The U.S. economy slowed considerably in the first half of 2011, with the Bureau of Economic Analysis (BEA) revising downward real GDP growth in the first quarter to 0.4 percent (from 1.9 percent, as stated earlier) and reporting advanced estimates for the second quarter of 1.3 percent.  (All percentages are in annualized terms.) BEA did some major revisions to data from 2007 onward using more complete information as part of its annual review.

Consumption, which accounts for approximately 70 percent of real GDP, rose just 0.1 percent in the first quarter, with durable goods sales down 4.4 percent.

For the manufacturing sector, much of this is not new news. The decline in durable goods consumption of 4.4 percent comes after five consecutive quarters of strong growth. Given the supply chain issues that challenged the sector during this time frame, this is not a surprise. The largest contributor to this decline was the motor vehicle sector, which was most impacted by the Japanese disaster. Nondurable goods sales rose 0.1 percent, while services were up 0.8 percent.

Government served as another drag on output, with government’s contribution to real GDP falling for the past three quarters. In the second quarter, government consumption fell 1.1 percent, led by declines in nondefense federal spending (down 7.3 percent) and state and local government spending (down 3.4 percent).

There were two bright spots in the news.  First, real exports outpaced real imports, 6.0 percent versus 1.3 percent, respectively, with healthy increases in goods sold oversees (6.8 percent). While these numbers are lower than the growth rates of the first quarter, they do highlight the important role that international trade plays in our overall economic growth. In fact, real exports accounted for 0.81 percent of the growth in real GDP in the second quarter.

The second bright spot is business investment, with real gross private domestic investment growing 7.1 percent in the second quarter. This was up from 3.8 percent growth in the first quarter, contributing 0.87 percentage points to real GDP. Nonresidential fixed investment was up 6.3 percent in the second quarter, with residential construction rising 5.7 percent and inventory growth increasing 3.8 percent.  This is a reversal from the steep declines in nonresidential structure construction in the first quarter.

Moving forward into the third quarter, we have started to see nascent signs of a rebound, particularly in the durable goods sectors. I say nascent, but there are also signs that this rebound is slow in getting started. While there remain cautiously optimistic perceptions of economic growth for the second half of this year, there are significant headwinds that can put a damper on these plans.

The ability to get this economy growing again in the third and fourth quarters will hinge on removing uncertainty in the marketplace, improved business and consumer confidence, continued growth in our sales overseas, and a stronger domestic economic footing. 

Chad Moutray is chief economist, National Association of Manufacturers.

The Census Bureau reported this morning that durable goods orders rose 1.9 percent in May, rebounding slightly from its 2.7 percent decline in April. The largest mover in this data was the transportation sector, which had been hard hit in previous months due to supply chain disruptions and was up 5.8 percent in May. Excluding transportation, new orders were up 0.6 percent.

Overall, these numbers show that manufacturing is starting to get back on track to where they were before the Japanese disaster, with durables helping to lead the recovery.

In addition to stronger numbers in transportation, other manufacturing sectors also experienced healthy increases in new orders in May. These include capital goods (up 5.6 percent); communications equipment (3.6 percent); electrical equipment, appliances, and components (up 3.2 percent); primary metals (up 1.8 percent); computers and related products (up 1.3 percent); and machinery (up 1.2 percent).

In addition to new orders, shipments, unfilled orders, and inventories were also up (0.3 percent, 0.9 percent, and 1.2 percent, respectively). Computers and related products and machinery were the two sectors that boasted the largest increases in both shipments and unfilled orders for the month.

In related news, the Bureau of Economic Analysis today revised its numbers for first quarter 2011 real gross domestic product. Real GDP is now said that have grown 1.9 percent, up from 1.8 percent as reported earlier.

Output growth was led by healthy increases in personal consumption, fixed investment (excluding nonresidential structures), and exports. Durable goods consumption, for instance, grew 9.3 percent from the previous quarter, and exports increased 7.6 percent.  However, decreases in government spending and strong import growth offset some of these gains.

Chad Moutray is chief economist, National Association of Manufacturers.

Chad Moutray, chief economist of the National Association of Manufacturers, gives a video report on the first quarter GDP, which is growing at an annualized rate of 1.8 percent according to advance estimates of real gross domestic product (GDP) released this morning.

For more of Moutray’s discussion of the data, see his earlier post, “GDP Slows to 1.8% Growth, Manufacturing Continues to Lead Recovery.”

The U.S. economy slowed somewhat in the first quarter of this year, growing at an annualized rate of 1.8 percent, according to advance estimates of real gross domestic product (GDP) released this morning.  Real GDP grew 3.1 percent in the fourth quarter of 2010. One reason for slowed growth is higher energy costs, which have been a drag on the economy. With that said, this was the seventh consecutive quarter of positive growth in output, and the overall figure was in line with economists’ estimates. 

For the manufacturing sector, the story continues to be the strong growth in durable goods, which were up 10.6 percent in the first quarter.  Nondurables rose 2.1 percent, and services grew 1.7 percent.  (See the accompanying figure.)  While each of these numbers was below the faster growth rates experienced in the last quarter of 2010, they do reflect pent-up demand for products coming out of the recession domestically, with positive increases for each since late 2009 or early 2010.  Durable goods alone, for instance, added 0.78 percentage points to real GDP in the first quarter of 2011.

Inventory growth was another strong contributor to growth, with nonfarm inventory accumulation adding 1 percentage point to real GDP.  Inventories, which had fallen significantly in the fourth quarter, grew in the first quarter as firms rebuilt their stocks and overall demand strengthened.

Overall growth was led by healthy increases in consumer spending, nonresidential fixed investment in equipment and software, and exports.  The rise in exports, though, was offset by strong growth in imports in the first quarter.  Residential and nonresidential structure investment fell dramatically, and decreased government spending at the federal, state, and local levels remained a drag on economic output. 

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

U.S. manufacturing remains the world’s largest manufacturer, despite an inaccurate report in today’s Financial Times that China has passed the United States. American manufacturing, in fact, is so large that if it were a self-standing economy, it would be the eighth largest in the world.

There are a number of errors in the data provided to the Financial Times by a private sector consultant. First, the report did not measure the physical quantity or volume of manufacturing, but rather measured current dollar output which is impractical due to price changes and exchange rate changes. Real Gross Domestic Product (GDP), and its manufacturing component, Real Manufacturing Value-Added, are the correct ways to measure economic output, because they are adjusted to remove the effect of price and exchange rate changes and measure real output.

The United Nations Statistics Division compiles global data on manufacturing value-added, and its most recent data shows the United States continues to lead, with close to 21 percent of all global manufacturing output in terms of constant dollars (real manufacturing value-added in 2009). China is the second largest, with about 15 percent of global manufacturing. No official data are available for 2010 yet, but given the gap between the top two manufacturers, China will not have surpassed the United States in 2010.

The second problem is that the consultant did not rely on official data in making its estimates. Rather than use the United Nations official data which is agreed upon by most economists as reliable, the consultant appears to have made its own assumptions. Using the consultant’s growth assumptions for China and the United States in 2010, and applying them to the official 2009 data shows that even in current dollars the United States remained the worlds’ largest manufacturer in 2010.

The U.S. Department of Commerce, which compiles the manufacturing value-added data, says that preliminary 2010 estimates will not be available until next month. In an effort to clarify the erroneous information provided to the Financial Times, the National Association of Manufacturers shared the data that shows the U.S. remains the world’s largest manufacturer.

Frank Vargo is the NAM vice president of international economic affairs.

Mixed in the sense of could be better.

Reuters, “Fourth-quarter growth revised down to 2.8 percent“:

WASHINGTON (Reuters) – The economy grew slower than initially estimated in the fourth quarter as government investment contracted more sharply and consumer spending was less robust, a government report showed on Friday. Gross domestic product growth was revised down to an annualized rate of 2.8 percent, the Commerce Department said in its second estimate, from 3.2 percent. Economists had expected GDP growth, which measures total goods and services output within U.S. borders, to be revised up to a 3.3 percent pace.

The Commerce Department report is here.

Bloomberg, “Britain’s Economy Contracts More Than Estimated as BOE Divides on Remedies“: (continue reading…)

The Gross Domestic Product (GDP) data released today by the Department of Commerce contained mixed news for American manufacturers. 

While real GDP increased 2.9 percent in 2010, more than half of that growth came from inventory accumulation. Real Final Sales (GDP net of inventory change) are a better indicator of underlying demand growth, increased only 1.4 percent.  As U.S. manufacturing productivity grows about 3.8 percent a year, considerably faster growth in final sales is necessary for employment to increase.

The good news is that Real Final Sales grew at a stunning 7.1 percent annual rate in the fourth quarter of 2010 – the fastest rate since 1984 – and could provide a foundation for strong growth in 2011.

Durable goods sales rose 7.7 percent in 2010, and hit a blistering growth rate of 21.6 percent in the fourth quarter, equipment and software sales grew 15.1 percent in 2010 and real exports were up 14.6 percent – solid growth that, if continued, would put us on the path for job growth.

But while the latest news is encouraging we cannot take it for granted. We still need pro-manufacturing fiscal, trade, and other policies to ensure the growth continues.

This is the time for the Administration and the Congress to pay close attention to the NAM’s Manufacturing Strategy and the NAM’s Blueprint to Double Exports. If those recommendations are implemented, U.S. manufacturing – and the whole economy – would be on a path to creating jobs.

Frank Vargo is the NAM’s vice president for international economic affairs.

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.

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.

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.