Economy

Manufacturing Wages and Salaries Rose at Their Fastest Pace since 2001 in the Second Quarter

The Bureau of Labor Statistics released the latest employer costs data, showing wage pressures picking up in the second quarter. Manufacturing wages and salaries increased 3.4 percent at the annual rate in the second quarter, doubling the 1.7 percent pace observed in the first quarter. This was the fastest pace for manufacturing wage and salary growth since the fourth quarter of 2001, or 12½ years ago.

On a year-over-year basis, manufacturing wages and salaries have increased 2.2 percent, up from 2.0 percent in the prior quarter. As such, it suggests that overall wages in the sector have risen at a mostly modest pace over the past 12 months, but that pace has definitely accelerated of late. Given that inflationary pressures have also picked up, particularly for energy and food costs, the Federal Reserve will likely keep a close eye on what happens with wage growth moving forward.

Total compensation for manufacturers increased 2.0 percent at the annual rate, with 2.1 percent growth year-over-year. Compensation costs for manufacturers has also picked up so far in 2014, rising from a 1.8 percent year-over-year rate in the fourth quarter of 2013.

Still, the second quarter data benefited from a slower pace of growth for benefits, up just 0.3 percent at the annual rate. However, this followed a hefty 3.8 percent annualized jump in the first quarter, which was more than likely influenced by the implementation of the Affordable Care Act and higher health insurance costs. On a year-over-year basis, manufacturing benefit costs were up 1.9 percent, accelerating from 1.3 percent growth in the fourth quarter.

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

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ADP: Manufacturers Added 3,000 Workers in July

Automatic Data Processing (ADP) said that manufacturers continued to add workers in July, but at a slower pace than the month before. The manufacturing sector created 3,000 net new workers in July, down from 10,000 in June. In the ADP’s analysis, the sector has hired an average of 6,000 additional workers each month since January. Note that this is lower than the roughly 9,000-worker average seen in the official year-to-date government data from the Bureau of Labor Statistics (BLS).

In the larger economy, nonfarm private businesses added 218,000 employees on net in July. This was down from 281,000 in June, but it was also the fourth straight month with employment growth exceeding 200,000. The year-to-date average is 204,000, an improvement from the 187,000 average seen for all of 2013.

In July, the largest job gains were seen in the professional and business services (up 61,000); trade, transportation and utilities (up 52,000); construction (up 12,000); and financial activities (up 9,000). Small and medium-sized businesses (e.g., those with less than 500 employees) contributed nearly 81 percent of the net new jobs.

On Friday, we will new employment figures from BLS, and I would expect roughly 225,000 nonfarm payroll workers and around additional 10,000 manufacturing workers.

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

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Manufacturers in Texas Note Accelerated Activity in July

The Federal Reserve Bank of Dallas said that manufacturing activity accelerated in July, continuing to rebound from softer levels earlier in the year. The composite index of general business activity rose from 11.4 in June to 12.7 in July. It was the 14th consecutive month of expanding levels of activity; however, manufacturers reported a near-stagnant pace in February. In July, the underlying data were mostly higher across-the-board, including the pace of growth for new orders (up from 6.5 to 13.0), production (up from 15.5 to 19.1), shipments (up from 10.3 to 22.8), capacity utilization (up from 9.2 to 18.0) and capital expenditures (up from 12.7 to 13.3).

With that said, employment growth (down from 13.1 to 11.4) eased slightly, one of the few areas that decelerated in the month. Still, hiring has generally improved from where it was two months ago, with the index up from 2.9 in May. Moreover, one-quarter of respondents to the Dallas Fed survey said that they had added workers in July, with just 13.6 percent suggesting that employment was declining for their company. In addition, the average number of hours worked (up from 4.7 to 6.3) increased somewhat.

Along those lines, a fabricated metal manufacturer noted difficulties in attracting and retaining workers in the sample comments. They wrote, “Skilled employee turnover is getting out of control. There are too many employers chasing too few skilled workers.” Other commenters spoke about the pickup in demand seen in July, with one computer and electronics product respondent adding, “The second quarter was a sold quarter from start to finish….”

Looking ahead six months, Texas manufacturers remain positive about future levels of activity. At least 45 percent of those taking the survey expect sales, production, and shipments to increase over the coming months, with just single-digit percentages anticipating declines. Beyond that, 31.5 percent plan to bring on new workers, and one-quarter are expecting to increase their capital expenditures. The one downside would be the forecast of higher raw material costs moving forward, with a pickup in pricing pressures. In all, 40.7 percent predict increased producer prices in the coming months, with just 6.5 percent expecting declines.

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

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Monday Economic Report – July 28, 2014

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

The International Monetary Fund (IMF) released its latest World Economic Outlook last week. The report reflected slower growth rates in the United States and elsewhere for 2014 mostly because of disappointing figures during the first half of the year. The IMF now predicts that U.S. real GDP will grow 1.7 percent in 2014, down from the 2.8 percent forecast in April. Much of this downgrade stemmed from the dismal 2.9 percent decline in real GDP in the first quarter, with output contracting for the first time in three years. At the same time, the manufacturing sector provided a positive contribution to growth in the first quarter, according to new data, despite bleakness in other areas. Fortunately, manufacturers are more upbeat about activity during the second half of this year and for next year. The IMF’s outlook for 2015 is for real GDP growth of 3.0 percent in the United States, which is in line with other predictions.

News regarding manufacturing activity was mostly positive last week, with surveys from the Kansas City and Richmond Federal Reserve Banks both reflecting a pickup in shipments and employment in July. New orders continued to grow at a moderate pace in each region, and respondents were mostly upbeat about sales and production over the next six months. Nonetheless, raw material costs have accelerated a bit in the Richmond district, and new export orders have contracted in eight of the past 12 months in the Kansas City district. Meanwhile, new durable goods orders rebounded in June, with year-to-date growth at a reasonably healthy rate of 4.4 percent. This indicates that the sector has recovered for the most part from winter-related softness, even if some components, such as motor vehicle sales, were lower for the month. Similarly, the Markit Flash U.S. Manufacturing Purchasing Managers’ Index (PMI) reflected relatively strong growth in sales and output for the sector despite some easing in the headline number in July.

Overseas, the data indicate that the Chinese economy has continued to stabilize from weakness in the first five months of the year. The HSBC Flash China Manufacturing PMI expanded for the second straight month in July, with the pace of activity up for new orders, exports and output. The sales pace was the fastest since January 2011, suggesting that recent measures taken by the Chinese government to stimulate growth have had a positive impact. Likewise, Japanese manufacturers also reported expanding levels of sentiment for two consecutive months, but activity decelerated overall and output stagnated. Export sales from Japan, on the other hand, grew. In other news, the European manufacturing sector made marginal progress in July, particularly for production and exports, and the Eurozone has now expanded for 13 straight months. Yet, growth varied from country to country. For instance, German manufacturing activity picked up in July, while the French economy continued to contract.

The other highlights last week centered on housing and pricing. The housing market remains weaker than we would like, as illustrated by the sharp drop in new home sales in June. Still, the June figure was consistent with the annual paces in March and April, with May’s sales numbers appearing to be an outlier. With the slower pace of sales, inventories of homes have increased. In contrast, existing home sales improved for the third straight month, with some progress in the second quarter relative to the softer first quarter. Even in the existing home sales release, however, there were some discouraging findings, including the fact that sales remain below where they were last year and that first-time homebuyers are still having difficulties making purchases. Meanwhile, on the inflation front, the consumer price index increased in June, led by higher gasoline costs. Yet, pricing pressures remain mostly in check, with core inflation up 1.9 percent over the past 12 months.

This week, the focus will be on second-quarter GDP and jobs. The expectation is that output will rebound from the drop in the first quarter, with consensus forecasts ranging from 2.5 percent to 3.5 percent growth. My view is that real GDP in the second quarter should exceed 3.0 percent. Regarding hiring, manufacturers have added, on average, more than 12,500 each month since August, and I would anticipate seeing a comparable figure for July. Nonfarm payrolls should increase by at least the roughly 230,000 average so far in 2014. Other items to look for this week include manufacturing survey results from the Dallas Federal Reserve Bank and the latest numbers for construction spending, consumer sentiment, employment costs and personal income and spending.

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

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In an Otherwise Bleak First Quarter, Manufacturers Made a Positive Contribution to Growth

The Bureau of Economic Analysis said that manufacturers added 0.30 percentage points to real GDP in the first quarter of 2014. Nondurable goods output provided 0.86 percent to growth; whereas, durable goods activity subtracted 0.57 percent. Indeed, winter weather and other factors helped to lead the country to its first quarterly contraction in real GDP in three years, with output down a very disappointing 2.9 percent.

Therefore, we can say that manufacturers made a positive contribution to growth overall in an otherwise bleak first quarter. Real value-added from manufacturing increased 2.1 percent in the first quarter, its slowest growth rate in five quarters and below the 3.1 percent pace seen in all of 2013. Yet, at least it was positive. Sectors with the largest quarterly declines in real value-added in the first quarter included:

  • Agriculture, forestry, fishing and hunting (down 31.0 percent)
  • Utilities (down 16.4 percent)
  • Construction (down 8.9 percent)
  • Wholesale trade (down 8.7 percent)
  • Professional and business services (down 6.4 percent)
  • Mining (down 5.6 percent)
  • Transportation and warehousing (down 4.6 percent)
  • Educational services, health care and social assistance (down 3.0 percent)
  • Finance, insurance, real estate, rental and leasing (down 2.9 percent)

With that said, value-added in manufacturing dropped from $2.14 trillion in the fourth quarter of 2013 to $2.09 trillion in the first quarter of 2014. Manufacturing accounted for 12.3 percent of GDP in the first quarter, down from 12.5 percent in the prior quarter.

This suggests that the increase in the “real” measure was influenced by price changes. Indeed, the price index for value-added output in manufacturing fell by an annualized 10.3 percent in the first quarter. Despite the quarterly decline, value-added in manufacturing has continued to move higher in the longer term, up from $2.05 trillion in the first quarter of 2013.

Next week, we will get our first look at real GDP growth for the second quarter of 2014. The expectation is that output will rebound from the 2.9 percent drop in the first quarter, with consensus forecasts ranging from 2.5 to 3.5 percent growth. My view is that real GDP in the second quarter should exceed 3.0 percent, but we will see next Wednesday.

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

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New Durable Goods Orders Increased 0.7 Percent in June, Rebounding from May’s Decline

The Census Bureau said that new durable goods orders increased 0.7 percent in June, rebounding from a 1.0 percent decline in May. This suggests that durable goods sales have continued to recover from winter-related softness in December and January, and it was mostly in-line with consensus estimates. Through the first six months of this year, new durable goods orders have risen 4.4 percent, which indicates reasonably healthy growth year-to-date.

Unlike previous reports, transportation orders did not skew the data by much, with the sector having sales growth of 0.6 percent for the month. If you were to exclude transportation, June’s new durable goods orders would have increased by 0.8 percent, with a year-to-date gain of 4.4 percent.

The underlying sector-by-sector data were mostly positive. The largest increases were observed in defense aircraft and parts (up 15.3 percent), nondefense aircraft and parts (up 8.2 percent), machinery (up 2.4 percent), primary metals (up 0.9 percent) and computers and electronic products (up 0.8 percent). On the other hand, motor vehicles and parts (down 2.1 percent), which have been a bright spot in general of late, were a drag on growth in June. Year-to-date, motor vehicle and parts orders have increased 2.2 percent.

Meanwhile, durable goods shipments were up a more-paltry 0.1 percent in June, offsetting the 0.1 percent decrease in May. Excluding transportation (which was up 0.7 percent, mainly on nondefense aircraft), durable goods shipments would have fallen by 0.1 percent. This indicates that shipments activity was weaker than the headline figure suggests. In fact, the data were mixed. Increased shipments for communications equipment (up 3.3 percent), primary metals (up 0.8 percent) and fabricated metal products (up 0.7 percent) were largely counterbalanced by declines in defense aircraft and parts (down 2.3 percent), motor vehicles and parts (down 2.0 percent) and machinery (down 2.0 percent).

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

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Kansas City Fed: Manufacturing Activity Expanded for the Seventh Straight Month in July

The Kansas City Federal Reserve Bank said that manufacturing activity has expanded every month so far in 2014, picking up slightly in July from June. The composite index of general business conditions rose from 6 in June to 9 in July. The pace of growth accelerated in many of the key indicators, including new orders (up from 8 to 12), production (up from 2 to 11), shipments (up from 2 to 14) and employment (up from 1 to 8). One-third of survey respondents said that their production had increased in the month.

There were two negatives in the report, as well. The average workweek (down from 7 to -3) shifted into its first contraction in six months. The percentage of those taking the survey who noted a reduced workweek increased from 12 percent in June to 17 percent in July, enough to tip the diffusion index. In addition, new export orders (up from -11 to -6) continued to fall, albeit at a slower pace of decline for the month. This measure has been in contraction territory in 8 of the past 12 months, indicating weakness on the trade front in the Kansas City Fed’s district.

Nonetheless, there continue to be encouraging signs for the months ahead. The forward-looking composite index increased from 12 to 15, with relatively strong growth anticipated over the next six months. Manufacturers in the region expect higher new orders (up from 14 to 24), production (up from 17 to 23), shipments (up from 20 to 28), employment (up from 14 to 23) and capital expenditures (up from 23 to 25) at rather healthy rates of growth. In fact, over 40 percent predict increased sales, output and shipments, with more than one-third seeing additional hiring and capital spending. Yet, the sample comments also suggest frustrations with attracting qualified workers. Exports are predicted to grow just modestly (unchanged at 6).

Respondents expect pricing pressures to remain elevated, with nearly half of those taking the survey saying that raw material prices should increase over the next six months. Still, 24 percent felt that input costs for them might fall, and the diffusion index for this measure (down from 49 to 46) eased slightly in July.

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

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Continued Progress in China and the U.S., with Europe and Japan Growing More Modestly

The HSBC Flash China Manufacturing Purchasing Managers’ Index (PMI) expanded for the second straight month in July, rebounding from softness from January through May. The headline index rose from 50.7 in June to 52.0 in July, its highest level since March 2011. The underlying data were mostly higher, including new orders (up from 51.8 to 53.7), output (up from 51.8 to 52.8) and exports (up from 50.6 to 52.7). The sales pace was the fastest since January 2011, and each of these measures are a sign that recent stimulative actions taken by the Chinese government have had a positive impact. Some downsides in the PMI survey contracting hiring rates for the 16th consecutive month (up from 48.7 to 49.5) and slightly accelerated raw material prices (up from 50.8 to 52.9).

Meanwhile, Japanese manufacturing activity also expanded for the second straight month, but it eased slightly in July. The Markit/JMMA Flash Japan Manufacturing PMI declined from 51.5 to 50.8. The recent uptick in activity has materialized as the Japanese economy has recovered from an increased in taxes that went into effect on April 1st. Still, manufacturers in the country cannot cheer yet, as output growth came to a halt in July (down from 51.8 to 50.0, or neutral). Other indicators were mixed. Export sales (up from 49.0 to 51.6) and employment (up from 49.8 to 50.8) both shifted to positive growth, but the pace of new orders decelerated somewhat (down from 52.0 to 51.1).

In other news, the Markit Flash Eurozone Manufacturing PMI edged marginally higher, up from 51.8 to 51.9. The Flash Eurozone PMI Composite PMI was up more strongly, increasing from 52.8 to 54.0, suggesting healthier growth in the service sector. For manufacturers, the data suggest slightly faster growth in production (up from 52.8 to 53.0) and exports (up from 52.4 to 52.7), but the pace of growth for new orders (51.9) and employment (50.3) were unchanged.

Overall, these figures provide a limited degree of encouragement for the manufacturing sector in Europe, which has worried of late about slow economic and income growth. It is also still clear that the data vary on country-by-country basis, with German manufacturing activity (up from 52.0 to 52.9) accelerating in July but with French manufacturers noting yet another deterioration in sales and output. Indeed, the French economy remains in a rut, with manufacturing activity positive in just three months since January 2013.

Closer to home, the Markit Flash U.S. Manufacturing PMI decreased from 57.3 to 56.3. Despite the slight easing in July, manufacturing activity continues to grow at relatively decent rates. Through the first seven months of 2014, the top-line index has averaged 55.9, stronger than the 53.5 average noted for 2013 as a whole. The July data show both new orders (down from 61.7 to 59.8) and output (down from 61.0 to 60.4) growing at a healthy paces, albeit with some deceleration for the month. Yet, hiring growth remains more modest (down from 53.8 to 52.1) and export sales (down from 50.9 to 50.6) were just barely growing, suggesting that there remains room for improvement.

Flash data give us an advance estimate of manufacturing activity incorporating “approximately 85% of the usual monthly survey replies,” with the final PMI data for the month released on August 1.

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

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Improved Trade Policies Will Foster Indian Innovation and Opportunity

While there are many variables that factor into a country’s development, the ability for businesses and individuals to innovate is key to empowering economic growth and fostering opportunity. When countries like India embrace innovation, they can create new jobs, expand trade opportunities and strengthen international relations.

There is reason to hope that the government of newly elected Prime Minister Narendra Modi will improve the India’s innovation environment and reverse a worrying downward trend in the protection and enforcement of intellectual property rights. Case in point, India was ranked 76th in the annual Global Innovation Index (GII) Survey published earlier this week by Cornell University, INSEAD, and the World Intellectual Property Organisation. With a drop of 10 spots from last year, India was the worst performer among the BRICS nations and the only BRICS member that did not improve its position from last year.

Part of this drop in rankings is the result of protectionist policies that undermine international trade norms and unfairly prop up domestic markets by closing off markets to foreign competition. For example, India has implemented retail investment caps that require stores to purchase from Indian producers as well as domestic manufacturing requirements that mandate certain materials be manufactured within India. As a result of these harmful policies, this is the fourth consecutive year that India has dropped in the GII rankings.

Ultimately, these policies create barriers to cutting edge technologies and harm domestic companies by restricting innovators’ access to next generation technologies. Rather than creating false protections for domestic producers at its own economic expense, India should incentivize ingenuity and entrepreneurship by implementing policies that reward the invention and creativity of its citizens.

Manufacturers hope the Indian government will continue on a path toward productive trade negotiations that will ultimately lead to policies that incentivize innovation and foster creativity. We are ready to work with Indian businesses to share best practices and improve operations to grow economic opportunity and create jobs in both of our nations.

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Richmond Fed: Manufacturing Activity Expanding at a Modest Pace

The Richmond Federal Reserve Bank said that manufacturing activity grew at a modest pace, expanding for the fourth straight month. The composite index of general business conditions edged slightly higher, up from 4 in June to 7 in July. Note that historical data in the Richmond Fed survey were revised in this edition to reflect new seasonal adjustments.

Despite the improved top-line figure, the underlying data were largely mixed. The biggest positive was hiring, with the employment index up from 4 to 13. This was the fastest pace of hiring growth since December, which was encouraging. Wage (up from 12 to 16) and shipments (up from 2 to 3) were also higher. Yet, new orders (5) expanded at the same pace, and both capacity utilization (down from 7 to 4) and the average workweek (down from 5 to 3) decelerated somewhat for the month.

Still, manufacturers in the Richmond Fed’s district were mostly upbeat about the next six months, with forward-looking measures increasing in July for many indicators. For instance, new orders (up from 27 to 34), shipments (up from 24 to 36), capacity utilization (up from 18 to 29), employment (up from 12 to 19) and capital expenditures (up from 18 to 19) were all higher, with each suggesting relatively healthy paces of growth.

Inflationary pressures have picked up a bit for the month, but remain mostly in-check. Manufacturers in the region said that prices paid for raw materials grew 1.99 percent at the annual rate in July, up from 1.47 percent in June. Looking ahead six months, respondents expect input costs to increase an annualized 1.89 percent, up only marginally from 1.84 percent the month before.

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

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