New orders for durable goods dropped in August (-1.3 percent) for the third time since April, adding to mounting evidence that manufacturing growth is slowing.  While the August decline was due mainly to a 40 percent plunge in new orders for the volatile nondefense aircraft category – and we saw gains in most other industries – a closer look shows that new orders are trending downward as manufacturing struggles to continue to lead the recovery.

In the three months ending in August, new orders for most manufactured durable goods (such as computers, machinery, primary metals, electrical equipment and motor vehicles) fell off significantly compared to the previous three months.  Even more troubling, the pace of growth for new orders for core nondefense capital goods – a bellwether for business investment – has also slowed sharply (by 77 percent) since May.

While the manufacturing slowdown in recent months stems in part from the expiration of tax credits earlier in the year, heightened uncertainty about the overall health of the recovery and the legislative and regulatory outlook is also holding back business investment.  Looking ahead, the new data point to continued bleak news on the jobs front.

The Federal Reserve’s report on August industrial production released earlier today shows that the economic recovery is slowing. Overall industrial production rose just 0.2 percent last month, the second instance of sub-par growth in the past three months. While it is somewhat encouraging that only six of the 19 major manufacturing industries posted declines in production last month, the fact remains that during the three months ending in August, manufacturing output increased at an annual rate of just 2 percent, the slowest rise in 14 months. So after falling 17.5 percent during the 18 months ending in June 2009, manufacturing production still remains 9 percent below the peak attained in December 2007. 

While some of the deceleration in growth that has taken place in recent months is due to the fact that temporary supports for growth, such as fiscal stimulus and inventory restocking, are now largely in the past, increased uncertainty with respect to federal tax and regulatory issues, documented in this year’s NAM Labor Day Report,  is acting as a burden to the recovery.

Labor Day approaches this year more with a feeling of trepidation than relief for the American worker.  Despite an economic recovery that began in the second half of 2009, the unemployment is higher now that it was a year ago and private sector job growth has slowed in recent months as consumer and business confidence has slipped.

The factors behind the current state of the labor market and the recovery are the topics of the thirteenth annual 2010 NAM Labor Day Report, which in addition focuses on possible legislation and regulations that could depress the outlook for workers and companies by making it more difficult for our economy to compete in the global marketplace.

One of the noteworthy findings of the report is that uncertainty with respect to both the underlying strength of the economic recovery as well as possible policy changes from Washington D.C is causing manufacturers to curtail employment and capital spending plans.

For comments from NAM President John Engler, see the NAM’s news release, “NAM Report Examines Impact of Anti-Labor Policies on Working Men and Women.”

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Today, the Commerce Department revised second quarter GDP growth down to 1.6 percent (seasonally-adjusted annual rate) from last month’s advanced estimate of 2.4 percent.

The large trade deficit reported in June was not included in the advanced report and was the main cause for the downward revision. This report elevates concerns that the economic recovery is decelerating faster than previously thought. In addition, more than a third (36 percent) of the growth in the second quarter came from a 27 percent surge in residential investment driven primarily by the end of the homebuyer tax credit in April. This signals that the underlying strength of the economy is even less than today’s already-anemic report shows.  Today’s revised reports show no significant changes in the manufacturing numbers.  However, with the recent reports of slower economic activity in July and August, it appears that a further deceleration is in store for the third quarter.

The Commerce Department reported today that new orders for durable manufactured goods rose by only 0.3 percent in July. This is the first increase in three months, but manufacturing growth continues to slow. Unfortunately, the July increase was mainly due to a 76-percent surge in new orders for non-defense aircraft, which are extremely volatile from month to month and are not a good indication of near-term growth because the lead time from order to production is so long.

Declines in orders were widespread in other areas, including fabricated metals, computers and electronics, machinery and electronic products. In most of these industries, the July decline was the second in the past three months. Outside of transportation, new orders fell by 3.8 percent in July, the largest drop in 18 months. A significant concern is that new orders for non-defense capital goods (excluding aircraft), a good proxy for business investment, fell by 8 percent in July. 

Business investment accounted for more than half of GDP growth in the second quarter. Today’s report of a significant decline in this area at the start the third quarter adds to the mounting evidence that the economy is poised to decelerate as businesses remain concerned about the underlying strength of the recovery.

Today’s Labor Department report on employment shows the job market continues to weaken as does our economic recovery. While manufacturing continues to lead the recovery with employment rising for the seventh consecutive month in July, with 36,000 jobs added, signs still show overall the industry is decelerating. The added jobs in July were largely due to seasonal factors in the auto sector. But changes in most other manufacturing industries were negligible which shows the manufacturing recovery is slowing down. While manufacturing has added 26,000 jobs per-month so far this year, this is still just a small fraction of the 91,000 jobs lost per-month during the prior two years. If this pace is maintained, U.S. manufacturing employment will not return to its pre-recession level for another six years.

Today’s news shows little evidence that the labor market will significantly improve in the next couple of months. After starting to increase last October, temporary employment — a good indicator of future permanent jobs — slowed in recent months and actually declined in July.   

The labor market over the past few months has clearly worsened, with private sector job growth falling 67 percent in the May-July period compared to the three months ending in April. This is a worrisome sign that employer’s confidence in the underlying strength of the recovery is tepid. At the same time, the unemployment rate remained stuck at an uncomfortably high 9.5 percent in July. This will likely weigh on consumer confidence and spending in the near term.

Today’s advanced report of second quarter GDP came in close to expectations, with growth decelerating to a 2.4 percent annualized rate in the second quarter, which is a slowdown from 3.7 percent growth in the first quarter and 5 percent growth in the fourth quarter of last year. While today’s report is the first estimate of overall economic growth in the second quarter and will be revised as additional data arrive, it appears that the recovery is slowing — concerning news to manufacturers. 

One sector important to manufacturing is residential investment and housing. Temporarily spurred by the end of the homebuyer tax credit, this sector rose at an annual rate of 28 percent, accounting for a quarter of overall economic growth in the second quarter. Since this temporary measure likely brought forward activity that would have taken place later in the year, housing activity will likely be a drag on growth in the third quarter. Manufacturers produce the majority of the products used in home construction; as the housing the housing market slows down from the temporary growth in the second quarter manufacturers will likely see demand for housing related products slow as well. 

Manufacturers could find some good news in today’s report. First was that exports, most of which are manufactured products, rose by 10.3 percent in the second quarter. This represents the fourth consecutive quarter of double-digit export growth, a feat that has not been accomplished in more than two decades! Exports are leading the way in this recovery and are one of the main reasons why manufacturing has been outpacing the overall economy over the past year.

The other good news in today’s report was that business investment rose a solid 17 percent in the second quarter, mainly driven by increases in equipment and software which rose at an annual rate of 22 percent. The increase is an important sign that while a slowdown may continue during the next several quarters, businesses are making some capital purchases, many of which are produced by U.S. manufacturers. It is important to note that some of these purchases of business equipment were likely due to pent-up demand that was put on the backburner during the recession. With that demand now met, I would expect a slowdown in business investment to take place in coming quarters.

Today’s report on June durable goods orders adds more fuel to the fire of concern that the recovery is decelerating. For the first time in nearly a year and a half, new orders for durable manufactured goods fell for a second consecutive month in June. While May’s decline was mainly caused by a large decline in nondefense aircraft orders, the June decline was joined by drops in new orders for both computer and electronic products as well as machinery. These declines in new durable goods orders are a worrisome sign that, after the recent growth due in part to fiscal stimulus measures as well as inventory restocking, the economy is now on a decelerating path, which is not a good place to be in the early stages of a recovery.

Based on today’s report, this slowdown will be felt more in the third quarter than the second. Due to stronger gains in prior months, shipments of nondefense capital goods increased at an annual rate of 12.5 percent in the second quarter. This is solid evidence that some combination of exports and domestic business investment made a positive contribution to second quarter GDP growth, which will be released on Friday. Given that machinery, one of the most export-intensive manufacturing industries, posted the strongest shipment gain in the second quarter, I believe that exports are currently a more-prominent driver of the manufacturing recovery than domestic business investment. Uncertainty about the underlying strength of the domestic recovery is likely restraining plans to increase capital investment.

The latest results of theNAM/IndustryWeek Manufacturing Index show that business conditions continued to improve in second quarter of 2010, though in some areas, the pace of the improvement was more moderate than in prior quarters.

 Roughly three quarters (74 percent) of the respondents to the second quarter survey reported a positive business outlook. While this was the highest level of confidence in three years and substantially up from the record low of just 28 percent in the first quarter of 2009, the rise from the 70 percent who had a positive business outlook in the prior quarter was the mildest improvement of the current recover to-date.

This signals that while the manufacturing recovery is likely to continue going forward, an accelerating growth path is not likely. This is consistent with other findings of the second quarter survey including expectations of positive, but mild, increases in both capital spending (1.7 percent growth) and employment (1.3 percent growth ) in the year ahead.

Asked if uncertainty about the business outlook is delaying plans to expand employment or capital spending, only a roughly quarter (26 percent) said no.  Of the roughly three quarters (74%) who responded that uncertain is a factor, the vast majority — 58% — reported that uncertainty is affecting both employment and capital spending plans.

Of those who reported that uncertainty is affecting their plans to expand capital spending and employment, the main areas of concern cited were the state of the U.S. economic recovery and possible regulatory or legislative changes from Washington D.C.

To see full results of the survey, click here.

Today the Commerce Department reported solid pickups in both exports and imports in May, resulting in a monthly trade deficit of $42.3 billion, up $2 billion from April. Both the $3.5 billion increase in exports and the $5.5 billion increase in imports reversed declines in April. On the export side, increases in sales of capital goods accounted for the majority of the May rebound. A strong upturn in capital goods exports has been a major driver of the manufacturing recovery this year. On the import side, purchases of consumer goods as well as computers accounted for most of the increase.

Over the past three months ending in May, capital goods exports rose at an annual rate of 34 percent, the fastest pace in nearly five years. As one of the most export-intense industries, this surge helped propel U.S. machinery production to a near 30 percent annual pace during the last three months, more than twice as fast as overall manufacturing production.

In stark contrast to the early stages of the last recovery, exports are helping manufacturers come back from this recession. Through the year ending in May, manufactured exports rose by 24 percent and accounted for one-third of the increase in overall shipments. Given the recent weakness in the U.S. labor market, continued strong export growth will be critical to keeping the recovery on track.