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Dave Huether

Manufacturing Production Up in December

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Manufacturing ended 2010 on another positive note, with production rising a solid 0.4 percent in December.  Today’s report by the Federal Reserve showed that 10 of the 19 major manufacturing industries gained ground last month.  For the year overall, manufacturing production rose a solid 6.4 percent, the strongest gain since 1997. 

Still, much of this growth took place early in the year and was boosted by temporary factors such as inventory rebuilding and several fiscal stimulus programs.  During the first half of the year, production increased at an annual rate of 8.5 percent.  During the second half of the year the pace of production was nearly cut in half, increasing at an annual rate of 4.3 percent.

After falling by 17.5 percent from the end of 2007 to mid-2009, the manufacturing recovery has made up slightly more than half (56 percent) of the production loss that took place during the recession.

A Closer Look at the Dec. Employment Report

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Today’s report by the Labor Department that the unemployment rate fell by 0.4 percentage point  – the biggest drop in a dozen years – to 9.4 percent is an encouraging sign for the economy and should be a boost to consumer confidence early this year.  Also, the 70,000 jobs added in October and November due to revisions from previous reports is a positive signal that the labor market gained more momentum in the fourth quarter than previously thought.  However, the fact that the economy created just 103,000 jobs in December shows that employers remain somewhat cautious in their outlook. 

A closer look at the report shows that in December 80 percent of the private sector job growth was concentrated in just two sectors: leisure and hospitality and education and health services. In other sectors employment edged up just 22,000.

Manufacturing ended 2010 on a somewhat positive note gaining a modest 10,000 jobs and breaking a string of four consecutive monthly losses.  This is consistent with a number of previous reports that showed manufacturing conditions improved last month.   For the year overall, manufacturers expanded payrolls by 136,000 in 2010, the largest yearly gain since 1997.  Still, after falling by 2.2 million during the previous two years, a much-more robust and broad-based economic recovery will be needed for manufacturers to make a more serious dent in the employment losses that occurred during 2008 and 2009.

Manufacturing Ends 2010 on a Positive Note

By | Economy | One Comment

Today’s manufacturing report by the Institute for Supply Management shows that the closely-watched Purchasing Managers Index increased from 56.6 in November to 57 in December, the highest level since May.  This confirms previous regional reports that the manufacturing recovery accelerated last month.  The December increase was driven by sharp improvements in both new orders and production, both of which rose to a level over 60 for the first time in seven months.

While the export orders component of the report moderated to 54.5 in December from 57 in November, the fact that the export index remains substantially above where it was eighteen months into the prior recovery is a positive sign that exports continue to be a strong source of growth for manufacturers.      

In the wake of the end of several fiscal stimulus programs in late spring, the manufacturing recovery had been slowing since mid-year.  Today’s report is a hopeful sign that the positive momentum of the recovery is rebuilding heading in to 2011.

Outside of Transportation, Durable Manufacturing Orders Gain Traction in November

By | Economy | One Comment

Despite a bigger-than-expected decline of 1.3 percent, today’s Commerce Department’s advanced report on durable goods for November shows that manufacturing continues to lead the economy out of recession.  The overall decline in orders was driven by an 11.9 percent plunge in transportation orders, which are extremely volatile from month-to-month.  The good news in today’s report is that outside of motor vehicles and aircraft, new orders for durable manufactured products rose a strong 2.4 percent – the third increase in the past four months and the fastest monthly rise in eight months. 

 The gains last month were diffuse, taking place in every industry outside of transportation, ranging from metals, to machinery, to electrical equipment, to computers and communications equipment.  And for most of these industries, this was the second increase in the past three months, which signals that the manufacturing recovery is gaining some traction in the fourth quarter after production moderated in the third quarter. 

 After slowing in recent months, new orders for nondefense capital goods excluding aircraft, rebounded in November and grew by a solid 2.6 percent.  Given that these orders are a good proxy for business investment and exports, today’s report is a hopeful sign that manufacturing will continue to lead the economic recovery.

Unemployment Edges Up in November

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Today’s employment report clearly shows that the economic recovery continues to sputter in manufacturing.  Clearly, the possibility of tax increases hitting both consumer and small businesses is creating increased uncertainty in the economic outlook.  As a result, businesses are becoming more hesitant to hire. 

For manufacturers, after adding 170,000 jobs through the first seven months of the year, employment fell for a fourth consecutive month in November – further signaling the pace of the manufacturing recovery has slowed since the first half of the year.  The decline in manufacturing employment in November was not driven by any one industry, but rather due to the fact that  13 of the 21 major industries posted moderate employment declines while only eight posted moderate increases. This marks the second consecutive month that a majority of manufacturing industries decreased employment, a troublesome sign that the positive momentum of the recovery is waning. After adding 170,000 jobs during the first seven months of the year, manufacturing employment has fallen 56,000 since July.     

Another concerning sign in today’s report is that after improving in the third quarter, the share of those unemployed who have been out of work for at least six months remained unchanged last month at an alarmingly-high rate of  41.8 percent.  The fact that the long-term unemployed continue to have a difficult time finding jobs is no surprise given the weak employment growth which is being caused, in part, by uncertainty of the strength of the recovery.  Washington policy makers should take today’s news as a warning that the recovery remains very tepid, and in uncertain times, increasing taxes on consumers and businesses is a toxic combination that will further weaken the state of the U.S. economy and manufacturing.

November ISM Index Decreases Slightly

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Today’s Institute for Supply Management report on manufacturing showed that the closely-watched PMI Index of industrial activity moderated down slightly to 56.6 in November from 56.9 in October, which was the highest level in five months.  Two-thirds the way through the fourth quarter and the PMI index during the past two months has been measurably higher than the 55.4 monthly average during the third quarter. 

However, the fact that several important components of the report (exports, production, new orders and employment) are not as high as they were during the first half of the year indicates that the manufacturing recovery has slowed. This is likely due to continued weakness in the housing market which is a major demand driver for manufacturing industries such as wood products, furniture and nonmetallic minerals which were some of the industries that did not report growth last month.

Durable Goods Orders Dip in October

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Today’s Commerce Department report on durable manufactured goods provides more evidence that the manufacturing recovery is continuing to slow as new orders fell by 3.3 percent in October, the largest single monthly decline in nearly two years. Stripping out the volatile transportation sector, new orders still fell by a sizable 2.7 percent in October. However, over the prior three months new orders continued to grow but at much slower pace than earlier in the year.

Part of the reason for the drop in orders in October, which spanned six of the seven major durable goods industries, was due to the fact that since May inventory investment has been outpacing shipments. Manufacturers have accumulated excess inventories given the current pace of demand, and as a result there is an imbalance. Today’s report signals that manufacturing output will likely remain in the rough patch it’s been in since July for several more months until excess inventories are worked off.

GDP Shows Slow Economic Progress, Exports Still Key

By | Economy, Trade | No Comments

Today, the Commerce Department’s second estimate of third quarter GDP growth showed that the economy advanced at an annual rate of 2.5 percent from the prior quarter. Faster growth in consumer spending on goods, business investment, and exports, along with a smaller decline in residential investment collectively added to the pace of economic growth in the third quarter, revising upward from the 2 percent advanced estimate reported last month.

Real GDP has now expanded for five straight quarters and, over the past year, the economy rose by 3.2 percent — the fastest year-over-year pace since the first quarter of 2005. Still, much of the growth over the past year was concentrated in late 2009 and early 2010, when the inventory cycle and fiscal stimulus measures were providing significant support to the economy.  In the third quarter, GDP growth was good, but not great, and not strong enough to make a significant improvement in the labor market, where private sector job growth averaged just 122,000 per month.

On the positive side, business investment in equipment and software — which increased by 16.8 percent in the third quarter –continued at a double-digit pace for a fourth consecutive quarter, and is a hopeful sign that businesses are starting to be confident enough in the recovery  to modernize operations. Historically, business investment has tended to lead employment growth by a few quarters.  So, today’s report is an encouraging sign that the labor market could start to improve more significantly in 2011.

Export growth moderated to a pace of 6.3 percent in the third quarter from 9.1 percent growth in the second.  It is important to note, however, that over the past five quarters, exports rose by 15.9 percent, the fastest pace in more than a dozen years. This export growth has been especially important for manufacturers, who produce the majority of U.S. goods and services sent to markets abroad, and one of the critical factors that has enabled manufacturing to begin to climb out of the deep recession that took place in 2008 and 2009. 

Looking ahead, export growth will continue to be a key indicator for the health of manufacturers.

Commerce Department Releases State GDP Data

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Yesterday the Commerce Department reported on state GDP by industry for 2009.  This report shows not only how deep but also how geographically broad the 2008-2009 recession was for manufacturing. Following a 3.6 percent decline in 2008, inflation-adjusted manufacturing GDP, called “output” from here forward, fell 5.9 percent last year. Over the past two years, the decline in manufacturing output was greater than the downturn in the overall economy in 42 of the 50 states. 

The Commerce Department categorizes the United States into eight geographical regions. Below is a brief description of how manufacturing fared in each of these regions over the past two years.

 Great Lakes: For manufacturers, the hardest-hit region of the country was around the Great Lakes, where 19 percent of U.S. manufacturing resides. Here, output declined by 17.3 percent from 2007 to 2009. Double-digit declines occurred in every state in this region (Wisconsin, Ohio, Michigan, Illinois and Indiana) ranging from -12.5 percent in Wisconsin to -24.6 percent in Michigan, which was the largest state manufacturing decline.

Southwest: The second hardest-hit region was the Southwest (Texas, Oklahoma, New Mexico and Arizona), which accounts for 12 percent of U.S. manufacturing. Here, manufacturing output fell 12.7 percent, as a 15.7 percent decline in Texas output and milder 7 percent declines in New Mexico and Arizona output more than offset a 10 percent rise in Oklahoma output.

Southeast: The third hardest-hit region was the Southeast (the twelve states east of Texas and south of Maryland, Ohio, Indiana and Illinois), which accounts for 23 percent of U.S. manufacturing – more than any other region. In the Southeast, manufacturing output fell 11.4 percent. Double-digit declines in Georgia, North Carolina, Arkansas, Tennessee, South Carolina, Kentucky and Virginia offset milder declines in other states and an actual increase in output in Mississippi.

Mideast: The fourth hardest-hit region was the Mideast (New York, Pennsylvania, New Jersey, Maryland and Deleware), which accounts for 12 percent of U.S. manufacturing. In the Mideast, manufacturing output fell 11 percent. Double digit declines in NY, NJ, and DE, offset a softer 4.8 decline in MD.

Plains: The Plain States was the fifth hardest-hit region (South Dakota, North Dakota, Nebraska, Missouri, Minnesota, Iowa and Kansas), which accounts for 7 percent of U.S. manufacturing. Here, output fell 10.6 percent.  Double digit output declines took place in Kansas, Iowa, Missouri and Nebraska and single digit declines occurred in South Dakota and Minnesota.  Manufacturing output only increased in North Dakota.

New England: In New England, the sixth hardest-hit region that accounts for 5 percent of U.S. manufacturing, output fell 8.4 percent. Double digit output declines took place in Connecticut and Rhode Island and single digit declines took place in the other states in the region except Vermont, where output rose 6.2 percent during this recessionary period.

Rock Mountains: In the Rocky Mountain region, the seventh hardest-hit region that accounts for 3 percent of U.S. manufacturing, output fell just 2.7 percent.  Here, a 21 percent output decline in Montana and milder declines in Utah, Idaho and Colorado were partially offset by a 14 percent rise in Wyoming manufacturing output during this time.

Far West: In the Far West, least hardest-hit region that accounts for 19 percent of U.S. manufacturing, output increased 7.2 percent from 2007 to 2009.  This is the only region of the country where manufacturing production did not decline. Here, declines in Washington, Oregon and Nevada were more than offset by a 12 percent increase in California and smaller increases in Hawaii and Alaska.

Industrial Production Remains Flat in October

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After edging down 0.2 percent in September, the Federal Reserve reported today that industrial production was flat in October. A 0.6-percent rise in manufacturing production was offset by declines in mining and utilities production. Following very sluggish growth during the past several months, the October increase in manufacturing production was primarily due to two factors.

First, the recent upturn in housing activity fueled increases in the production of wood products, nonmetallic minerals and electrical equipment and appliances, all of which posted healthy production gains in excess of 2 percent last month. 

Second, continued growth in business investment and exports drove noticeable upturns in the production of machinery, computers and electronic products in October. This is a positive sign that businesses are now replacing equipment that has become outdated — actions that were likely delayed during the recession. At the same time, with over half of the growth in machinery output driven by sales abroad over the past year, today’s report is good news on the export front. Solid growth in exports over the past year has been one component of the recovery that has outperformed most prior recoveries and one of the main reasons manufacturing has been outpacing the overall recovery.

One area of weakness continues to be consumer-related. The production of consumer goods was flat in October after declining each of the prior two months. Retail inventory-to-sales ratios have increased in recent months to their highest levels since last October. As retailers reduce excess inventory stocks, this will likely curtail both production and imports of consumer goods over the next several months.