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

Manufacturing activity picked up somewhat in January, according to several reports that came out last week. The Institute for Supply Management’s (ISM) Purchasing Managers’ Index (PMI) rose from 50.2 in December to 53.1 in January. Stronger sales and production data helped to lift this index higher, with export growth still lagging (but no longer declining). The data was mirrored in the latest surveys from ISM-Chicago and the Chicago and Dallas Federal Reserve Banks. New durable goods orders were also higher in December, mainly due to increased aircraft sales.

The sentiment surveys tended to show an uptick in hiring in January, which might be a gauge of future activity. However, for now at least, the data show that employment growth in the sector has been slow at best. The ADP payroll data suggest that manufacturing employment contracted in January, while the government report showed that manufacturers added just 4,000 workers during the month. It is hard to ignore the significant slowdown in hiring that took place among manufacturers during the second half of 2012, with worries about sales and the economic outlook taking a toll on hiring and investing. While the larger economy added roughly 180,000 workers on average each month last year—a figure which is decent, but still not strong enough to bring the unemployment rate down—manufacturers only gained 11,000 additional workers in the last six months of the year.

Much of the economic uncertainty was tied to the fiscal cliff negotiations, with upcoming debates on the budget and deficit still causing uncertainty for many manufacturers. With the debt ceiling conversation postponed until mid-May, all eyes will now focus on the across-the-board federal budget cuts scheduled for March 1 and the possibility of a government shutdown on March 27. The fiscal cliff’s impact can be seen in the economic data as well, with manufacturing activity falling and consumer and business confidence indicators plunging. Dividends rose sharply at the end of the year (up 34.3 percent in December), as companies tried to accelerate these payments in anticipation of higher dividend taxes. The result was a 2.6 percent rise in personal income, pushing the savings rate up to 6.5 percent, its highest level (albeit a temporary one) in nearly four years.

The Federal Reserve Board reported that the economy “paused” at the end of 2012, referencing both Hurricane Sandy and the political wrangling over the fiscal cliff. Beyond that, however, the Federal Open Market Committee (FOMC) made little news. It continued the stimulative policies put in place in December, with new rotating members of the FOMC voting much like the old ones did. Kansas City Federal Reserve Bank President Esther L. George picked up the mantle of her fellow inflation hawks by being the lone dissenter.

This week is a much slower one on the data front. The key data to watch for will come on Thursday with new labor productivity numbers and on Friday with the latest international trade figures. The export data will be closely followed as it will be the first to show activity for all four quarters of 2012.

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

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

With a last-minute deal to avert the fiscal cliff, manufacturers have fewer uncertainties to worry about at the start of the new year. The threat of an economic downturn appears to have largely dissipated, with modest growth in real GDP of 2 percent or so expected this year. However, while the agreement ensures that tax rates for most individuals will remain the same, marginal tax rates will rise for some manufacturing companies that are organized as pass-through entities.

The agreement delays budget sequestration for two months, but that only extends the uncertainty over how this matter will be resolved. In addition, policymakers did not even begin to address the long-term fiscal challenges that confront us by ensuring meaningful tax and entitlement reforms. However, because of the structure of the agreement, they will have additional opportunities to do so over the next few months when they must address the debt ceiling limit, sequestration and the soon-to-expire continuing resolution that funds the government.

The data released last week tended to reflect an economy that was strengthening, even as it continues to show signs of persistent weaknesses. On the employment front, manufacturers added 25,000 net new workers. This is a healthy figure to end the year on, with 180,000 additional jobs in 2012 and 522,000 since the end of 2009. Still, the pace during the second half of the year was much slower than the first half, and it would be encouraging to see the sector producing outsized output and employment growth again. Sentiment surveys have tended to show some manufacturers pulling back on hiring. This might change if business leaders see an economy on more solid footing.

There are some signs that the U.S. and global economic environments have stabilized. As noted in the Global Manufacturing Economic Outlook released on Friday, January 4, seven of our top 10 markets for manufactured goods are growing—an improvement from just three months ago when much of the world outside of North America was experiencing declines. Looking specifically at the U.S. market, the Institute for Supply Management’s (ISM) Purchasing Managers’ Index (PMI) shifted from contraction to a slight expansion last month, with export orders and hiring helping to lift the measure. While there is still much progress to be made on this front, the positive PMI number is good news. Similarly, the Dallas Federal Reserve Bank reported higher activity levels and increased manufacturing business confidence in its region.

This week, the key highlight will come on Friday with the release of new international trade data for November. The October data reflected reduced exports and imports as a result of slowing global growth. With improvements in some countries, we will see if manufactured goods exports begin to pick up. Other numbers to watch include data on consumer credit, job postings and small business optimism.

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

The Institute for Supply Management’s purchasing managers’ index (PMI) edged higher, from a contracting 49.5 in November to a slight expansion of 50.7 in December. While the PMI is above the threshold figure of 50 which signifies net growth, it is also not growing with any gusto. Indeed, in the buildup to the fiscal cliff negotiations that just ended, manufacturers remained quite anxious, dampening production and sales. Indeed, in the last seven months of 2012, the PMI was below 50 four times, and overall manufacturing activity was reduced from what was seen earlier in the year.

On the positive side, though, it was nice to see manufacturers end the year with a net expansion, even a more lackluster one. The index for new orders was unchanged at 50.3, growing for the fourth consecutive month (but just barely). Meanwhile, the pace of production eased somewhat, slowing from 53.7 to 52.6. There were two notable areas of strength. First, export orders – which have been a real challenge for much of the past year – shifted from contraction (47.0) to expansion (51.5). This is definitely good news for the industry. Similarly, hiring also picked up, rising from 48.4 to 52.7.

The sample comments tend to support this mixed view of the economic world, with some signs of increased demand even as manufacturers were uncertain about the future. One respondent said, “We are seeing stabilization of orders and costs as well as production capacity for the first time in months.” Yet, others tended to echo the sentiment of the fabricated metal producer who cautioned that future conditions were “foggy.”

Overall, manufacturing sales and production appear to have improved in December, which bodes well for the sector as we move into 2013. Some of this is likely the result of a pickup in activity after Hurricane Sandy; although, increased exports and imports also suggest improvements in the international economic environment.

Yet, the pace of growth is only slightly above neutral, with many business leaders pulling back on activity in December due to uncertainties surrounding the U.S. fiscal situation and slowing orders globally. With the fiscal cliff situation resolved, at least some of these uncertainties will be resolved for now. Even with this, manufacturing production is expected to grow more modestly in 2013 than in 2012. Moreover, the fiscal cliff agreement did not tackle larger structural issues, leaving larger reforms to the tax code and to entitlements for later, perhaps during the political haggling over the debt ceiling which will take place between now and the spring.

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

The Institute for Supply Management’s purchasing managers’ index (PMI) moved lower in November, falling once again into contraction territory. The PMI fell from 51.7 in October to 49.5 in November. It is clear that worries about slowing sales and the fiscal cliff are having an impact. Additionally, the Mid-Atlantic region was likely affected by Hurricane Sandy.

Many of the subcomponents of this measure reflected a worsening of conditions in the past month. For instance, the index for new orders declined from modest growth (54.2) to essentially neutral (50.3). Reduced export sales were likely a factor in this decline, falling from 48.0 to 47.0, but easing domestic sales were probably also to blame. Surprisingly, the pace of production edged slightly higher in November, up from 52.4 to 53.7. However, this could be short-lived given the slowing of new sales.

Later this week, we will learn about hiring in the manufacturing sector both from ADP on Wednesday and the Bureau of Labor Statistics on Friday. The ISM figures suggest that these numbers will be weak, or potentially declining. Indeed, the index for employment dropped from 52.1 to 48.4, suggesting that more manufacturers are reducing their staffs than hiring during the month. It is the first time that this index has contracted in over three years. To demonstrate the extent to which net hiring has diminished, the employment index stood at 56.9 just six months ago in May.

The sample comments that were provided help frame the decreased levels of optimism in this month’s report. The concerns range from worries about the global environment to the U.S. fiscal situation. As one fabricated metal products company wrote, “The fiscal cliff is the big worry right now. We will not look toward any type of expansion until this is addressed…” Regarding international sales, a chemical manufacturer added, “Global economic uncertainty still seems to be sticking around, which is not necessarily making things worse, but it is also not making things better from a demand standpoint.”

A food manufacturer said that their business was in a “lull” right now.  That pretty much describes how many business leaders feel, with most of them frustrated with our political leaders for failing to avert the fiscal cliff up to this point.  Hurricane Sandy also played its part in reducing activity. But, based on the statements in the ISM survey as well as with the several manufacturers that I spoke with last week, business leaders are extremely nervous about the future direction of the economy.

Chad Moutray is chief economist, National Association of Manufacturers.

New data from Markit provides mixed news for manufacturers and the economy. First, the Markit Flash Manufacturing Purchasing Managers’ Index (PMI) continues to show modest growth for the United States. The “flash” PMI – which is an advance measure of the final PMI data using 85 to 90 percent of the total responses – edged slightly higher from 51.7 in July to 51.9 in August. A small increase was observed in output and new orders, which helped to push the composite figure higher. Pricing pressures also continue to ease.

Still, it is important to keep in mind that manufacturing activity remains sub-par. According to their press release, August’s PMI is the “third-lowest reading in 35 months.” This includes having employment growth at its slowest pace in a year and a half. Not only were many of the components decelerating from earlier in the year, but some of them were shrinking outright. For instance, new export orders remain virtually unchanged at 48.7 in August, with values under 50 suggesting contracting activity.

Falling export orders are the result of slowing global activity. The Markit Flash Eurozone PMI was mostly unchanged, up from 46.5 in July to 46.6 in August. This was the seventh consecutive monthly contraction, with the Flash Eurozone Manufacturing PMI at 45.3. New orders and employment continue to fall, as the continent grapples with the economic consequences of its sovereign debt crisis.

This includes even the strongest economies globally. The Flash German Manufacturing PMI is currently 45.1, up slightly from 43.0 last month. The key point is that manufacturing remains very weak, with similar findings in France (46.2) and China (47.8). The coming weeks will bring new data on other countries, as well. For China, the Flash Manufacturing PMI figure was the lowest in nine months, with falling new orders, exports, and employment. Its press release says, “… Chinese producers are still struggling with strong global headwinds.”

Indeed, these figures provide further evidence that the global economy is slowing, and while the U.S. manufacturing sector continues to have modest gains, there are significant headwinds on the horizon. The Institute for Supply Management, which also produces a PMI report, has found that the U.S. manufacturing sector has contracted for two consecutive months, led by declining new sales. As such, we will be closely looking at the latest ISM figures, which will be released on September 4^th, to see how the slowing global economy and uncertainty domestically impact U.S. manufacturing activity.c

Chad Moutray is chief economist, National Association of Manufacturers.

Two surveys released this morning both show weaker manufacturing activity, continuing an ongoing trend. Anxieties about Europe and slowing growth in the U.S. and elsewhere appear to have dampened overall enthusiasm among many in the manufacturing community.

First, the Federal Reserve Bank of Philadelphia’s Business Outlook Survey observed contracting activity in its region. The composite index of general business conditions was negative for the second month in a row, as the net percentage of respondents viewing their conditions favorably dropped from -5.8 in May to -16.6 in June.

Many of the measures reported lower levels of activity. For instance, the net percentage of those reporting increased new orders fell from -1.2 to -18.8. To arrive at this figure, just 21.4 percent said that they were experiencing increased new orders, with 40.2 saying that their new sales were declining. Similar trends were seen in shipments, delivery times, and the average workweek. Net hiring remained positive but only barely. Almost three-fourths of manufacturers report no changes in their employment. (continue reading…)

The Institute for Supply Management (ISM) released its purchasing managers index (PMI) this morning, showing an unexpected decline from 54.1 in January to 52.4 in February. This is the second surprising announcement this week, as durable goods numbers for January were also lower than anticipated. Both of these measures differ from the current narrative that manufacturing activity has begun to recover, with positive expectations for growth ahead.

Of course, it is important to point out that today’s release still suggests an expanding sector, albeit one that is growing a little slower than last month. Several of the subcomponents to the ISM measure reflected this easing, with new orders dropping from 57.6 to 54.9 and production falling slightly from 55.7 to 55.3. Job growth also slowed; whereas, inventory levels continued to contract. On the positive side, export growth expanded at a faster rate (although so did imports).

Not surprisingly, higher energy and raw material costs and developments in Europe are weighing on respondents’ minds. The index for raw material prices reflected an acceleration from 55.5 to 61.5. A chemical manufacturers, through sample comments provided in the press release, said, “Business is holding steady. Concern over commodity prices ongoing.”  Another individual from the computer and electronics industry noted softening in global economic growth. Yet, most of the responses tended to echo the more upbeat sentiment of higher demand and production, but perhaps with some cautious. As a wood products manufacturer wrote, “Shipments are increasing over last year. Waiting to see if the trend continues.”

That last sentence pretty much sums up these ISM figures, as well. Most of us were anticipating that the PMI would rise to 55.0, reflecting stronger manufacturing growth. Instead, it pulled back a little, reversing three consecutive months of gains. New orders led the decline lower, but hopefully, this is more of a “blip” and the longer-term trend returns to being positive with March’s readings.

It does, though, suggest the fragility of our current economic recovery. Manufacturing has played an outsized role in the rebound to date, and yet, it is not immune to the headwinds that surround it.

Chad Moutray is chief economist, National Association of Manufacturers

The widely watched Purchasing Managers Index (PMI) released today by the Institute for Supply Management shows manufacturing output is expected to continue to increase, but probably at the relatively moderate rate of the last few months.

The March PMI index stood at 61.2, slightly lower than the February index value of 61.4. Any value over 50 indicates that more manufacturers are expecting an increase than a decrease, and the March index figure is consistent with the generally 6-8 percent annual rate of manufacturing increase, in current dollars, implied by a variety of statistical indicators.

While still portending an increase, the fact that the index declined slightly from February and stood only 0.4 points higher than January does not suggest an accelerating rate of manufacturing growth in the near term. This observation is consistent with the manufacturing employment data released today by Department of Labor, which show that manufacturing employment increased in March, but by a smaller amount than in January or February.

The new export orders data from the Institute for Supply Management bear watching, for that index slipped sharply to 56.0 from February’s figure of 62.5. The export index appears generally more volatile than the overall PMI index and has been subject to rather wide month-month swings, so one month is not necessarily indicative. If the index continues to show softness, however, this could indicate a slowdown is coming in exports. As exports have been the fastest-growing part of U.S. factory shipments, this would be a worrisome development.

Catching up …

• Walter Williams in Investor’s Business Daily, “U.S. Manufacturing’s Exaggerated Death,” comparing the historical improvements in agriculture to current trends in manufacturing.
• New York Times, “Biopharmaceutical Industry Is Banking on Boston“: “Companies battling for an edge in the biopharmaceutical industry have $2.3 billion in manufacturing plants in development in the Boston area to produce genetically engineered drugs.”
• Reuters, “Global factory PMI jumps to near 4-year high“: ” Global factory business activity grew at its fastest pace in nearly four years in December as new orders growth accelerated at a rate not seen in more that five and a half years, a survey showed on Monday.”
• Reuters, “U.K. manufacturing PMI hits 25-month high“: “U.K. manufacturing PMI hits 25-month high: “LONDON (MarketWatch) — Purchasing managers in Britain’s manufacturing sector reported an unexpected acceleration in activity in December, pushing a closely-watched gauge to its highest level in more than two years.”
• Associated Press, “Upbeat manufacturing data point to job growth“: “An unexpectedly strong report on manufacturing activity Monday bolstered confidence that the nation’s factories will help sustain an economic recovery.”
• Los Angeles Times, “U.S. manufacturing grows in December“: “Even more gains could be on the way as manufacturers’ customers continue to report plunging inventories and turn to new production instead of a merchandise backlog to fill orders and feed sales.”