Manufacturing employment changed little in October, falling by 7,000. For the year so far, manufacturing employment has increased by 135,000. However, 99 percent of this increase took place during the first five months of the year, when the fiscal stimulus and inventory rebuilding were providing growth to industry.

Since May, manufacturing employment has been essentially flat, edging up just 1,000.  This indicates that in the wake of these mostly-expired supports for growth, the underlying strength of the recovery has weakened, causing firms to put off hiring plans.

The good news in the report is that the private sector added 159,000 jobs in October, the fourth improvement in the past five months and the single largest increase since April. While the improvement has been gradual, the fact that private sector job growth has been on the rise discounts the likelihood of a double-dip recession in the near-term.

 And while the increase in employment has not been strong enough to reduce the unemployment rate, it is important to keep today’s number in perspective — a year ago the economy shed 224,000 jobs. 

 The economy will have to create a significantly higher number of new jobs for the unemployment rate to decline. In addition, after two months of increases, the labor force actually declined in October as discouraged workers stopped searching for work. Had these unemployed workers remained in the workforce, the unemployment rate would have increased to 9.8 percent last month. The chance of the unemployment rate increasing as workers eventually re-enter the workforce is very high. This could depress consumer confidence and keep the recovery in low gear over the next several quarters.

The Institute for Supply Management’s closely-watched manufacturing report shows that conditions improved for manufacturers in October. Sizable gains in new orders, production and exports drove the overall Purchasing Managers Index (PMI) up from a 10-month low of 54.4 in September to 56.9 in October.

The PMI had declined for four of the prior five months.  Today’s report should be viewed with some caution as just one month does not make a trend, and the PMI remains well below its recent peak of 60.4 reached in April. 

A particularly welcome sign in today’s report is the sharp improvement in exports, which, after falling to an average of 55.5 in the third quarter, soared to 60.5 last month — close to the recent high of 62 attained in May. 

Given the fact that last week’s report on GDP showed that export growth slowed in the third quarter, today’s report points to a possible pickup in export growth in the fourth quarter, which will be a shot in the arm for manufacturers.

Today’s Commerce Department advance report that the economy grew at an annual rate of just 2 percent in the third quarter shows that the recovery continued at a lackluster pace in the three months ending in September. U.S. manufacturing output grew at an annual rate of 4 percent in the third quarter, which is half the pace we saw during the first half of the year. This was due to slower business investment, a downturn in housing and slower export growth in the third quarter.

After temporarily surging by 26 percent in the prior quarter due to the end of the home-buyer tax credit, residential investment dropped in the third quarter, falling at an annual rate of 29 percent. This is clear evidence that the stimulus merely brought forward activity into the second quarter, and confirmed by the fact that housing-related manufacturing activity has slowed in recent months.  In addition, the deceleration in business investment in the third quarter is a sign that firms remain concerned about uncertain federal policy with respect taxes and regulations.  And given the latest report on new orders for capital goods, I would not be surprised if this initial estimate is revised down in later revisions.

 Despite the overall modest rise in third quarter GDP, there were some pockets of encouraging news in today’s report.  First, after anemic growth during the prior three quarters, consumer purchases of services, which accounts for 46 percent of GDP, rose by a solid 2.5 percent in the third quarter, the fastest pace in nearly four years.  If this positive momentum continues in upcoming quarters, it could be a sign that a stronger recovery could be in the making in 2011.  In addition, while today’s report showed that exports grew by a modest 5 percent in the third quarter, this slowdown from the 9.1 percent pace in the second quarter was mainly due to exports of aircraft, which are volatile from month to month and fell off significantly in August.

 Overall, the recovery has continued its recent slowing trend as businesses remain cautious, reacting to the uncertainty created by Washington’s future action – or inaction — on critical issues such as tax and regulation.

While soaring civilian aircraft (up 105 percent) lifted overall manufacturing orders in September, other manufacturers remained grounded last month. (Commerce Department news release.) New orders for durable goods rose by 3.3 percent in September.

However, outside transportation, new orders fell by 0.8 percent, the second decline in the past three months. Moreover, the drop in new orders for primary and fabricated metals, computer and electronic products as well as motor vehicles for the second time in the past three months is a concerning sign for manufacturers. The growth in manufacturing production was cut in half in the third quarter from the pace of growth in the first half of the year.

Outside of aircraft, the only silver lining in today’s report is that new orders for machinery rose for a second consecutive month in September. Since machinery is one of the most export-oriented manufacturing industries, this is encouraging news for the export recovery that has been slowing in recent months.

Overall, today’s report signals that a further slowdown in the fourth quarter is likely to be in the making.

After six consecutive monthly increases, the Federal Reserve reported today that industrial production fell by 0.2 percent in September, the largest decrease since May 2009.

Making up 72 percent of overall industrial production, the overall decline was mainly caused by a 0.1 percent fall in manufacturing production in September.  And for the third quarter overall, manufacturing production only increased at an annual rate of 4 percent, less than half the 8.7 percent pace achieved during the prior four quarters. 

The fact that the September decline in manufacturing production came right after a sharp deceleration from 0.7 percent growth in July to 0.2 percent growth in August is a concerning sign that even though manufacturing continued to recover last quarter, it has lost steam over the last three months ending in September. The drop in manufacturing production last month was mainly due to a 0.2 percent drop in durable goods industries, which more than offset a modest 0.1 percent increase in the nondurable goods sector.

Within durable goods, the drop in output was very diffuse, with eight of the eleven major manufacturing industries posting declines.  The industry declines ranged from capital goods such as machinery, aerospace, computers and electrical equipment to supplies such as wood products, furniture, fabricated metals and primary metals.  For half of these industries, this was the second consecutive monthly decline.

With most of the fiscal stimulus and inventory rebuild now in the past, today’s report adds to the mounting evidence that the manufacturing recovery has decelerated significantly from the robust growth achieved earlier in the year.  And with increased business uncertainty building due to possible policy changes from Washington, lawmakers should take note of today’s report and pause before enacting any measures that would undercut the economic recovery, which clearly is weakening.

Following an identical increase in August, the Labor Department reported today that producer prices rose by 0.4 percent in September. The strong rise in prices last month was from a 1.2 percent increase in finished food prices, where accelerations in the prices for meat more than offset a huge decline in the price of eggs, likely from ongoing fears regarding the possibility of a salmonella outbreak.  Importantly prices of core finished goods, which exclude food and energy, edged up just 0.1 percent for the third time in the past four months.  This signals that producers continue to have modest pricing power due in part to a slowing domestic recovery.   Slower demand is also having an impact on manufacturing pricing power, which on a year-over-year basis increased by 6.8 percent in March and has now slowed to just 4.1 percent in September. This is the slowest pace since December and another concerning signal that the economic recovery is losing steam.

Today’s report on the August trade numbers should serve as a wakeup call to policymakers in Washington as to the benefits of lowering trade barriers abroad for U.S. exporters.  The Commerce Department’s August International Trade report shows our trade deficit increased by $3.7 billion bringing our total to $46.3 billion.  These numbers do cause us to view the report with some concern as they show exports of goods were unchanged from July and imports of goods rose by $3.8 billion.

The stalling of exports of goods is mainly due to a $1.7 billion drop in exports of civilian aircraft (which are extremely volatile from month to month).  We are now just over a year into recovery and so far in 2010 we had been seeing large growth in exported goods — manufacturing exports were up 20.7 percent in the 12 months ending in August.  This has been good news because by comparison to the prior recovery this pace of export growth was not attained.  Strong export growth has been one of the main reasons why the manufacturing sector has led the recovery to date and we were hoping to see stronger growth for August.  And while it appears that the domestic economy has decelerated in recent months, that fact that exports have been a source of growth shows the importance of selling to markets abroad. 

Given that exports remain unchanged from July to August, yet imports increased, reminds us how critical it is to reducing trade barriers and taking the steps outlined in the NAM’s “Blueprint to Double Exports in Five Years” to help meet the goal of the President’s National Export Initiative.  Further, dozens of free trade agreements are currently being negotiated around the world while the U.S. sits on the sidelines.  If we don’t see any movement on our agreements with other countries, these numbers could become very alarming in the future.

Today’s report by the Labor Department that 95,000 jobs were shed in September while the unemployment rate remained unchanged at an elevated 9.6 percent shows that the economy is still struggling and there is much uncertainty in the private sector. Falling for a second consecutive month, for the first time since last December, manufacturing employment edged down by 6,000 in September. While manufacturers overall have added 136,000 to payrolls so far this year, the fact that 99 percent of this increase took place during the first five month of the year shows that the economic recovery is cooling, not gaining steam. This is largely because temporary forces, such as inventory restocking and several fiscal stimulus measures, have largely played themselves out. 

 The main reason for the loss of 159,000 government workers last month was because of declines in temporary Census workers employed to conduct the 2010 Census. Meanwhile, the sluggish 64,000 gain in private sector employment shows that employers remain guarded in their outlook and remain pessimistic with respect to the underlying strength of the recovery.  This is highlighted by the fact that increases in temporary employment, which rose to nearly 50,000 in January, have been edging down ever since and increased by less than 17,000 last month.

 The uncertainty about the underlying strength of the recovery coupled with possible legislative and regulatory actions coming from Washington is continuing to constrict private sector job growth which kept unemployment higher in September than it was 15 months ago when the recession ended in June of 2009.

New orders for manufactured goods edged down 0.5 percent in August, the Commerce Department reported today.  After growing faster than the overall economy during the first year of the recovery, manufacturing has clearly downshifted into low gear.

Today’s report marks the second decline in factory orders in the past three months.  Much of the overall August decline was due to a 40.2 percent plunge in volatile non-defense aircraft orders, which tend to fluctuate from month-to-month.

Orders in the rest of manufacturing actually rose 0.4 percent in August, due chiefly to rebounds in machinery, computers and electronic products. But even with these increases, orders in these areas have slowed considerably from earlier in 2010, signaling that business investment will not likely continue to be the catalyst for economic growth as it was in the second quarter of the year.

Continued declines in new orders for construction materials and supplies and consumer goods show that housing and consumer spending have similarly weakened now that much of the temporary boost from several fiscal stimulus measures has ended.

The weak status of the labor market and increased uncertainty – stemming from possible federal tax and regulatory changes that are looming – will likely weigh down the recovery going forward.

The Institute for Supply Management (ISM) reported today that its closely-watched manufacturing index fell to 54.4 in September from 56.3 in August.

Manufacturing expanded in September at the slowest pace in 10 months, adding to the mounting evidence that the manufacturing sector is slowing after leading the recovery for the past year. The ISM manufacturing index has fallen four out of the five months since April, and now stands at the lowest level since last November, a clear sign that the recovery continues to struggle.  Transition from economic growth supported by inventory rebuilding and temporary surges from fiscal stimulus to a self-sustaining recovery is proving to be rocky.  The fact that most of the components of today’s report, such as new orders, production, employment and exports, all moderated last month signals that the slowdown in the manufacturing recovery will spill into the fourth quarter as well and that the outlook for jobs remains gloomy.