent, its lowest level since July 2008. However, one persistent challenge has been the labor force participation rate, which dropped from 62.8 percent to 62.7 percent. That rate was the lowest since February 1978.

Overall, the data are mostly positive, particularly for the U.S. economy as a whole. It is encouraging to see upward movement in job creation, with the unemployment rate falling to a six-year low. Still, there continues to be sufficient slack in the labor market, and manufacturing employment growth was well below expectations in both August and September. Manufacturers remain mostly optimistic about demand and production, and recent data on hiring plans would seem to indicate stronger job growth than what these figures show. We hope to begin to see healthier employment gains in the coming months. If not, this report tends to support a degree of cautiousness in the economic outlook that might dampen an otherwise positive expectation about the next few months.

Chad Moutray is the chief economist, National Association of Manufacturers. 

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Manufacturing Construction Spending Rose 1.5 Percent in August

The Census Bureau said that manufacturing construction spending rose 1.5 percent in August, increasing for the fifth straight month. Manufacturers have continued to edge their construction dollars higher since bottoming out at $46.84 billion at the annual rate in March. Manufacturing construction rose from $55.47 billion in July to $56.31 billion in August, with year-over-year growth of 14.9 percent. This indicates that manufacturers are stepping up their investments in new structures, which is consistent with the recent pickup in demand and output.

Meanwhile, total construction spending fell 0.8 percent in August, pulling back from the 1.2 percent gain observed in July. Both private and public sector spending were lower for the month, down 0.8 percent and 0.9 percent, respectively. Private, nonresidential construction activity was off 1.4 percent. In addition to manufacturing, other areas with higher levels of spending in August were communication (up 3.6 percent), educational (up 1.4 percent), religious (up 0.9 percent) and lodging (up 0.4 percent) projects. However, these were offset by declines for power (down 3.9 percent), amusement and recreation (down 3.7 percent), commercial (down 3.5 percent), and transportation (down 2.0 percent) firms, among others.

It should be noted that the year-over-year data for private, nonresidential construction spending, which has risen 9.2 percent over the past 12 months. The top five areas for growth in the past year were office (up 18.6 percent), power (up 17.2 percent), manufacturing (up 14.9 percent), commercial (up 10.2 percent) and lodging (up 9.7 percent) construction projects.

Public, nonresidential construction spending was off 1.0 percent for the month but has increased 2.3 percent over the past 12 months. Some bright spots at the public sector level year-over-year include office (up 20.2 percent), conservation and development (up 18.3 percent), amusement and recreation (up 16.2 percent), power (up 9.9 percent), sewage and waste disposal (up 4.7 percent), transportation (up 3.2 percent) and educational (up 2.9 percent) endeavors.

Chad Moutray is the chief economist, National Association of Manufacturers. 

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ISM: Manufacturing Production Continues to Expand Strongly, but Activity Eased Slightly Overall

The Institute for Supply Management’s (ISM) manufacturing purchasing managers’ index (PMI) continues to reflect a strong expansion, but activity eased slightly overall in September. The headline figure dropped from 59.0 in August to 56.6 in September, which was weaker than anticipated. August’s reading had been the highest level since March 2011, and the pullback in September stemmed from slower paces of growth for new orders (down from 66.7 to 60.0), employment (down from 58.1 to 54.6) and exports (down from 55.0 to 53.5). It is likely that softer growth abroad and geopolitical events have dampened some enthusiasm, particularly on the international sales figures.

Despite some reduced data points for the month, manufacturers remain mostly positive. For instance, the pace of production (up from 64.5 to 64.6) was marginally higher in September, with the index exceeding 60 – indicating strong growth – for four consecutive months. Likewise, the new orders index has measured 60 or higher for three straight months. As such, it suggests that manufacturing leaders continue to see strengths, albeit with less optimism that the month before. The sample comments tend to support this interpretation, with several of them noting increased demand, sales and shipments.

While it is disappointing that the employment index declined somewhat in September, the longer term trend line reflects improvements from earlier in the year. For instance, the hiring measures averaged 57.0 in the third quarter, a nice step up from the 51.9 and 53.4 averages in the first and second quarters, respectively.

Overall, manufacturing sentiment was a bit softer than expected in September, but the underlying data show strong expansions in both demand and output. Manufacturing leaders are mostly positive about the coming months. This is largely consistent with the findings of our most recent NAM/IndustryWeek Survey of Manufacturers, which observed two year highs in respondents’ outlook. Yet, business leaders are also keenly aware of possible risks on the horizon. This includes geopolitical events, slowing economic growth in key export markets, a still-cautious consumer, workforce challenges, and other possible downside risks.

Chad Moutray is the chief economist, National Association of Manufacturers. 

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ADP: Manufacturers Added 35,000 Workers in September

ADP said that manufacturers added 35,000 net new workers in September, the fastest monthly pace of job growth in the sector since May 2010. With that said, the August number was revised down from its original estimate of 23,000 to 16,000. Note that this is still more than the zero jobs added in August according to the Bureau of Labor Statistics, but it is widely assumed that figure might get revised slightly higher with Friday’s employment data release. I expect Friday’s jobs report to be more consistent with the 12,500 to 15,000 per month average experienced over the past year for the manufacturing sector.

The ADP data show positive job gains in each of the past eight months, with January’s weather-related decline being an exception to an otherwise decent year. Over the past five months, manufacturers have hired 17,000 additional workers each month on average, reflecting a pickup in hiring since the spring.

In the larger economy, nonfarm private businesses added 213,000 employees in September, averaging 217,000 since January. Moreover, it was the sixth straight month with nonfarm payroll growth exceeding 200,000. Outside of manufacturing, the largest job gains in September were seen in trade, transportation and utilities (up 38,000); professional and business services (up 29,000); construction (up 20,000) and financial activities (up 5,000). Small and medium-sized businesses (e.g., those with less than 500 employees) contributed 63.8 percent of the net new jobs.

Chad Moutray is the chief economist, National Association of Manufacturers. 

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Conference Board: Consumer Confidence Unexpectedly Fell in September

The Conference Board said that consumer sentiment unexpectedly fell in September to its lowest level since May. The Consumer Confidence Index declined from a revised 93.4 in August to 86.0 in September. This pullback was even more disappointing given the fact that August’s reading had been the highest since October 2007, nearly seven years ago and pre-dating the recession. Therefore, while confidence remains higher today than earlier in the year, it is clear that Americans still remain anxious about the economy and about labor and income growth. It is also possible that geopolitical events have put the public on edge, dampening optimism. We have similar concerns in comparable data from the University of Michigan and Thomson Reuters.

Indeed, perceptions about current (down from 93.9 to 89.4) and future (down from 93.1 to 83.7) conditions were both lower for the month, particularly the latter. The percentage of respondents saying that jobs were “plentiful” dropped from 17.6 percent to 15.1 percent, and the percentage expecting their incomes to decrease rose from 11.6 percent to 13.4 percent. These data tend to suggest that there are nagging worries about jobs and the economy. Yet, there were also some positives. The percentage of those taking the survey who felt that their incomes would increase rose from 15.5 percent to 16.8 percent, and overall, many of these measures had made improvements over recent months despite the declines in September.

Buying intentions were also mixed, largely mirroring the reduced confidence described above. The percentages planning to buy a new automobile (down from 13.5 to 12.0 percent) and home (down from 5.3 percent to 4.9 percent) were both lower; yet, the percentage planning to purchase new appliances increased from 45.7 percent to 51.3 percent.

Chad Moutray is the chief economist, National Association of Manufacturers. 

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Dallas Fed: Manufacturing Activity Picked Up in September

The Federal Reserve Bank of Dallas said that manufacturing activity picked up in September. The composite index of general business activity increased from 7.1 in August to 10.8 in September, and in general, the data continue to show stronger growth since being nearly stagnant in February. In fact, the paces for production (up from 6.8 to 17.6), capacity utilization (up from 3.6 to 20.2) and shipments (up from 6.4 to 15.9) were all up strongly in September, which was encouraging.

At the same time, there were also measures that expanding at a less-robust pace. New orders (up from 2.2 to 7.5) rose modestly, but with somewhat less gusto than the production figures. Just over one-quarter of those taking the survey said that their sales had increased in September, with 18.4 percent noting declines and 55.7 percent saying that orders were unchanged. Along those lines, hiring (down from 11.1 to 10.6) and capital spending (down from 6.6 to 4.4) both eased slightly, even as they both continued to reflect modest expansion.

The sample comments tend to reflect this nuanced view of the current economic environment, noting both strengths and some challenges. For instance, a chemical manufacturer said, “Our increased business activity is based on orders placed this time last year. We see some softening, especially in demand from Europe and China, while the U.S. remains strong.” Other concerns include cautious consumer behavior and wage and price pressures. A food manufacturer noted, for example, “We remain concerned that our consumers remain under serious financial pressure.” Indeed, where we have seen pricing pressures this year, it has largely been in the food category, with higher costs for meats, eggs, dairy and produce.

Manufacturers in the Dallas Fed region were mostly positive in September about the next six months, albeit less so than in August. The forward-looking measure of business activity dropped from 18.7 to 12.1. With that said, over 40 percent of respondents expect higher levels of production,  new orders, and shipments in the coming months, with nearly 30 percent planning to add new workers and 35.7 percent predicting increased capital spending. The one negative remains elevated pricing pressures, with 45.5 percent of those taking the survey seeing higher input costs over the next six months versus 9.1 predicted lower costs.

Chad Moutray is the chief economist, National Association of Manufacturers. 

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