Here are the files for this week’s Monday Economic Report:
Data reports on the manufacturing economy were mixed last week, with some releases providing hints of optimism, while others continued to note challenges. Output soared in the latest Institute for Supply Management’s (ISM) Purchasing Managers’ Index (PMI) report. The PMI rose from 50.9 in June to 55.4 in July, far exceeding expectations and lifted by jumps in production (up from 53.4 to 65.0) and new orders (up from 51.9 to 58.3). Hiring also shifted from contraction to modest growth (up from 48.7 to 54.4). The ISM report was overwhelmingly positive and more evidence that the sector has improved this summer after weaknesses in the spring, with cautious optimism for the second half of the year. Sentiment surveys from the Chicago and Dallas Federal Reserve Banks noted similar progress, mirroring findings from most other regions.
Despite encouraging recent developments regarding output and sales, overall hiring has yet to pick up beyond small gains. The Bureau of Labor Statistics reported that manufacturers added 6,000 net new workers in July, ending four straight months of declines. Yet, the auto sector alone contributed 9,100 to this figure, suggesting that without gains in motor vehicle employment, the broader sector would have had losses again. Moreover, in the past 12 months, manufacturers added just 40,000 additional workers, or 1.8 percent of all net new nonfarm payroll jobs. This is a far cry from the outsized role that the sector played during the two months following the recession. Manufacturers continue to be hesitant to add new workers, a trend that will probably continue until they perceive the economic marketplace to be on a firmer footing.
The Federal Reserve Board’s policy statement—which kept “highly accommodative” monetary policies in place without any changes (perhaps until this fall)—said that economic activity expanded modestly during the first half of the year. Yet, while there was progress by midyear, growth has not been fast enough. The Bureau of Economic Analysis did a major revision on its GDP and income data going back to 1929, adding in new measures of intellectual property and research and development. Using the new data, we now know that real GDP increased by 1.1 percent and 1.7 percent in the first and second quarters of 2013, respectively. While the second-quarter figure exceeded expectations, the U.S. economy has been operating below its potential, with manufacturers keenly aware of and challenged by this softness. Still, real GDP should increase by roughly 2 percent for 2013 as a whole.
This forecast, however, relies on a better second half of the year. For that to happen, we will need to see continued strength in consumer and business spending, which alone added 2.56 percentage points to real GDP in the second quarter. Consumer confidence remains strong overall, with measures from the Conference Board and the University of Michigan at or near pre-recessionary highs. Personal spending data have also been mostly positive, with increases in durable and nondurable goods spending in June. This is true despite the fact that personal income grew less strongly, lowering the savings rate from 4.6 percent in May to 4.4 percent in June. Meanwhile, construction activity has been less robust of late, with reduced housing starts and declines in nonresidential spending. Manufacturing construction was off 1.9 percent year-over-year in June, highlighting its weaknesses; however, a pickup in production or sentiment could rejuvenate construction investments for the sector.
One of the larger drags to real GDP in the second quarter was net exports, with growth in imports outstripping exports. Tomorrow, we will get new international trade data, which will hopefully show some improvements. Through the first five months of 2013, manufactured goods exports grew a paltry 1 percent. Recent reports show that Europe’s problems might be stabilizing, even as China’s seems to be slowing. The trade figures will be watched closely for signs of progress regarding international demand for our goods. Other economic highlights for the week include the latest credit availability and demand, job openings and wholesale trade reports. In addition, the new Global Manufacturing Economic Update will be released on Friday.
Chad Moutray is the chief economist, National Association of Manufacturers.