While the media has been rightly focused on first quarter GDP and April employment numbers, which showed that the economy grew by a modest 0.6 percent in Q1 while overall employment edged down in April for a fourth consecutive month, the Commerce Department released a separate report last Tuesday on GDP by Industry for 2007 that you might find interesting.
According to the report, which breaks down the economy (GDP) by contributions by industry (as opposed to the typical Consumption+Investment+Government+Trade), the GDP grew by 2.2 percent in real terms on an annual basis last year. The manufacturing sector edged out the overall economy and grew a slightly faster 2.3 percent in 2007.
Here are some highlights of the report.
Manufacturing accounted for 11.7 percent of GDP last year, the same share as 2006 and virtually the same as the 11.9 percent in 2005.
Six of the 15 major industrial sectors, accounting for roughly a third (36 percent) of the overall economy grew faster than manufacturing last year. The Information sector (4.7 percent of GDP) grew the fastest, advancing 9 percent in 2007. The only individual sector larger than manufacturing which also grew faster than manufacturing was Professional Services, which at 12.2 percent of the economy grew by 4.6 percent last year.
8 sectors, accounting for roughly half (52 percent) of GDP grew slower than GDP. Not surprisingly, the only sector where there was an outright decline was construction. Following a 6 percent decline in 2006, construction GDP, which accounts for 4 percent of the overall economy, fell by 12.1 percent last year. This is the biggest yearly decline going back to 1988.
Over the course of the current expansion, the manufacturing sector has grown in tandem with the overall economy. From 2001 to 2007, manufacturing GDP has risen by 16.7 percent, nearly identical to the 16.9 percent rise in overall GDP.
During the ongoing presidential campaigns, the issue of NAFTA (the North American Free Trade Agreement) has repeatedly come up. Some have claimed that NAFTA has been bad for the U.S. economy and has contributed to the deindustrialization of America.
Well, with the latest data now available, here is what the facts show. In the 14 years since NAFTA went into effect, the U.S. economy has grown by 54 percent, which is 17 percent more than the 46 percent rise in GDP during the 14 years prior to NAFTA. At the same time, the manufacturing sector increased by 61 percent between 1993 and 2007, which is nearly 80 percent faster than the 34 percent rise in manufacturing GDP during the 14 years prior to NAFTA's implementation (1979-1993).
Posted by Dave Huether at 7:00 AM
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Results from the 1st Quarter NAM/Industry Week Manufacturing Index shows that
confidence among large manufacturers eroded (for a third consecutive quarter) in the first quarter of 2008 to the lowest level in five years, with sales expectations falling to their lowest level since the second quarter of 2001. For small manufacturers, the business outlook moderated as well in the first quarter of the year, but remained elevated compared to large survey respondents.
70 percent of small manufacturing companies who responded to a survey conducted by the National Association of Manufacturers (NAM) had a positive business outlook for their firm in the first quarter of 2008. This marks a 10 percent drop in confidence from the 80 percent of survey respondents who had a positive outlook in the fourth quarter of 2007. This was the biggest quarterly drop since the 11 percent decline in first quarter of 2001. Having declined five of the past eight quarters, the level of optimism in the first quarter of 2008 was at the lowest level since the second quarter of 2003.
After tumbling 17 percentage points in the third quarter of last year, and dropping another 4 percentage points in the fourth quarter, the percent of large manufacturers with a positive business outlook eroded another 2 percentage points to 57 percent in the first quarter of 2008, the lowest level since the first quarter of 2003.
Despite the moderating business outlook that had taken place over the past two years, the level of optimism for both large and small survey respondents remained higher in the first quarter of 2008 compared to the first quarter of 2001. This is consistent with survey responses indicating that most companies' business environment is better than it was back in 2000-2001.
Asked how their current business environment compares to the 2000-2001 period, nearly two thirds (61 percent) of survey respondents answered that current conditions for their company are 'better than 2000-2001,' 17 percent responded that current conditions are 'similar to 2000-2001' and 22 percent responded that current conditions are 'worse than 2000-2001.'
Asked if the U.S. economy would go through a recession in 2008, half (50 percent) of the survey respondents answered 'yes,' 17 percent answered 'no' and 33 percent answered 'maybe.'
Survey results also show that more export-oriented companies are more optimistic. For firms that expect at least 25 percent of their company's sales growth this year to come from exports, 81 percent reported a positive business outlook in the first quarter survey. However, just 60 percent of firms that do not export reported a positive business outlook.
Results from the first quarter survey also show that more export-oriented companies have more positive outlook with respect to sales, capital investment and employment.
Looking ahead 12-months, both large and small manufacturers expect their sales to continue to increase, but at slower rates than earlier in the expansion. Small firms expect their sales to increase by 3 percent, which is the same pace as the prior two quarters but slower than the expectation during the first half of last year.
Meanwhile, large firms expect their sales to increase by just 0.9 percent over the next 12 months. This is less than half of the pace of the fourth quarter, and the slowest sales expectation since the second quarter of 2001.
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An article in the March 14th edition of Manufacturing & Technology News, entitled USTR's U.S. Production Claim Riles Union Boss Leo Gerard (not online), caught my eye. Evidently, the Office of the U.S. Trade Representative's recent fact sheet on NAFTA (the North American Free Trade Agreement) upset the president of the United Steelworkers.
In the fact sheet, the USTR states: "Myth No. 3: NAFTA has hurt America's manufacturing. Fact: U.S. manufacturing output rose by 58 percent between 1993 and 2006, as compared to 42 percent between 1980 and 1993"
In the article, Gerard's printed response to this claim is "Can you print 'bullsh@$'? This is just pure bullsh@$. I am fed up with that crap," Gerard goes on to say that "We're not producing more steel. We're not producing more glass. We're not producing more cement. We're not producing more tires. We're not producing more of these either as a percentage of the economy or in real terms, and I can tell you that unequivocally."
Later in the article, Lori Wallach, director of Public Citizens Global Trade Watch is said to have looked at the USTR fact sheet, and says "trick number one" is that it is not in inflation-controlled dollars: "When you control for inflation, you cut the growth by 40 percent. That's a math trick."
Well, someone better tell Ms. Wallach to look again. The statistics that the USTR bases its fact sheet on ARE ADJUSTED FOR INFLATION.
According to the Bureau of Economic Analysis, which is part of the Commerce Department, after adjusting for inflation (i.e. changes in prices) real manufacturing output rose by 58 percent between 1993 and 2006. This is more than a third faster than the 42 percent rise during the 1980-1993 time frame. Why Ms. Wallach is cited as an expert on statistics is beyond me.
And what about Mr.Gerard's claim that we are not producing more steel, glass, cement or tires.
U.S. manufacturers aren't producing more of these products? Really? In fact, according to Federal Reserve's industrial production statistics, output of all of these products has actually increased since the NAFTA agreement was signed.
Since 1993, glass production is up 15 percent; iron and steel production is up 19 percent; cement production is up 52 percent; and tire production is up 2 percent. With the exception of tire production, each of these sectors has outpaced the performance during the 1980-1993 period.
This article clearly lifts the adage "Never let the facts get in the way of a good story" to a new level of absurdity.
Posted by Dave Huether at 9:25 AM
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The Labor Department reported on Friday that the economy failed to create jobs for a second consecutive month in February. After falling by 22,000 in January, the economy shed a net 63,000 jobs last month. As many newspaper articles have noted, the U.S. economy rarely averts a recession when employment declines at least two consecutive months. So, is Friday's news the final nail in the coffin for the six-year long expansion. Maybe, but there is still a real possibility that the expansion will instead go through a moment of pause before resuming later in the year.
To be sure, the downside risks to the expansion are substantial. In addition to the housing downturn, high energy prices are eating into real wage growth, consumer confidence is down, stock prices have moderated, corporate profits have slowed, and (now) employment growth has turned negative. While these factors are not in nearly as bad a shape as they were earlier in the decade, together they pose a strong headwind for the economy.
So what is keeping the economy going. Well, an improving trade balance for one thing. During the 2001 recession, the manufacturing sector was much harder hit than the rest of the economy. One of the reasons for this is that export growth plummeted. This was mainly due to the combined effects of an overvalued dollar and stagnant growth abroad (not problems from U.S. trade policy as free-trade foes would have you believe).
Since then, conditions have improved significantly on the trade front. The dollar has fallen about 23 percent and now stands at its 1996 level. At the same time, economic growth abroad has picked up, not just in Asia, but in Europe and Americans as well. Back in 2002, when the dollar was at its most-recent peak, economic growth of our 30-largest export markets averaged just 1.1 percent. By the end of 2007, this pace increased to 3.7 percent.
In the past two years, U.S. export growth alone has added more to the nation's economy (GDP) than residential investment (housing) has taken away. With effects from the housing downturn spilling over into other parts of the economy, whether or not the economy enters recession will be largely determined by whether or not the improvements in trade can offset these spillover effects.
That being said, it is downright curious why some of the candidates for President of the United States are trash talking trade -- Free Trade Agreements like NAFTA to be exact. Not only is blaming current economic troubles on trade blatantly inaccurate, categorizing opening up foreign markets for U.S. producers through more Free Trade Agreements as "part of the problem" instead of "part of the solution" shows a fundamental lack of understanding of how our economy works.
Going forward, it will be important to make sure that the next president understands that lowering barriers abroad for U.S. products makes U.S. manufacturers more competitive globally. And increased export growth is one way that our country can weather domestic problems (such as the current housing downturn) without going through a deep recession.
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The Federal Reserve reported last Friday that overall industrial production edged up jus 0.1 percent in January, mirroring the pace in December. For manufacturing, which makes up over three quarters of industrial production, production stalled in January -- no growth -- after modest increases in November and December. Under the surface, however, there was a lot of action.
Of the 19 major manufacturing industries, 8 sectors (representing about 60% of manufacturing output) experienced increases in production (nonmetallic minerals, computers, electrical equipment, aerospace, misc. manufacturing, food production.)
At the same time, 10 sectors (representing 40% of manufacturing output) experienced decreases in production. (Motor vehicles, furniture, wood products, textiles had the biggest declines.)
Basically, the January report on manufacturing is the latest chapter of a story that has been going on for some time. While positive growth in exports are helping some sectors continue to expand, slowing domestic demand (particularly sectors connected to housing as well as motor vehicles) is hurting other sectors within manufacturing.
Posted by Dave Huether at 12:27 PM
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The Commerce Department reported today that exports surged $2.2 billion in December while imports declined by the same about. This positive news mirrors much of what happened throughout 2007. Thanks to a realigning dollar, solid growth overseas, and a moderating U.S. economy, exports grew fast than imports in 8 of the 12 months last year.
One result of this positive trend is that, for the first time in six years, the trade deficit actually declined in dollar terms last year. After reaching a level of -$758 billion in 2006, the trade deficit narrowed by 47 billion to a level of -$711 billion last year. This is the biggest improvement in the U.S . trade deficit in sixteen years.
What's impressive about the improving trade situation is that for a second consecutive year in a row, U.S. exports outpaced imports:
(1) in every major product category (capital goods, consumer goods, industrial supplies, automotive parts, and foods, feeds and beverages), and
(2) with every major location in the world in 2007 (North America, South/Central America, Europe, and Pacific Rim nations.)
With three free trade agreements awaiting action up on Capitol Hill, lets hope our country's lawmakers will see the wisdom of reducing trade barriers overseas. After all, exports are helping our economy avert a recession right now. And more of a good thing should always be welcomed.
Posted by Dave Huether at 12:57 PM
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Anytime somebody tries to make a political or economic point about trade policy and rising trade deficits, just check to see if they mention oil imports as a factor. If they don't, they're not giving you the straight story.
New economic figures point out what's really going on. The Commerce Department reported yesterday that the economy rose an an annual rate of just 0.6 percent in the fourth quarter of 2007. For the year overall, the GDP increased by 2.5 perent in 2007 on a Q4/Q4 basis.
One bright spot in yesterday's report was a continued improvement on the trade front, thanks to a realigned (lower) dollar and solid economic growth abroad. For the year overall, U.S. exports increased 7.7 percent, more than five times faster than the 1.4 percent rise in imports. Exports accounted for 40 percent of economic growth last year, the most in a dozen years.
With exports growing faster than imports for three consecutive years, the trade deficit has begun to narrow. After peaking at -6.2 percent of GDP in the fourth quarter of 2005, the trade deficit declined to -5.2 percent of GDP by the fourth quarter of 2007.
While this decline is noteworthy, it masks an even greater improvement. Because our economy relies heavily on imported oil, the rising cost of a barrel of oil has become a major factor in the U.S. the trade deficit. In the fourth quarter of last year, petroleum imports alone accounted for the majority (55 percent) of the entire U.S. trade deficit. Outside of petroleum imports, the U.S. trade deficit has already narrowed by 40 percent over the past three years and now, at 2.3 percent of GDP, stands at its lowest level since 1999 (see chart).
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The current state of the economy is gaining a lot of attention both in Washington D.C. and on the campaign trail. Some claim that the housing downturn could have already put the economy into recession, while others remain optomistic that the expansion, while clearly slowing, will continue on.
The NAM's economic outlook for 2008 calls for a substantial deceleration in GDP growth this year. After growing by 2.6 percent last year, the economy is expected to grow by half that pace during the first half of this year, due mainly from the ongoing downturn in housing, which is expected to fall by a double digit rate for a third consecutive year in 2008 -- a first in the post WW II era. The forecast anticpates 2.1 percent GDP growth this year, the slowest pace in five years.
Meanwhile, after growing faster than the overall economy during the 2004-2006 period, the manufacturing sector will grow slightly slower (1.9%) than the GDP this year.
To check on the NAM's Economic forecast for 2008, click here
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The Commerce Department reported yesterday that Gross Domestic Product grew by 3.9 percent in the third quarter. This suggests strongly that the economic expansion remains on track despite the meltdown in the housing market.
Solid 3 percent growth in consumer spending provided a good base of economic activity last quarter. The fact that the economy grew at an even faster rate was due to solid growth in business investment and net exports, which more than offset a steep 20.1 percent decline in residential investment.
Business investment increased a strong 7.9 percent while exports surged at an annual rate of 16.2 percent, which is more than three-times faster than the 5.2 percent rise in imports.
Overall, exports added 1.8 percentage points to the GDP in the last quarter, more than offsetting the -1.1 percent subtracted from GDP due to the drop in residential investment.
Manufacturers continue to benefit from a more competitive dollar and strong growth abroad, as evidenced by the fact that goods exports, most of which are manufactured products, grew at an annual rate of 23 percent last quarter. This marks the fastest pace in more than a decade and nearly four-times faster than the 6.2 percent rise in goods imports! As a result, the trade deficit fell to a three and a half year low of 5.1 percent of GDP last quarter.
Housing is only one of many pillars of the U.S. economy, and right now exports are compensating for the weak housing sector. Congress can help the economy withstand future domestic trouble spots by helping U.S. producers sell more goods abroad. There are currently four free trade agreements that lower trade barriers for U.S. manufacturers pending in Congress right now.
A vote on the first of these, the Peru Trade Promotion Agreement, is expected soon. Congress should pass these agreements to help U.S. manufacturers sell more abroad. This will improve America’s manufacturing base and help the U.S. economy overcome domestic economic trouble spots, such as the current downturn in the housing market.
Posted by Dave Huether at 8:46 AM
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While questions on the Fed's next move on interest rates continues to roil financial markets, this past week offered some encouraging news on the overall state of the economy.
Last Thursday, the Commerce Department reported that the economy grew at an annual rate of 4 percent in the second quarter of 2007. This is the best performance in over a year. The Commerce Department reports said that the economy grew at an annual rate of 4 percent in the second quarter compared to 0.6 percent in the first quarter. Improvements in trade and business investment resulted in an upgrading from last month’s advanced estimate of 3.4 percent growth in the second quarter.
Exports rose by 7.6 percent and imports fell by 3.2 percent. As a result, trade contributed 1.4 percentage points to growth last quarter. This marks the best performance from trade in a dozen years. As a result, the trade deficit is now at its lowest level in three years as a share of GDP.
Business investment and trade accounted for two-thirds of economic growth in the second quarter. As a result, despite a double digit decline in housing, the economic expansion remains on track despite turmoil in the mortgage markets.
In a separate report, the Commerce Department also reported that real disposable personal income rose a strong 0.5 percent in July, and personal consumption expenditures increased a solid .03 percent to start off the 3rd quarter...this is the fastest pace in three months. This is a hopeful sign, again, that the overall expansion remains in good shape.
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The turmoil in the sub-prime mortgage markets have lead to a great deal of concern about the state of the economy in recent weeks. Clearly, the full impact of the housing downturn has yet to play out fully. Many have called for the Federal Reserve to lower the Federal Funds rate to boost economic growth in the short term. In a statement on August 17, in tandem with a lowering of the discount rate, an FOMC statement said in part, "Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably."
Whether or not the Fed will take any action before its next meeting scheduled for September 18th is a tough call. One factor that may stall any more on the Federal Funds rate until then is that other sources of growth appear to be continuing to offset the ongoing housing downturn.
Two days ago, the Commerce Department reported that durable goods orders rose a sharp 5.9 percent in July! This marks the fifth rise in the past six months and the biggest single increase in 10 months.
Ordinarily, such a large monthly rise is driven by volatile aircraft orders, and, in fact, nondefense aircraft and parts orders rose by 12.6 percent last month. But, even taking out transportation, new orders were up 3.7 percent in July, the biggest monthly gain in 23 months!
New orders for primary and fabricated metals, machinery, computers and electronics, as well as motor vehicles all posted increased orders last months. This is a good indication that business investment and exports continue to gain momentum as the economy makes its way through the third quarter.
To date, the economy has weathered the largest downturn in housing in 16 years pretty well. Though the construction sector as well as some manufacturing sectors that are closely linked to housing, such as wood products, nonmetallic minerals, furniture, and textile products have been hit very hard, the economy, and manufacturing, remain in an expansionary mode.
The Fed has stated that it will be following incoming data very closely as it weighs its next move. My guess is that the Fed is a little less likely to move today than it was last Thursday.
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Manufacturers ended the second quarter on a high note. Last week, the Federal Reserve Board reported that manufacturing production advanced by 0.6 percent in June. This marks the fourth-consecutive monthly increase and the the fastest monthly rise in the second quarter. As a result, the manufacturing sector grew at a solid 3.5 percent annual rate last quarter -- the fastest pace since the third quarter of 2006. The level of output in manufacturing, even excluding "high-tech" sectors, now stands at an all-time high.
As shown in the chart below, the state of manufacturing of manufacturing has improved after production fell in the fourth quarter of 2006 and then basically stagnated in first quarter of this year. The bubble chart below should be read as follows:
(1) The size of the bubble represents the relative size of each manufacturing industry
(2) The color shows if the industry has increased (green) or decreased (red) employment over the past year
(3) Placement: the x (horizontal) axis measures growth in production of each industry over the past year while the y (vertical) axis measures the growth (at an annual rate) in production in the second quarter.
Basically, here is how to read this chart.
Industries in the upper-right quadrant are in expansion (growth in most recent quarter and over past year)
Industries in the upper-left quadrant are in recovery (growth in most recent quarter but down over past year)
Industries in the lower-right quadrant are struggling (down in most recent quarter but growth over past year)
Industries in the lower-left quadrant are in recession (down in most recent quarter and down over past year)
Of the 19 major manufacturing industries, 14 are in either expansion or recovery.
Eight sectors, representing 53% of manufacturing output, are currently in expansion. These sectors include: computers and electronics, aerospace, misc. mfg (mostly medical equipment and supplies), plastics, electrical equipment, food and beverage, fabricated metals and machinery. Six of these sectors have added employment over the past year.
Six sectors, representing 22 percent of manufacturing output, are in recovery. These sectors include: primary metals, motor vehicles, nonmetallic minerals, wood products, furniture, and paper production. While an encouraging sign is that five of these sectors were in recession last quarter, employment declines have continued in all these industries over the past year.
Two sectors, representing 8 percent of manufacturing output, are struggling. These sectors are printing and petroleum.
And finally, three sectors, representing 17 percent of manufacturing output are in recession. These sectors are chemicals, textiles and apparel. It should be noted that chemical output is only down 1 percent over the past year. This sector has recovered from the 2001 recession. This is not the case for textiles or apparel. After a decade-long downturn, apparel production has essentially remained stagnant since mid-2004. The downturn in textile production, meanwhile, has not relented since it began in 1998. More than other manufacturing sectors, these two industries have struggled against a rapid rise of import competition.
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Manufacturers ended the second quarter on a high note. The Institute for Supply Management reported last Monday that its closely-watched PMI Index for manufacturers increased for a third-consecutive month in June to a level of 56 (where a reading above 50 indicates that the manufacturing economy is expanding). This signals that the manufacturing sector is leaving the doldrums that it has been stuck in for the past half year. After three years of solid growth, the manufacturing expansion slowed abruptly in the fourth quarter of 2006 and the first quarter of this year, when the PMI Index averaged just 50.9 over this span.
With a PMI level of 56 consistent with over 4 percent GDP growth, today’s report is an encouraging sign that the worst of the slowdown may be behind us. Especially encouraging for manufacturers is the fact that the ISM’s New Orders Index rose to a level above 60 (60.5) for the first time in sixteen months, pointing toward continued health growth in the months ahead.
While the ISM’s index of new export orders moderated to a level of 56 in June, the overall level of 57.3 for the second quarter was best showing since the first quarter of 2006. This is welcomed news. With the housing downturn still in full swing, a pickup in export growth is critically needed to at-least partially offset the on-going housing recession.
Then on Tuesday, the Commerce Department reported that new manufactured orders in May fell by 0.5 percent from April. While this may seem to conflict with the ISM release on Monday, the slowdown in orders in May should is not too worrying. First of all, the drop in May followed 3 consecutive monthly increases, including a 4 percent rise in March that was the biggest monthly gain in 3 years. This, along with the fact that unfilled orders, which rose by 0.9 percent in May supports the notion that manufacturers are still in recovery mode.
Continuing the positive news, the Institute for Supply Management's non-manufacturing report showed on Thursday that business activity in outside of the factory sector also improved in June. Increasing to a 14 month high of 60.7, the business activity in the non-manufacturing economy increased for a third-consecutive month last month.
All 14 industries, ranging from construction to retail trade to Health-care, posted growth in June. No industries reported decreased activity from May to June and all reported increasing employment last month. This is clearly a good sign that the broader economy is also coming out of a period of subdued growth.
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A slew of economic releases came out this past week. And most of them suggest that the economy has yet to break out of the state of sluggish growth that it has been stuck in for the past half year.
Last Monday, the National Association of Realtors reported the existing home sales declined by 0.3 percent in May compared to April (and over a 10 percent decline from May of 2006). This cements this spring as one of the weakest housing in recent memory.
The realtors report also showed that home prices are down 2.1 percent compared to a year ago. One of the reasons for this may be an increase in the supply of homes on the market, as sellers are testing the waters: The report showed that " Total housing inventory rose 5.0 percent at the end of May to 4.43 million existing homes available for sale, which represents an 8.9-month supply at the current sales pace, up from an 8.4-month supply in April."
This sour news was then followed by Tuesday's Commerce Department report that new home sales in May slipped 1.6 percent in May to 915,000 annualized units. On a year-ago basis, sales are down by 15.8 percent. The median and average prices of new homoes did rise in May, but this was because there was a smaller number of lower-priced houses being sold. This is partley due to the fact that banks and other types of lenders are tightening their lending standards in responce to problems in the sub-prime mortgage market.
The final piece of news on the housing front came out last Friday. The Census Bureau reported that new construction spending actually rose by 0.9 percent in May. This was the fourth consecutive monthly increase and the largest monthly gain since February of last year.
While this is encouraging, there is no sign of a rebound on the residental front. The gain in May was all in busines spending. While residential construction spendinding fell by 0.8 percent in May, nonresidential construction spending surged 2.7 percent-- the 8th consecutive monthly increase. Over the past year business construction spending has risen by 19 percent...mirroring the 18 percent decline in residential construction.
So while the on-going downturn in housing has shown no signs of recovery, the good news is that business construction spending remains robust, and will offset some of the decline on the residential side, even though housing is nearly twice (87%) as large as business structures investment.
Adding to the sour news was the downturn in consumer confidence in June. The survey of consumer confidence showed that consumer confidence fell by 4.2 percent last month. Lynn Franco, Director of The Conference Board Consumer Research Center stated taht "A perceived softening in present-day business and employment conditions are the major reasons behind this month's pull-back in confidence. In fact, the Present Situation Index now stands at levels not seen since the final quarter of last year. Looking ahead, consumers remain rather subdued about short-term economic prospects. All in all, the glass remains half empty and half full."
Last thursday, the Commere Department reported that real personal disposable income fell in May by 0.1 percent. After an 0.6 percent decline in April, the subsequent drop off in May is a troubling sign that income growth is not keeping up with inflation. As a consequense, consumer spending is slowing. The report showed that real consumption expenditures edged up just 0.1 percent in May. Following modest growth over the prior two months, it is clear that consumer spending is slowing.
On Thursday, the Commerce Department reported that new orders for durable manufactured goods fell by 2.8 percent in May. Following very strong growth rates during the previous months, the drop in May should not be seen as a sign that business spending is slowing. Instead, this is likely a 1-time correction following two very strong months.
Also on Thursday, the Commerce Department reported that the economy increased by 0.7 percent in the first quarter of the year. This was little changed from the 0.6 percent preliminary estimate put out last month. A 15.8 percent drop in residential investment as well as a large increae in peotroleum imports offset solid growth in consumer spending. The big surprise in the first quarter was the stagnant growth in exports. Solid growth abroad combined with a more favorable dollar against most currencies should help boost export growth, which it has over the past several years. Look for this component to bounce back in coming quarters.
Amid all this news, the Federal Reserve decided to keep interest rates unchanged at its June 27/28 meeting. In its statement, the Fed expects that the pace of economic growth will continue to be moderate in the second half of the year. And while core inflation has eased a little in recent months, the Fed remains conserned on the inflation front, stating that "a sustained moderation in inflation pressures has yet to be convincingly demonstrated." Continuing the Federal Reserve statement reads " In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."
From this statement it seems clear that the Fed continues to have its eye on inflation, rather than slowing growth prospects. Therefore, it seems unlikely that the Fed will lower interest rates in the near term.
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He didn't tell me how to live; he lived, and let me watch him do it. ~ Clarence Budington Kelland
That's how I feel about my dad and hope that's how my two wonderfull kids will feel about me. Happy Father's Day to all my fellow dads! Now, on to the weekend economic wrap up.
Last week contained a number of reports on the economy covering the labor market, the consumer, inflation, and industry. And while each report contains individually contains useful data to measure the relative health of the economy, this past week also included an important report by the Federal Reserve on how it viewed current economic conditions.
Last Wednesday, the Commerce Department reported that retail sales rose a surpringly-strong 1.4 percent in May...the largest gain in sixteen months. The increase in May was led by a 3.8 percent rise in spending at gasoline stations, largely reflecting the continued rise in gasoline prices during the month. However, the closely-watched retail sales (excluding gas stations) rose a surprisingly solid 0.8 percent last in May.
This is data in nominal terms. The real growth rate in retail sales will be available once May consumer inflation becomes available next week. Even so, this report shows that the recent rise in gasoline prices has not had as harmful effect on consumer spending as initially thought.
Also on Wednesday, the Labor Department reported that import prices rose again in May! Increasing by 0.9 percent last month, the rise in May follows strong increases during the prior two months. Some of this increase was due to rising fuel costs, however, excluding fuel products, the price of imported goods rose by 0.4 percent in May -- the fastest pace since last June. Over the past year, prices of imports (excluding fuel) have increased 2.3 percent.
Between 1996 and 2001, a period of the dollar's appreciation, imports were generally deflationary. However, since the dollar began to realign in 2002, import prices have generally become inflationary. The good news is that they have not become excessively so. This has allowed the dollar to readjust without significant abrupt inflationary episodes.
More on the inflation front came out last Thursday, with a report on producer prices in May. The report showed that inflation at the producer level rose by 0.9 percent last month, following similar gains in prior months. The good news in the report is that core (excluding food and energy) producer prices rose by just 0.2 percen tin May.
Following two months of flat readings, the mild upturn in core producer prices in May suggests that depite the rise in import prices as well as fuel proces, the general inflationary picture at the procer level remains under control. Next week brings a much anticipated report on CPI in May, while the headline number may be strong due to energy prices, the May producer price report forshadows continued mild core inflation.
Also on Wednesday, the Federal Reserve released its Biege Book report on the state of the economy. With respect to the manufacturing sector, the report found:
Most Districts reported that manufacturing activity was up in the most recent period. Growth rates varied by industry group, however, and some Districts experienced little or no overall growth. Cleveland and Chicago reported stable conditions or little change in the manufacturing sector. St. Louis said manufacturing activity was mixed. Richmond is the only District that reported a decline in manufacturing activity. Some Districts (Philadelphia, Atlanta, Dallas, and San Francisco) mentioned that industries producing for the residential construction market were weak. On the other hand, four Districts--Boston, Philadelphia, Cleveland, and Chicago--mentioned that there was strength among machinery and equipment manufacturers. While several Districts mentioned capital spending plans, reports on capital spending from Philadelphia, Cleveland, and Kansas City were particularly positive. Both New York and Philadelphia noted that manufacturers were optimistic about growth over the remainder of this year. Manufacturers in Boston and Cleveland expected little change in activity.Finally, on Friday, the Federal Reserve report on industrial production found that after an erratic six months of large ups and downs, industrial production showed no change in May. For the manufacturing sector, which accounts for more than three quarters of industrial output, production edged up 0.1 percent last month. While the fact that this was the first time since last August that manufacturing production increased for a third consecutive month, the tepid rise signals that a moderate acceleration from the sluggish performance of the past two quarters is in the making.
The housing downturn continues to have an adverse impact on certain industries, such as wood products, furniture and textile product manufacturing, none of which showed growth in output last month and have experienced significant declines in production over the past year.
At the same time, other sectors are experiencing robust growth. Aerospace, computer and electronic products, plastics products, and miscellaneous manufacturing, chiefly medical equipment, are all in a strong expansionary mode. At the same time, it appears that the primary metal sector, which experienced a significant decline in production in the second half of last year, is on the mend. Through the first five months of this year, output increased by more than 20 percent at an annual rate.
With some sectors are running hot and others rather cool, the overall state of manufacturing is luke warm. While most manufacturing sectors have increased production of the past year, the overall 2 percent pace is not a robust as in the 2004-2006 period. This trend will likely continue going forward, with manufacturing growing more in-line with overall GDP instead of outpacing the overall economy as it did in recent years.
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Over the past week, a number of indicators gave some conflicting looks on the state of the economy. First last Monday, the Census Bureau provided a look at manufacturing, with April Orders. New orders for manufactured goods in April, up five of the last six months, increased $1.3 billion or 0.3 percent to $418.0 billion. The increase was concentrated in durable goods, which rose by 0.8 percent. Fabricated and primary metals shows impressive gains, electrical equipment. This is an positive sign that the recent upturn in busines structures investment, which started last year, continues. This is a good sign for the expansion, since residential investment has continued to show no signs of picking up.
Then on Wednesday, the Labor Department reported that labor productivity increased an anemic 1 percent annual rate in the first quarter. At the same time unit labor costs increased by 1.8 percent in the first quarter. More ominous is the fact that over the past year, while productivity has edged up just 1 percent, unit labor costs increase by 2.2 percent. This has been a developing concern on the inflation front. Productivity has slowed, and unit labor costs have accelerated. While some believe a structural shift toward slower producitivity growth is occurring, I think this conclusion is premature.
The economy has slowed rather rapidly over the past year, due to the housing slump, and this slowdown in output has the effect of slowing down productivity in a cyclical sense, since output falls faster than employers can adjust labor. By bet is that when the economy picks up in the second half of the year, productivity will also accelerate.
The good news is that manufacturing producutivity continues to be strong, rising by 3.5 percent over the past year, while unit labor costs have fallen 0.4 percent, showing that core inflation within the manufacturing sector continues to be restrained.
Finally last Friday, the Commerce Department reported on U.S. International Trade in April. The Commerce Department reported that the nation’s trade deficit improved from $62.4 billion in March to $58.5 billion in April. Marking a $3.9 billion improvement in April, this was the largest reduction in our nation’s trade deficit in six months. While this is welcomed news, the trade deficit did not improve because of rising exports, which were essentially unchanged in April, but rather from a $3.6 billion drop in imports.
The driving force behind drop in imports in April was a correction in pharmaceutical preparations from a surge in March. After increasing 1.6 billion in March, the largest monthly increase in more than four years, imports of pharmaceuticals dropped by $1.2 billion in April, accounting for a third of the overall decline in imports for the month. Elsewhere, declining imports of other consumer products as well as automotive products signal that the recent rise in gasoline prices, caused by domestic supply disruptions, is having a dampening effect on consumer spending.
The good news in the report is that a more-realistic value of the dollar is making U.S. products more competitive. Over the past 12 months, goods exports have increased by 7 percent in real, inflation adjusted, terms. This is more than 3-times faster than 1.9 percent rise in goods imports. Through the first four month of 2007, the trade deficit with the European Union has shrunk an incredible 20 percent compared to the first four month of 2006. This validates the NAM’s long-held position that currency rates matter, and that a more realistic value of the dollar would pay dividends for U.S. manufacturers.
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This past week contained a number of interesting indicators on the state of the economy.
Despite the fact that the average cost of a gallon of gasoline increase by 23 cents to a nominal record high of $3.25 last month, the conference board reported last Tuesday that consumer confidence actually increased in May for the first time in three months! Primarily a reflection of improving business conditions, the rise in confidence points to continued growth in the economy, but not at the pace attained in the 2004-2006 period. The number of those claiming that their economic conditions were "good" was double the number who stated that their conditions were "bad". Overall, this is a favorable indication that, despite the recent rise in energy prices, the consumer remains confident about the state of the economy.
Next, on Thursday, The Commerce Department reported that GDP increased at an annual rate of just 0.6 percent in the first quarter. This is a deceleration from last month's advanced report, with estimated that growth was up 1.3 percent. The slowdown from two factors: a spike in imports, mainly from petroleum, and a strong downturn in business inventories.
Imports, whhich are a negative in the GDP, grew at an annual rate of 5.7 percent in the first quarter – this was twice as fast as the 2.3 percent estimated in the advanced report. The reason: domestic supply and refinery problems that caused a 30 percent rise in petroleum imports.
As for the inventory issue, business inventories went through an excessive growth period early in 2006 and have been going through a correction over the past several quarters. Thankfully recent data show that manufacturers are starting to restock inventories - a signal that the excesses have been worked off.
These two negative factors offset modest improvements in consumer spending, business fixed investment, housing and exports, from the advance report.
Finally on Friday, the Labor Department reported today that the economy added 157,000 new jobs in May, sufficient enough to keep the unemployment rate stable at 4.5 percent. While private sector service employment posted its biggest increase so far this year, rising 155,000, the manufacturing sector posted its 11th consecutive monthly employment decline. For the month, manufacturing employment fell by 19,000 in May, similar to the declines of the prior three months.
The silver ring to the dark cloud for manufacturers is that production employment in manufacturing, jobs most-closely tied to output, edged down by just 1,000 last month, the smallest decline so far this year. Of the 21 major manufacturing sectors, eleven actually increased employment collectively by 19,600. Led by fabricated metals, machinery and transportation outside of motor vehicles, this is the highest number of sectors that added production workers so far this year. And of the nine sectors that together lost 20,400 production jobs in May, about half of the drop was concentrated in the motor vehicle sector, which is going through significant restructuring.
While the fact that overall manufacturing employment fell last month is indeed sour news, the fact that production employment appears to be stabilizing is a hopeful sign that manufacturing is emerging from the slowdown in the expansion that began last September. This notion is buttressed by the fact that the Institute for Supply Management’s report on manufacturing, which also came out today, shows that the closely-watched PMI Index increased again in May to thirteen-month high of 55 from 54.7 in April (a level of over 50 indicates growth.) Buoyed by increases in production, new orders, and exports, today’s ISM report signals that demand for manufactured products, both at home and abroad, is improving.
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This past week provided some mixed signals on the state of the economy.
First. The Labor Department reported that consumer prices (CPI) increased by 0.4 percent in April. While this is a little slower than the 0.6 percent rise in March, the continued increase in energy prices is increasing the pace of inflation. Enegy prices rose by 2.4 percent last month.
The good news, however, is that core consumer prices, which exclude food and energy, edged up just 0.2 percent last month, similar to the pace of the prior 2 years. This is a hopefull sign that the recent rise in energy prices has not yet spilled over into the general economy.
Second. With April consumer prices in, the Labor Department also reported on real earnings for April. With energy prices pushing up the overall inflation last month, inflation-adjusted average hourly earnings remained unchanged last month. This is an indication that consumer spending will be moderating in the months ahead. Since consumers are less able to depend on home equity line of credit for spending, they are more dependent on their earnings. And, with earnings stagnating, consumer spending should slowdown in the second quarter.
Third. On Wednesday, the Federal Reserve reported that industrial production accelerated in April. After falling by 0.3 percent in March, industrial production rose by 0.7 percent in April. Closer to home, the manufacturing sector rose by a solid 0.5 percent last month. This is very close to the 0.6 percent rise in March. Most of the gain was in the durable goods sectors, such as computers, motor vehicles, medical equipment, electronic components, and primary metals. This is a hopeful sign that the manufacturing sector is begining to pull out of its recent six-month slump.
Four. The Census Bureau reported that on building permits and housing starts. Building permits plummeted 8.9 percent in April, signaling that the housing downturn will continue into the second quarter. Over the past year, permits are down 28 percent.
Housing starts fell by 2.5 percent last month. Again, thi sshows that the housing slump is continuing.
Together, all these reports show that the economy in second quarter will continue to underperform. The downturn in housing is ongoing, higher energy prices are eating into workers earnings, pointing toward slower consumer spending compared to the first quarter. This bad news is balanced, to a degree, by a recovery in durable manufacturing output, indicating that a rebound in exports as well as business investment may be in the works.
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The just-released May 2007 NAM Economic Forecast shows that the economy will remain stuck in low gear in the short term, growing by 2.3 percent in the second quarter. Then, the economy will accelerate gradually in the second half, growing by 2.7 percent in the third quarter and then 3.2 percent in the fourth quarter. For 2007 overall, the economy is forecast to grow by 2.4 percent on a Q4/Q4 basis. This is the slowest pace in five years.
Continued modest economic growth will be driven by three factors.
(1) a continued downturn in housing, which will also curtail the growth in consumer spending
(2) a pullback in inventory investment by businesses and,
(3) sluggish business investment, particularly industrial equipment.
These negative factors will be offset by
(1) positive consumer spending (though hampered by rising energy costs and the housing downturn, real wages have rebounded in the past 6 months),
(2) continued growth in business structures and,
(3) an improving trade picture.
Manufacturing output will grow by 2.2 percent this year. While this is the sixth consecutive year of positive growth, it is nonetheless measurably slower that the 3.9 percent average pace during the 2004-2006 period. The ongoing downturn in housing, slower consumer spending, and a temporary pause in transportation and industrial equipment investment will together dampen demand for manufacturing products. This will be offset, to a degree, by favorable trade winds from a more-competitive value of the dollar and solid economic growth abroad, which together will create a favorable environment for exports.
Job losses will continue in construction (-140,000) and manufacturing (-100,000) in 2007. The decline in manufacturing employment will be concentrated in transportation products as well as the sectors closely connected with housing.
Outside of manufacturing and construction, a slower-growing economy will create 1.1 million new jobs this year, half the 2.2 million jobs created last year. As a result the unemployment rate will climb to 4.9 percent by the end of the year.
Nonfarm business productivity will accelerate from 1.4 percent growth last year to 2.1 percent this year. This is equal to the 2005 pace but slower than the 2.6 percent average growth attained so far during this expansion. At the same time, hourly compensation is expected to increase by 4 percent this year. This points to a modest 1.8 percent rise in unit labor costs for 2007, which is lower than the 3.4 percent surge in 2006 but slightly higher that than the 1.5 percent rise that has taken place since 2001.
At present, monetary policy is marginally restrictive. With core-consumer inflation expected to rise by 2.5 percent this year, and with economic growth expected to pickup in the second half of the year, the Federal Reserve will likely stay on the sidelines and keep current interest rates in place for the remainder of 2007.
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This past week, two economic reports came out, one on international trade and another on retail spending. Both were influenced by the recent rise in energy prices.
On Wednesday, the Commerce Department releaed its report on March international trade. The report showed that higher oil prices led to a $6 billion increase in the trade deficit to $63.9 billion in March. The rise in imports of petroleum, exacerbated by higher prices, was responsible for more than half of the rise in the trade deficit in March. Outside of petroleum, the report contained some encouraging nuggets, notably for manufacturers.
Through the first three months of this year, manufactured exports increased by 10 percent versus the first quarter of 2006. This is more than half again as fast as the 5.9 percent rise in imports. An encouraging result of this trend is that the $119 billion manufactured goods trade deficit in the first quarter was $1.6 billion smaller than during the same period last year.
The realigning dollar, which fell by 17 percent since early 2002, along with solid economic growth in most areas of the world, are together creating favorable trade winds for manufacturers. This is the antithesis of the perfect storm scenario of an overvalued dollar and a global economic downturn that hit manufacturers back in 2001.
With the U.S. economy currently stuck in low gear due, in part, to the housing downturn, import growth will be restrained in the months ahead. At the same time, favorable global trends should accelerate export growth. As a result, the trade balance should improve over the course of the year.
Then on Friday, the Commerce Department reported on April Retail Sales. The report showed that retail sales fell by 0.2 percent in April. This was the second drop of the year and the largest monthly decline since last September. Excluding spending at gas stations retail sales fell by a stronger 0.4 percent, the single largest drop since last June.
Clearly the rise in energy prices is starting to squeeze consumer spending. This is an early indication that the 3.8 percent rise in consumer spending in the first quarter will not be repeated in the second quarter. With the housing downturn continuing into the second quarter, and with consumer spending under new pressure from higher energy prices, look for continued modest growth in the economy in the near term.
Next Wedneday, the government will report on industrial production as well as housing starts/permits, which should give us some information with respect to the duration of the housing downturn. Stay tuned!!
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This past week contained a number of interesting economic statistics, some encouraging and some concerning.
First. Last Tuesday, the Conference Board reported that consumer confidence fell by 3.9 percent in April (likely caused in part by the recent rise in gasoline prices).
Also last Tuesday, a report that got little attention in the press that was put out by the Commerce Department on GDP by Industry for 2006 showed that the manufacturing sector maintained its share of GDP last year at 12.1 percent...the same as its share in 2005. This is the first time in a decade (1995) that manufacturing did not become a smaller share of the economy. The reason: in real terms, growth in manufacturing value added (output) matched the rise in the overall GDP last year, 3.3 percent. At the same time, the inflation rate in manufacturing came in at 2.4 percent last year, which was slightly below the 2.9 percent inflation rate for the economy overall last year. This marks the 2nd consecutive year that the inflation rate in manufacturing was positive, this after 9 consecutive years of deflation.
On Wednesday, the Commerce Department reported that new orders for durable goods rose a strong 3.4 percent in March..the second rise in as many months. Importantly, new orders for non-defense capital goods (excluding aircraft) rose by a stronger 4.7 percent last month..the fastest monthy increase since September 2004. After declining four out of the prior five months, news of a sizable reobound in capital goods orders is a positive omen for business investment in the second quarter.
Finally, last Friday the Commerce Department released its advanced report on first quarter GDP growth, which showed that the economy grew at an annual rate of just 1.3 percent in the first quarter of 2007, marking the slowest quarterly pace in four years. Consumer spending rose a strong 3.8 percent thanks to the recent surge in real wages. Meanwhile, residential investment posted a 17 percent decline, marking the fourth consecutive double digit drop in housing. This downturn in housing continues to have a significant negative impact on some manufacturing sectors, such as wood products, furniture and nonmetallic mineral products, all of which posted falling output in the first quarter.
Business investment grew by a modest 2 percent in the first quarter, which is a reassuring turnaround from the 3.1 percent drop in the fourth quarter, especially for manufacturers who produce capital equipment. At the same time businesses inventory investment moderated for a second consecutive quarter. While this is a negative in GDP accounting, the drawdown in inventories is actually reassuring news. During the latter half of last year, manufacturing accumulated excessive inventories. Today’s report shows that firms are working down their inventories to more reasonable levels, which means that a more problematic inventory correction has been averted.
It is important to note that there will be several revisions to today’s advanced report card on GDP. there is a good chance that subsequent revisions will upgrade the performance of the economy in the first quarter, particularly in the area of trade. One of the more surprising features of today’s report was the 1.2 percent fall in exports in the first quarter, the first decline in exports in 15 quarters. Because March trade data has not yet been published, and the recent Institute for Supply Management report on manufacturing showed that export orders surged to a four-month high in March, export grow has a good chance of being revised upward. This should bring first quarter economic growth closer to 2 percent when all is said and done.
Up on the docket this coming week: construction spending on Monday, the ISM report on Manufacturing on Tuesday, total manufacturing orders on Wednesday, 1st quarter productivity on Thursday and April employment on Friday. Stay tuned!
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This past week showed some encouraging news on the economic front.
First, last Monday, the Census Bureau reported that March Retail Sales surged 0.7 percent. This is the biggest gain of the first quarter. As a result, retail sales rose at an annual rate of 4.7 percent in the first quarter. While inflation may remove half of this growth, it seems that solid consumer spending remains on track. And while I expect the overall economy to post a modest gain in the first quarter, the fact that consumer spending remains steady is very encouraging.
Second, on Tuesday, the Federal Reserve released its report on industrial production. It turns out that industrial production fell by -0.2 percent in March. This decline was a reflection of weather more than anything else. Last month was the 2nd warmest March on record going back to 1895. This reduced the demand for utilities to warm homes and buildings, evidenced by the fact that utility output fell by 7 percent last month.
Elsewhere, the report gave encouraging news for the manufacturing sector, which has been underperforming the overall economy since the third quarter of last year. Manufacturing output increased a health 0.7 percent in March, fueled by solid gains many sectors including computer and electronics, machinery, fabricated metals, chemicals and plastics and food products.
At the same time the on-going downturn in housing continues to have a major negative impact on other manufacturing industries, such as wood products, furniture, and textile products, all of which posted falling output last month.
Coming up this week, we have consumer confidence and GDP by industry on Tuesday, Durable goods orders on Wednesday and finally the initial estimate of GDP growth in the first quarter.
What will the numbers tell us about the state of our economy? Stay tuned!!
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On Friday the Commerce Department reported that the trade deficit in goods and services fell by 500 million dollars to 58.4 billion dollars in February. Typically, a fall in the trade deficit is good news. A lower trade deficit means that a smaller amount of what is being consumed domestically is produced overseas.
However, Friday's report shows that the decline in the trade deficit mainly took place due to a substantial downturn in imports of industrial supplies and materials. Since these imports are intermediate products that are used as inputs into finished products, the decline in imports is more a signal that the U.S. economy (especially business spending on investment) is slowing. At the same time, the fact that imports of consumer goods continued to rise is positive news that overall consumer spending remains healthy. This is critical for the state of the current expansion given the fact that exports of capital goods fell as well in February.
If the current expansion is going to post a healthy gain in 2007, it is critical that the trade sector be a significant contributor to growth. Last week's report does not offer too much reassurance that the expansion remains on track.
Next week, the Commerce Department reports on retail trade on Monday as well as industrial production on Tuesday as well as the leading economic indicators on Thursday. Given the fact that consumer spending is almost 70 percent of the U.S. economy, Monday's report on retail sales will give a good indication with respect to the state of the consumer mid-way through the first quarter.
Stay tuned!
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This past week was not a banner week for the U.S. economy. No foolin. All indications show that the economy remains stuck in low gear, and the possibility that the economy will decelerate in the first quarter from the sluggish pace attained in the fourth quarter is very real.
First, the Conference Board reported last Tuesday that consumer confidence fell by 3.6 percent in March. This was the biggest monthly decline in seven months and it brought consumer confidence down to a four-month low.
Second, the Commerce Department reported that, after plunging 9.3 percent in January, new orders for durable manufactured goods rebounded in last month and increased by 2.5 percent in February. While the news of a rebound in orders was encouraging, the underlying data in the report offers nothing but cold comfort.
The rebound in new orders was driven by the volatile aircraft sector, where new orders of non-defense aircraft and parts surged 88.4 percent. Outside of transportation, new orders edged down 0.1 percent in February, marking the fourth decline in the past five months. New orders for primary metals, machinery and electrical equipment were all down in February for the third time in four months. This signals that the fourth quarter decline in business investment in machinery is carrying over into the first quarter.
Third, the Commerce Department's final estimate of GDP growth showed that the economy grew at an annual rate of 2.5 percent in the fourth quarter. While this is marginally better than the 2.2 percent preliminary estimate, it nonetheless was not an encouraging report. While trade and consumer spending were real bright spots, the downturn in housing worsened and there was also a decline in business investment.
Fourth, on Friday, the Commerce Department reported that residential construction fell again in February to a 32-month low. This marks the 11th consecutive month that residential investment fell. While this sour news is tempered by the fact that nonresidential construction had its best month in half a year, its clear that the downturn in residential investment is ongoing in the first quarter of the year.
And fifth, the Commerce Department also reported that personal disposable income and spending both decelerated in February. While this is to be expected given the strong gains of the past few months. The fact remains that consumer spending is not growing as rapidly as it did in the fourth quarter. So, when taking this into account along with an ongoing downturn residential investment as well as some weakness in business equipment purchases, it seems clear to me that we will likely see weak growth again in the first quarter of the year.
Coming up next week, the ISM report on Manufacturing comes out on Monday, followed by factory orders on Wednesday and Employment on Friday. Will these reports show more bad news? Stay tuned!
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Last Friday, the Federal Reserve report on industrial production (IP) showed that overall industrial activity increased a strong 1 percent n February. This was the strongest gain in fifteen months. Is this an indication that the soft patch may be coming to an end? Not likely. The rise in IP was mainly due to a 7 percnet surge in utilities output due in-part to unseasonably cold weather last month.
Outside of computers and electronic production and motor vehicles, manufacturing production remained unchanged. Coming on the heals of declinign four out of the previous five months, stagnant growth in non-motor and non-high tech manufacturing is a pretty solid indication the economy remains mired in a sluggish state.
Wood products, nonmetallic minerals and furniture production all posted significant production declines last month. This shows that the ongoing downturn in the housing continues to have a major impact on manufacturing sectors closely related to the construction industry. This, combined with an excess inventories and a deceleration in purchases of capital equipment by business, will together stifle the manufacturing expansion during the first half of this year.
Also flast Friday, the Labor Department reported today that consumer prices increased by 0.4 percent in February. The good news is that beyond spikes in energy and food prices, the core-CPI only edged up 0.2 percent, a deceleration from the previous month. This is a good signal that underlying inflation remains contained.
Next week, the Commerce Department reports on housing starts and building permits for February..this should give us a good indication as to the current status of the housing downturn. Stay tuned....
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While the economic data released over this past week did not show an economy about to spiral into a significant downturn, the news was not good. The newest information on productivity, new manufacturing orders and employment all posted some disappointing news that collectively should be a concern about the economy going forward.
First. Productivity. Due to a downward revision in output, labor productivity increased by just 1.6 percent in the 4th quarter. This marks the 3rd consecutive quarter of sub-par gains in efficiency in the overall non-farm business sector. For the year overall, productivity growth increased just 1.4 percent -- the slowest annual pace since 1995. At the same time, hourly compensation rose by 4.9 percent. As a result, unit labor costs, the foundation for underlying inflation, increased by 3.4 percent in 2006. This is the largest increase in 6 years. This is an ominous signal, that if it continues, could indicate that inflationary concerns could be on the rise going forward.
On the positive side, manufacturing productivity remains strong. Over the course of the past 4 quarters, manufacturing productivity growth increased a solid 4 percent -- marginally below the 4.4 percent average pace over the past 5 years. At the same time, hourly compensation increased by 3.5 percent last year. As a result, unit labor costs in manufacturing edged down by 0.5 percent last year, signaling that labor costs are being contained within manufacturing.
Second. Manufacturing Orders. New manufacturing orders fell by 5.6 percent in January -- the largest monthly decline since July 2000. While nondurable orders fell by 2 percent, durable orders plummeted by 8.7 percent in January. Construction machinery orders fell by 41 percent, turbine generators and power transmission equipment orders fell by 21 percent and transportation equipment orders fell by 19 percent. Together, these large declines signal that a slowdown in capital investment may be in the making.
Third. Employment. The Labor Department reported that 97,000 jobs were added in February, the smallest monthly rise since November, 2004. Employment in goods-producing sectors fell by 71,000 jobs last month, 90 percent in construction, the largest single monthly drop since July, 2003. The housing slump continues to weigh on the manufacturing sector, as jobs in wood products accounted for nearly a third of the 14,000 manufacturing jobs lost in February.
On a positive note, average hourly earnings accelerated by 0.4 percent in February and workers wages are up 4.1 percent over the past year. The tightening labor market is driving up wages. This should offset some of the negative wealth effects from the ongoing housing correction and shore up consumer spending in the coming year.
Coming up this week, retail sales, consumer sentiment and industrial production will give an update on the state of the consumer and industry. Stay tuned.
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For those of us who follow economic statistics, this past week had a "Spaghetti Western" feel to it. In a phrase, it was the Good, the Bad and the Ugly.
The Good. The Institute for Supply Management released its report on manufacturing activity in February. After hovering around the "break-even level or 50 for about 4 months, the overall PMI index for manufacturing jumped to a level of 52.4 in February. This signals that the slowdown in manufacturing that took place in the 4th quarter appears to have been more of a temporary pause rather than the beginning severe downturn.
The Bad. The preliminary report by Commerce Department showed that the GDP rose a modest 2.2 percent in the 4th quarter. This is a major downward revision from the 3.5 percent rise reported in the advanced report last month. One of the main reasons for the deceleration in growth is that business investment was weaker in the fourth quarter according to last week's report compared to the advanced report released last month.
Finally, the Ugly. The Commerce Department reported that new orders for durable manufactured products fell by 7.8 percent -- the 2nd drop in the past 4 months. More worrisome is that non-defense capital goods orders (excluding the volatile aircraft sector) declined by 6 percent in January, marking the 3rd drop in the past 4 months as well as the single largest monthly decline since in 3 years. This is a signal that the slowdown in investment spending by businesses will continue into the 1st quarter of 2007.
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Some reassuring news came out of the Labor Department this past week. On Wednesday, the consumer price index for January was released. It showed that consumer prices increased 0.2 percent. This is reassuring news after the 0.4 percent jump in December.
Aided by a 3.1 percent drop in energy prices over the past year, the overall CPI has increased just 2.1 percent in the last 12 months. This is reassuring news that the tightening labor market over the past several years has not accelerated inflation significant. Some of the reason for this is that energy prices have come down over the past six months. When taking out food and energy, "core" consumer prices are up a higher 2.7 percent over the past 12 months. There is little doubt that the tightening labor market has put some upward pressure on prices, but this appears to be modest. At this point it does not appear that inflationary concerns are a major concern.
Also last Wednesday, the Labor Department released its report on worker earnings for January. It showed that growth in hourly earnings matched the rise in inflation last month. As a result, real earnings held steady. On a positive note, real earnings is up a healthy 2.1 percent over the past 12 months. This should support solid growth in consumer spending this year, which is good news, considering that the downturn in housing has removed equity financing as a source of consumer spending.
Looking to the week ahead, consumer confidence comes out on Tuesday, followed by manufactured orders on Wednesday, and the ISM report on manufacturing on Thursday. These reports should give a good indication as to the direction of the economy in the first quarter of the year.
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Last Thursday, the Federal Reserve released its report on industrial production for the month of January. The report showed that overall industrial production fell by 0.5 percent in January. The manufacturing component, which accounts for more than three quarters of industrial output, declined by 0.8 percent...the fourth decline in the past five months. Despite solid gains in aerospace and computer and electronics production, the January downturn was led by a 1.3 percent decline in durable goods production. The cause? A precipitous 20 percent decline in heavy-duty truck production -- the largest monthly decline in 16 years --, probably resulting from new regulatory standards for trucks that went into effect January 1, was largely responsible for the January downturn.
In recent years, heavy truck production has been increasing at double-digit rates. Industry has been forward buying trucks in advance of the new 2007 EPA regulation, which makes trucks more expensive. I expect we will see continued downturns in truck production going forward in the year.
On Friday, the Commerce Department reported that both housing permits as well as new housing starts fell in January. Permits fell by 14 percent -- the 8th decline in the past 12 months and the largest single monthly drop in more than a year. Housing starts were down 3 percent in January, marking the 11th drop in the past 12 months. Friday's report shows that the housing downturn will be with us for a while. I expect residential investment will continue to be a drag on the economy throughout the first half of this year.
Continued weakness in housing and a softening for transportation equipment will likely be a drag on manufacturing in the months ahead. While this will be partially offset by continued growth in consumer demand, exports and business investment in structures, manufacturing will likely grow more in-line with the overall economy in 2007, after outpacing GDP for the last three consecutive years.
For the week ahead, next Friday, the Labor Market will release its weekly report on initial claims for unemployment. This should give some indication if the economy is slowing from the solid 3.5 percent growth registered in the 4th quarter...stay tuned!
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Last week, the Labor Department released its preliminary report on 4th quarter productivity. The good news is that after two quarters of stagnant growth, workers' output per-hour grew at solid 3 percent pace during the last three months of the year. Also noteworthy is the fact that real (inflation-adjusted) hourly compensation rose by a very strong 7.1 percent in the fourth quarter. This should dispel the myth that workers are not benefiting from the economic expansion.
In fact, for the year overall, real workers' hourly compensation grew a robust 2.1 percent. This is the fastest pace since 2000 and equal to overall 2.1 percent rise in productivity growth last year. Some have claimed that workers have not benefited from the rise in productivity during the current expansion. However, last week's report dispels this claim. The fact is that workers are now benefiting from a tight labor market that this expansion has produced. It should be pointed out that workers' real incomes did not start to post significant increases during the 1990s until the unemployment rate fell below 5 percent. What we are seeing today is history repeating itself -- a growing economy producing a tight labor market starts to put upward pressure on compensation.
For manufacturing, productivity increased by a strong 3.9 percent in 2006, slightly faster than the 3.7 percent rise in output (this marks the 3rd consecutive year that manufacturing outpaced the overall economy). The fact that manufacturing productivity slightly outpaced output in 2006 helps explain why manufacturing employment edged down last year.
However, the report did contain some warnings as well. Productivity growth is moderating. The 2.1 percent rise last year was the fourth consecutive deceleration and the slowest pace in nearly a decade. This, combined with a 5.3 percent in nominal hourly compensation, resulted in unit labor costs (equal to hourly compensation minus productivity growth) advancing by 3.2 percent in 2006 -- this is the fastest pace in 6 years! And, since unit labor costs is the underpinning for overall inflation, it appears that inflationary pressures will likely be a growing concern for the Federal Reserve in 2007. Whether or not the Fed will increase interest rates will likely be driven by how fast the economy continues to grow. Our outlook calls for the economy to cool a bit this year. If this occurs, the the Fed will likely maintain a holding pattern.
Looking to the week ahead, government reports on international trade (Tuesday), retail sales (Wednesday), industrial production (Thursday) and housing (Friday) should give some indication if, in fact, the economy is starting to cool off a bit.
Posted by Dave Huether at 1:57 PM
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Last week provided several major shapshots of the economy. The good news is that the economy ended last year on a strong note. The not-so-good news is that early indications suggest that the pace of growth may be slowing.
Last Wednesday, the Commerce Department reported that the economy increased at a 3.5 annual rate in the 4th quarter. This is significantly faster than the pace during the prior two quarters. For the year overall, the economy increased by 3.4 percent (I'm glad to point out that this is nearly the same as the NAM's January 2006 forecast of 3.3% growth for 2006 -- NAM bases its forecast on Economy.com's macromodel).
What is noteworthy about the 4th quarter performance is that the economy achieved such a solid pace despite the continued downturn in housing and a slowdown in business investment.
Down for a fifth-consecutive quarter, residential investment fell by 19 percent in the fourth quarter, the biggest decline since the early 1990s. Also, breaking a streak of 14 consecutive quarterly increases, business investment edged down 0.4 percent in the fourth quarter. This was and was mainly caused by a 12 percent decline in transportation products. New emission standards set to go into effect this year had previously caused a surge in spending on transportation products before the new regulations go into effect. As a result, a short-term correction, which may last several quarters, is taking place in business investment in transportation products.
Aided by lower energy prices as well as strong growth in real wages, consumer spending increased a robust 4.4 percent in the fourth quarter, the fastest pace in three quarters. At the same time, double-digit export growth coupled with the first decline in imports since the first quarter of 2003 resulted in trade (exports-imports) accounting for 1.64 percentage points to overall GDP growth in the fourth quarter -- the largest contribution to growth from trade in a decade!
The surge in exports came from well-balanced double-digit increases in sales abroad of industrial supplies, capital goods and consumer goods. The decline in imports was due to slowdowns in industrial supplies and capital goods, mainly caused by the slowdown in business equipment spending here at home. Based on this report (which also showed modest inflation growth, the Federal Reserve chose to keep interest rates at current levels).
On Friday, the Labor Department reported that the that the economy created 111,000 jobs in January, a sharp deceleration from the 206,000 increase in December. This suggests that the economy may be beginning to cool. However, one month of sluggish job growth does not make a trend and we will have to wait for more data to judge if the economy is slowing.
Manufacturing lost 16,000 in January -- the seventh-consecutive monthly decline (ough). This complements Thursday's report that the closely-watched ISM index of manufacturing activity dipped below 50 in January. After outpacing the economy for much of last year, the manufacturing sector posted negative growth in the fourth quarter for the time since the second quarter of 2003. Friday's report signals that manufacturing remains in a soft patch.
While nondurable manufacturing employment rose by 12,000 last month, employment in durable manufacturing sectors fell by 28,000. The bulk of this decline was in the motor vehicles sector, which shed 22,.500 jobs in January. After very-strong growth earlier in the expansion, motor vehicle production has moderated significantly over the past several years. And with consumer and business spending on motor vehicles and trucks likely remain sluggish this year, further job losses in this sector are likely.
Upcoming: This-coming Wednesday, the Labor Department will report on 4th quarter productivity. With GDP accelerating in the 4th quarter, I expect we will see an increase in productivity, which has been on the decline in recent quarters. Look for NAM comments on this shortly after the Labor Department releases its report at 8:30 Wed. morning
Posted by Dave Huether at 9:34 AM
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Last Friday, the Commerce Department reported that new orders for durable manufactured goods increased by 3.1 percent in December. Following a 2.2 percent rise in November, it appears that the manufacturing expansion is on the rebound. In the fourth quarter of last year manufacturing output declined at an annual rate of 1.7 percent -- the first decline since the second quarter of 2003
The rise in orders in December was led by a robust increase in aircraft orders-- which accounted for more than half of the overall monthly increase. This should bode weuioll for exports in 2007, since roughly half of aircaft sales are destined for markets abroad. In addition, there were healthy gains in new orders of computer equipment as well as machinery and fabricated metals.
All told, it looks like business investment spending will continue to be a source of growth in the economy in the new year. However, the pace of growth will likely be slower than the increases that have taken place over the last couple of years. One of the reasons why business investment spending will likely be slower this year is that new emission standards for heavy duty trucks in 2007 have caused businesses to invest significantly in trucks before the new standard goes into effect. Over the past several years, purchases in new trucks have increased at very high rates (25 percent in 2004 and 2005). As a result, investment spending will likely grow at a milder 6 perent this year...compared to 8-9 percent growth over the past several years.
On the positive side, real wages grew at a solid 1.7 percent in 2006-- the fastest pace in six years. This signals that even though the downturn in housing has limited the equity-induced growth in consumer spending, solid gains in real wages should bouy consumer spending in the new year.
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Housing and manufacturing rebound while inflation remains in check -- Over the past week, economic data released by various government sources suggest that the economic slowdown which has taken place over the past several quarters may be thankfully coming to an end.
First. Last Wednesday, the Federal Reserve released its report on industrial production, which showed that in December, overall industrial (manufacturing, mining and utilities) output rose a solid 0.4 percent in December after 3 consecutive monthly declines. The upturn was driven by an 0.7 percent rise in manufacturing production (which accounts for three-quarters of industrial output). The upturn in manufacturing output was due to solid gains in computer and electronics, motor vehicles, aircraft, machinery and primary metal production.
Despite the fact that manufacturing output fell in the 4th quarter, overall for 2006, manufacturing output rose by 3.5 percent, which is faster than the 3.1 percent rise in overall GDP. This marks the 3rd consecutive year that manufacturing outpaced overall GDP.
Second. Last Thursday, the Commerce Department reported that both housing starts (up 4.5%) and building permits (up 5.5%) rose in December. This marks the first time since last January that both indicators of construction activity posted gains during the same month. For housing starts, the December rise was the 3rd increase in the past 4 months. For building permits, it was the first upturn since January. While one month does not make a trend, the fact that both of these leading indicators of housing activity rose in December is a hopeful sign that the housing slump may be beginning to moderate.
Third. Inflation remains contained. Last Wednesday, the Labor Department reported that core (which excludes the volatile food and energy components) producer prices edged up just 0.2% in December and over the whole year, producer prices in general rose just 1.1 percent. Add to this the fact that on Friday, the Labor Department reported that core consumer prices rose just 0.2 percent in December and for the year increased just 2.5 percent -- the slowest pace in 3 years -- it appears that the inflation concerns are no-longer a significant concern. This could pave the way for the Federal Reserve to lower interest rate sometime in the first half of the year, which would give the economy a boost in the second half of the year.
Next Friday, the Commerce Department will report on new orders for durable manufactured goods. This will provide some insight into the pace of the manufacturing expansion in the first quarter of 2007. Stay tuned....
Posted by Dave Huether at 7:00 AM
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Today, the Institute for Supply Management reported that the closely-watched PMI index rose back above 50 (the line of demarcation between in expansion and contraction) -- to 51.4 -- from 49.5 in November. This indicates that the manufacturing sector, which many thought was in danger of going into recession, since the PMI index and other indicators had been softening during the prior few months, is more likely in a deceleration mode.
While I'd rather see the manufacturing sector continue to outpace the overall economy (as it had done each of the past 4 quarters), a deceleration at some point to growth that is more in line with the overall economy is inevitable. Why is this? Well, unlike other sectors of the economy, which may rely chiefly on consumer spending, or government purchases, for instance, manufacturing relies on all components of the economy (consumer spending, business investment, housing, foreign demand, and government spending) due to the diversity of the products that American manufacturers produce.
As the overall economy moderates in 2007 (see the NAM economic outlook) look for the manufacturing sector to simmer down as well in the new year.
Posted by Dave Huether at 1:05 PM
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On Friday, the Institute for Supply Management (ISM) released its report on manufacturing for the month of October. The report showed that the closely-watched PMI Index, which summarizes the state of manufacturing, fell to a three-year low of 51.2 from 52.9 in September (a reading over 50 indicates expansion).
As recently as the third quarter of 2006, the manufacturing recovery was growing at a healthy 4.2 percent, nearly twice as fast as overall GDP growth. So what's behind the recent slowdown? Well, the continued downturn in the housing sector is continuing to hit some manufacturing sectors (like wood product and non-metallic mineral (products like cement) manufacturers very hard.
At the same time, rising interest rates appear to be beginning to depress business demand for investment products. At present, the prime rate is at its highest level since the economy entered recession back in 2001. And in today's ISM report, both fabricated metal and machinery manufacturer respondents commented that business was softening.
At the same time, despite the healthy jump in October, consumer spending has been moderating since February. So, with housing in a slump and business investment and consumer spending moderating, domestic demand for manufactured products is slowing. As such, I think we should be ready to expect several quarters of sup-par growth in manufacturing going forward.
Thankfully, today's cloudy report by the ISM had a silver lining. Export orders rose to a 9-month high in October, besting imports for the 2nd time in 3 months. According to the most recent report by the Commerce Department, goods exports have grown faster than imports in each of the first three quarters so far in 2006. With today's report in hand, I expect this trend will continue in the 4th quarter. This is pretty remarkable. The last time that exports grew faster than imports over 4 consecutive quarters was in 1989!
Posted by Dave Huether at 7:46 AM
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While the overall economy (1.6% growth in the 3rd quarter) is decelerating, manufacturing output continues to be robust.
Last week's Labor Department report on productivity showed that output of the manufacturing sector rose at a seasonally adjusted annual rate (SAAR) of 4.2 percent in the 3rd quarter. This marks the 4th consecutive quarter with manufacturing outpacing the overall economy. The last time this happened was 1997!
Over the past 4 quarters, manufacturing output is up 6.1 percent, the best performance since the 4 quarters ending in the first quarter of 1998!
And while overall non-farm business productivity growth slowed to an anemic 1.3 percent in the 3rd quarter, manufacturing efficiency gains continued to remain strong, with manufacturing productivity increasing by 5.9 percent in the 3rd quarter -- the best quarterly performance in 3 years!
So while the on-going housing market correction has taken some steam out of the recovery, the manufacturing sector has performed solidly over the past year. And, with output outpacing productivity growth, manufacturers have expanded production employment by 143,000 over the past 4 quarters.
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Today's Commerce Department advanced report on GDP showed that the economy edged up just 1.6 percent in the 3rd quarter. This is the slowest quarterly pace in three and a half years. Coming on the heels of a 2.6 percent increase in the second quarter.
With the November mid-term elections less than two weeks away, do you think today's report stimulated any reactions from politicians in Washington? You bet it did.
House Democratic Leader Nancy Pelosi stated, "Today's report demonstrating that the economy is slowing is more bad news for the millions of middle-income American families." Similarly, Democratic Senator Jack Reed of Rhode Island said, "This report undercuts the President's claim that his tax cuts are working." Wow! Those are some stinging indictments.
Countering this gloomy view, Commerce Secretary Carlos Gutierrez said, "I would not panic about this," while Treasury Secretary Henry Paulson said the housing boom over the last five years was "clearly unsustainable" and that the housing market "needed to have a correction" by slowing to a more sustainable pace.
Here is my take on today's report.
Story (1) The slumping Housing Sector
Residential investment declined at a seasonally adjusted annual rate of 17.4 percent in the third quarter. Following a string of three consecutive quarterly declines, residential investment removed 1.12 percentage points from GDP last quarter -- the biggest negative contribution to economic growth from housing since the fourth quarter of 1981. Clearly, housing is going through a major correction after 3 years of very strong growth.
Story (2) The Solid Economy Outside of Housing
Outside of residential investment, the status of the economy is more encouraging than some would have you believe. Excluding residential investment, the economy grew by 2.7 percent in the third quarter, nearly identical to the 2.8 percent average pace so far during this recovery.
Consumer spending (increasing 3.1%), business fixed investment (8.6%), and goods exports (10%) all accelerated last quarter. So, with three of the four pillars of the expansion remaining firm, the foundation for continued growth going forward appears to be pretty solid.
Posted by Dave Huether at 11:45 AM
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With election day looming, the importance of every economic indicator that is released becomes elevated. Next Friday, the Commerce Department will release its advanced estimate of GDP growth in the third quarter, where the general consensus is that the ongoing slowdown in housing will pull down GDP growth below a 3 percent pace for a second-consecutive quarter (the economy grew by 2.6 percent in the 2nd quarter.)
If this estimate is accurate, then the manufacturing sector (which grew at a 4.3 annual rate in the 3rd quarter) will have outpaced overall GDP for 4-consecutive quarters. Manufacturing is driving the expansion. In fact, over the past year, manufacturing output has increased by 6.2 percent -- the fastest 4-quarter pace in six years.
The fastest-growing manufacturing sector in the past year has been Aerospace, where output has surged 37 percent. This is followed by computer and electronics (18%), machinery (9%), petroleum products and electrical equipment (both up 8%).
In fact, of the nine largest manufacturing sectors (which account for 75% of manufacturing in America) seven reached record-levels of production in 2006, including food, chemicals, computers, fabricated metals, machinery, plastics and rubber products and miscellaneous manufacturing.
However, all is not sanguine. Of the remaining 10 major manufacturing sectors (which account for 25% of manufacturing in America), seven remain at production levels below their pre-recession levels of 2000 (paper products, electrical equipment, printing, furniture, wood products, textiles and apparel).
So a distinct dichotomy has developed in manufacturing. Sectors that are heavily export-engaged or produce capital equipment have benefited from dual recoveries in business investment and exports over the past several years. However, sectors that compete significantly with imports or are closely aligned with the slumping housing market continue to face very tough times.
While manufacturing production is now at an overall historic high, the recovery to-date has not been as strong as prior upturns. While some of this has to due with the fact that the manufacturing recovery was delayed for a year and a half and did not really begin until mid-2003, it is also true that not all sectors of manufacturing have experienced a recovery.
The challenge to lawmakers post-election is to enhance the competitive position of American manufacturing going forward. And a lot needs to be done. Domestic non-production costs continue to be way too high and have largely offset the incredible advances in productivity that have taken place in manufacturing in recent years. Let's hope policy makers roll up their sleeves and tackle the major problems that continue to face American manufacturers in the 21st century.
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As you probably heard by now, the economy created just 51,000 last month -- the slowest monthly job gain since the hurricane-induced slowdowns last October and November. Retail employment was down for the 3rd time in the past 4 months -- indicating that consumer spending continues to moderate.
At the same time, manufacturing production employment (that's jobs on the factory floor) dropped by 30,000 -- the largest monthly decline in over 3 years. More than a third of this drop took place in sectors closely connected with the housing sector (furniture, wood products, and nonmetallic minerals).
It's clear that the economy is slowing down. This report should give the Federal Reserve ample ammo to keep interest rates unchanged when they meet in a few weeks.
There was some good news for workers, however. Wages are up 4 percent over the past year...the fastest pace in 5 years. Unfortunately, this has not taken place in manufacturing. Some may conclude that the reason for this is that the "good" jobs are leaving. In reality, manufacturing hourly compensation is up over 6 percent over the past year, with rising health care costs eating into the lion share of this increase. As a result, wages are up just 1.5 percent over the past year.
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The quarterly NAM/Fortune Manufacturing for the second quarter of 2006 is in this week's Investing Section of Fortune Magazine.
Our quarterly questionnaire of our membership shows that the business outlook for both large (those that employ 1,000 or more employees) and small manufacturers remained high in the second quarter. For large firms, 90 percent of the respondents had a positive business outlook. This matches their outlook in not only the first quarter of 2006 but also the average during the 2003-2005 period.
For small firms, business confidence slipped a bit in the second quarter, though it remains strong. 85 percent were optimistic last quarter. This is down from 91 percent in each of the prior two quarters but slightly higher than the overall average in the 2003-2005 period.
Together these data suggest that manufacturers remain optimistic about their business prospects looking out 12 months. However, growth is likely to moderate in the months ahead along with slower overall economic growth.
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The Labor Department reported today that the economy added just 113,000 jobs in July and the unemployment rate rose to 4.8% from 4.6% in June. July was the fourth consecutive month of sub-par job creation. Since March, the economy has created, on average, just 112,000 jobs per-month. This is 34% below the average 169,000 jobs created per-month during the prior 12 months. Over the past 12 months, the economy has created 1.7 million, the smallest 12-month gain in 2 years.
Manufacturing employment fell by 15,000 in July, after rising 22,000 in June. Production employment (jobs on the factory floor most-closely tied with manufacturing output) was up a 10th-consecutive month in July, rising by 1,000. Non-production employment fell by 16,000.
Interestingly, a dichotomy has emerged in manufacturing employment. Over the past 10 months, production employment in manufacturing has risen by 171,000, the best performance in eight years, while non-production employment has fallen by 117,000.
Retail employment was unchanged in July after 3 consecutive monthly declines. In addition, construction employment edged up just 6,000 in July, after 4,000 losses in May and June. Over the past 5 months, construction employment has risen just 1,800 per month. This is much slower than the average rise of 27,000 over the prior months. Today's report indicates that both housing and consumer spending are continuing to moderate.
Today's report is a real shot across the bow for the the USS Federal Reserve. High energy prices and a cooling housing market are moderating economic growth. With this in mind, the Fed would be well advised to hold interest rates at their present levels when the federal open market committee meets next week.
Posted by Dave Huether at 2:24 PM
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The Commerce Department reported today that new orders for manufactured products rose by 1.2% to a record $406 billion in June. The gain in June was all in durable goods (fabricated metals, primary metals, computers and electronics, transportation equipment and furniture all posted gains). Meanwhile, following very strong gains in April and May, new orders for nondurable fell by 0.7% in June (9 of 11 nondurable sectors posted falling orders).
Since manufacturing orders tend to bounce around from month-to-month like a Yo-Yo, measuring orders over a 3-month span gives a little better perspective on the health of manufacturing. Here we see that new orders for durable products has dropped off by 1.7% in the 3 months ending in June, due primarily to big drop-offs in transportation and computers after big increases earlier in the year.
Excluding these two sectors, new orders for durable manufactured products have risen by 4.7% over the past 3 months (primary metals up 12.4%, electrical equipment 8.7%, fabricated metals 5.3%, machinery 3.7% and furniture 2.7%). At the same time, nondurable orders are up 2.3% over the past 3 months.
While the overall U.S. economy is slowing, today's report indicates that the manufacturing recovery remains on solid ground. Tomorrow, the Labor Department will report on the employment situation in July, where I expect manufacturing production employment will rise for a 10th consecutive month.
Posted by Dave Huether at 10:55 AM
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I posted an entry this morning on The Hill's Blog site. Check it out by clicking here.
Posted by Dave Huether at 8:26 AM
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Yesterday, yours truly participated on a panel at the National Press Club that discussed the effects of globalism on the U.S. economy. While panelist Fred Bergsten, Director of the Institute for International Economics, discussed the net benefits of globalization to the U.S. economy, Lou Uchitelle of the New York Times talked about globalism's impact on the labor market and Jeffrey Sparshott of the Washinton Times discussed his recent series on how U.S. companies successfully compete in the world economy, I discussed globalization from the perspective of U.S. manufacturers. Click here to see my comments.
Posted by Dave Huether at 8:32 AM
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Today's USA Today article on the trade deficit picked up our point that excluding a surge in oil imports, the May trade numbers were quite encouraging...a nice change. Excluding petroleum, goods exports (adjusted for inflation) surged by $2 billion in May while imports fell by the same amount.
After looking at the data a little closer today, I discovered another encouraging nugget that I though I'd pass along. Over the past 12 months, exports have outpaced imports in every product category (capital goods, consumer goods, industrial supplies, autos, and foods feeds & beverages. Click here to see the chart!
Though not unprecedented, this is an unusual event. In fact, a clean sweep of exports out-pacing imports in every product category has happened only one other time (June 04 to June 05) in the past 11 years! Lets hope it become less or a rarity in upcoming months.
Posted by Dave Huether at 4:59 PM
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Who would have believed that the U.S. Department of Labor would be stickin' it to "The Man". Well, that's exactly what they did, today, when they issued the June Employment Report . When you think of "The Man", do you think of Blue Collar, or White? White, right? Well, that exactly who felt the pain in today' report: "The Man."
Now that I've got you attention, let me shed some light on an interesting dichotomy that has emerged in the manufacturing sector since last September and has continued through the June report that was issued today. Over the past nine months, manufacturing production employment (workers on the factory floor) has increased every month -- the longest winning streak in nine years. All told manufacturing production employment is up 168,000 since last September. Meanwhile, non-production employment in manufacturing has fallen every month, and a lost 104,000 over the same time.
Since "manufacturing" employment only includes employment at manufacturing establishments (places where things actually are getting built), its tough to figure out what is causing this. Are non-production workers being moved to other locations within companies, thus lowering the number of "white" collar workers at production facilities? Are "white collar" jobs being outsourced? Or, are they being lost to efficiency games? Any or all of these possibilities could be happening. But one thing is for sure, production jobs in manufacturing are on the rise while non-production jobs continue to drop.
Posted by Dave Huether at 1:47 PM
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The most recent report by the Commerce Department shows that U.S. goods exports outperformed imports 18.5% to 11.1% in the first quarter of this year and the balance of trade actually improved by $3 billion. Does this mean that the tide is beginning to turn and the end to the burgeoning trade deficit is finally at hand? Well, while one quarter does not make a trend, there is mounting evidence that suggests that the trade picture is beginning to brighten for U.S. manufacturers.
Over the past 4 quarters (1st quarter 2005 to 1st quarter 2006), U.S. goods exports have risen by 11.3%, the fastest pace in more than half a decade. At the same time, imports of goods have risen by a slower 6.6%. In fact, the 4-quarter change in goods exports has outpaced import growth every quarter since the 1st quarter of 2005, resulting in the longest sustained period of exports besting imports in a decade. (Click here to see chart).
Capital goods exports, up 17% over the past year, have been the driver of U.S. export growth over the past year, alone responsible for two-thirds of the rise. By comparison, capital goods imports have rising by 13%. Similar favorable trends have emerged in industrial supplies (ex-petroleum), where the 5% rise in exports has outpaced a 2% gain in imports and consumer goods, where exports have outpaced imports 10% to 4% over the past year. (Click here to see chart)
There are likely several factors behind this trend. Growth abroad, particularly in Asia, remains very solid. At the same time, the U.S. dollar has fallen by 14% since it peaked in February 2002. And since it takes arguably several years for a change in the dollar to have an impact on trade flows, it appears that the benefits of a lower dollar are finally starting to show up in the trade figures.
Posted by Dave Huether at 6:50 AM
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The Federal Reserve reported on Thursday that overall industrial production declined by 0.1 percent in May and that the manufacturing sector, which makes up about 80 percent of the index, dropped for the second time in the last four months. The fall off in manufacturing production was lead by significant declines in machinery and auto production on the durable goods side and as well widespread declines in nondurable industries.
Thursday's report shows that the economic growth is likely decelerating below potential. I expect that GDP growth will come in below 3 percent in the sencond quarter. While last month's decline in overall industrial production followed 3 months of growth, the diffusion of the decline is noteworthy. For the first time in more than three years, production of consumer goods, business equipment, construction supplies and business supplies all fell in May. This shows that a broad-based slowdown in the economy is in the making.
The message to the Federal Reserve policy-making committee is as clear as a lighthouse beacon on a cloudless night. With the economy already slowing down, further interest rate increases, which would not impact the economy until 2007, are not needed at this point.
For a quick overview on the economy and manufacturing, check this out!
Posted by Dave Huether at 8:00 AM
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Following an 0.4% rise in March and 0.6% up tick in April, the Labor Department reported yesterday that the Consumer Price Index (CPI) rose strongly again by 0.4% in May. While the recent increase in the CPI has been fueled by surging energy prices, even the "core" CPI, which excludes food and energy products, has accelerated recently. Specifically the "core" has risen by 0.3% in each of the past 3 months (the first time this has happened in over a decade.)
Since February, the core CPI has risen at an annual rate of 3.8 percent. Again, this is the fastest pace in a decade. However, this rise in the core CPI is more a function of a slowing housing market than anything else.
The main driver of the acceleration in the core CPI has been housing, specifically an increase in owners' equivalent rent (OER), which accounts for more than a quarter of the weight of the core CPI and is designed to measure changes in the cost of housing through the rental market. As the housing market has slowed, demand for rental units has increased, and so have rental prices, which have, in turn, pushed up OER prices. Over the past 3 months, the OER prices have risen at an annual rate of 5.6%, the fastest pace since the early 1990s.
However, excluding housing, the core CPI remains relatively well contained, growing at a 2.8 percent pace during the 3 months ending in May, with core goods prices up by less than 2 percent.
All told, the May report on the CPI shows that while energy and housing prices have risen significantly in recent months, pass through to other segments of the economy remains modest. With the economy showing significant signs of slowing, the Federal Reserve would be well advised move into a holding pattern and leave interest rates alone at its meeting at the end of the month.
To check out an overview of the U.S. economy and manufacturing click here!
Posted by Dave Huether at 8:00 AM
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Last Friday's Comment & Analysis section of the Financial Times had a very sobering report on Germany's export prowess. Germany's best-kept secret: how its exporters are beating the world provided some context to an alarming fact that we here at the NAM have been aware of for some time: Germany has been the world's largest exporter of goods, or "Exportweltmeister" every year since 2003 when it captured the title from the United States. Its trade surplus is six times that of China.
As stated in the article, "Exports have become the main driver of German growth. Today, 9m jobs depend directly on them and they generate 40 per cent of gross domestic product" in Germany. What's behind this export surge? The article proposes that one reason behind Germany's export success is that "Because engineering accounts for a bigger share of gross domestic product in Germany than in comparable economies, the country has benefited more from investment-driven global growth. German companies, in other words, have provided the machines and vehicles that faster-growing economies have used to build their factories, fleets and infrastructure."
This should be a wake up call to policy makers here in Washington and around the country. U.S. manufacturers are not only competing more than ever with cheap imports backed by artificially-low currencies, the U.S. is loosing out on the export-front as well. While improving our competitiveness won't take place over night, its essential that we get started. And there is not better place to start than education, where U.S. students rank relatively low in science and math compared to other countries. Without a solid foundation in these disciplines, where will the engineers and innovators who design and develop the products of tomorrow come from?
Some say from oversease. Maybe. But our country should not put all our eggs in that basket -- the internatinoal talent competition for scientists and engineers is fierce and will only grow in coming years. Therefore, its imperative that our country get its act in order and make sure that the workers of tomorrow will have the skills to successfully compete in the global economy. Maybe then, we can reclaim the title of Exportweltmeister.
Posted by Dave Huether at 7:24 AM
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For a 16th consecutive time, the Federal Reserve's Open Market Committee (FOMC) raised its benchmark federal funds rate 25 basis points to 5 percent, its highest level in half a decade. In its statement, the Fed left the door open for further rate increases if new signs of inflation show themselves. However, it seems clear that the FOMC feels it has reversed most of its accommodative policy and is now at more-or-less a neutral stance.
As the Fed noted, the recent rise in energy prices has yet to have a significant impact on the prices of other goods, but my bet is that this can't go on much longer. If producer are convinced that the rise in energy prices is permanent, then more pass through to consumers is likely. However, there is some hopeful news on the energy front. A significant amount of refining and production capacity is still being repaired in the gulf coast, and when more its comes back on line, some moderation in energy prices is likely.
Like most private-sector forecasts, the Fed sees the economy moderating to a more sustainable pace as the year goes on, chiefly due to a slowdown in housing. Will this Goldilocks scenario play out? While the fundamentals are sound, the fact of the matter is that the volatile world energy market continues to be a real concern. And while nothing can be done to buffer ourselves in the short run, it should be clear to anyone who follows the economy that it is imperative that we begin to diversify our energy consumption and enhance our own energy productive capabilities. Like having an itch that you can't scratch, our dependency on foreign sources of energy is getting really annoying, especially since we currently have domestic resources that are just waiting to be tapped.
Posted by Dave Huether at 8:30 AM
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Manufacturing outpaced the overall economy in 2005, though it experienced slower growth last year along with most sectors. Today, the Commerce Department released its annual report on GDP by Industry for 2005 which showed that manufacturing GDP increased a solid 4 percent last year in inflation-adjusted terms, or half a percentage point faster than the 3.5 percent pace of the overall economy.
Last year's 3.5 percent rise in overall GDP was a deceleration from the 4.2 percent growth rate in 2004. While only two sectors (agriculture and mining) actually showed negative GDP growth last year, another seven experienced a deceleration in the pace of growth, including manufacturing, which increased by a stronger 4.8 percent in 2004. Only five sectors showed an acceleration in GDP growth last year (including education and health care, finance, construction and arts entertainment and recreation.)
Within manufacturing, most of the growth was in durable goods sectors, where GDP increased by 5.7 percent in 2005. Nondurable manufacturing grew a much slower 1.6 percent.
At $1.5 trillion, manufacturing made up 12 percent of the economy last year, virtually the same as 2004. This is the first time in 7 years that there was not significant erosion in manufacturing's share of the economy. One of the reasons that manufacturing stabilized as a share of GDP last year is that for the first time in a decade, inflation in the manufactured sector did not decline in 2005, and instead rose modestly by 1.4 percent. In past years, deflation in manufacturing, along with sluggish growth surrounding the 2001 recession combined to reduce manufacturing's share of GDP.
As in every year since 1987, manufacturing's share of GDP was larger than every other private sector except FIRE (Finance, Insurance and Real Estate) in 2005.
Posted by Dave Huether at 12:03 PM
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In 10 days, the Commerce Department will release its advanced report on the performance of the economy during the 1st quarter of the year. When the news comes out that the GDP grew at or near a 5 percent pace, some pundits may warn that the economy is overheating. But don't believe it. More than anything, the strong growth that took place earlier in the year was more of a rebound from wake of anemic growth in the 4th quarter that was left by the 2005 hurricane season.
In fact, a slowdown is in the making. As reported in the AP today, housing starts were down in March for the 4th time in the past 6 months. This is a clear sign that the surge in the housing market is finally starting to cool down. And with increasing gasoline prices ( up 20% since the beginning of March and now approaching $3 a gallon) likely to reduce consumer spending, a deceleration in economic growth going forward is a sure bet.
Whether or not, the economy will continue to grow fast enough to maintain current employment levels will be left to business investment and export growth, which is where manufacturers come in, since they purchase roughly a fifth of all business investment and account for nearly two-thirds of all exports.
One key going forward will be future decisions by the Federal Reserve to raise interest rates. While one more increase in the federal funds rate to 5% is all by assured, the Fed should be wary to raise interest rates beyond that point. Amid skyrocketing health care and energy costs, a relatively low cost of capital is one thing our economy has going for it. Take that away, and the chances of a slowdown turning into a meltdown becomes a real possibility. Lets hope Chairman Bernanke and the rest of the FOMC make the right call over the coming months and give their interest rate campaign a summer break.
Posted by Dave Huether at 3:12 PM
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The protests over the past weeks by youth of France highlight the frustration that a stalled economy can produce. Just think, over the past 5 years, France's economy has achieved an average annual growth rate of just 1.4 percent. With this anemic performance, is it any wonder that France's unemployment rate, at 9.6%, is double that of the U.S.?
The controversial new law, called the Fist Employment Contract, aims at making it easier for employers to both hire and fire young workers. Currently, the unemployment rate for men under 25 in France stands at nearly 21 percent (up 38% from the level 5 years ago). So while its understandable that concerns about job security have elevated, its also painfully obvious that job security without growth opportunities in an oxymoron.
The French government took a necessary step to add some flexibility to its labor market. Maybe the rest of Europe will learn from this move and take their own steps to reinvigorate their own economies, and take the pressure off the U.S. to be the sole engine of economic growth in the world
Posted by Dave Huether at 1:58 PM
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Washington Post columnist Sebastian Mallaby correctly identified world-leading productivity as the foundation of a new "heyday" for American business [ Why U.S. Business Is Winning].
But he's wrong to say that "American business is not especially good at coaxing productivity out of factory workers." In fact, U.S. manufacturing's productivity has soared a dizzying 24 percent since 2001. That's 76 percent higher than the 13.6 percent productivity growth for all non-farm businesses, and it was the primary reason our manufacturing sector comfortably outgrew the overall economy in both 2004 and 2005.
Innovative U.S. manufacturing now produces and exports more than ever before, albeit with fewer workers. America's economy would struggle to grow without a healthy manufacturing sector.
Posted by Dave Huether at 10:10 AM
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Yesterday, I had the pleasure to participate in an economic forecasting forum in South Bend Indiana put on by the Northern Indiana Workforce Investment Board. During the event, which was moderated by Terry Savage of the Chicago Sun Times, the other economists and I not only talked amongst ourselves but also responded to questions from an audience of about 300-400.
More than any other topic, the issue of skills and education came up again and again. What skills are manufacturers looking for? How does our educational system stack up internationally? Are we producing enough engineers and scientists? What will happen to those who lack the skills required in the ever-changing workforce? The topic of skills and education was on the mind of the audience.
Which should not be a surprise. You see, 28 percent of Indiana's economy is manufacturing, making it the most industrial-intense state in the nation. Indiana manufacturing is very diverse, including sizable shares of transportation products, chemicals, primary/fabricated metals, medial equipment and machinery. After falling by 9% in 2001, Indiana manufacturing has averaged 5% growth in the following 3 years, an has accounted for 50% (half) of the state's economic growth since the end of the recession.
As the most recent Manufacturing Week Survey shows, manufacturers are now in the mood to hire. However, half of them who are looking to hire can't find qualified candidates to fill an opening. This brings us back to education. It seems clear that there is a disconnect between what high schools and 2 year colleges are teaching, and what skills industry needs in today's economy. The longer we let this skills gap expand, the larger the problem will become. Its time for policy makers at the state, local and national levels to come together with industry to make sure that the U.S. education system is better aligned with the job market of today and tomorrow.
Posted by Dave Huether at 12:53 PM
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After out-pacing the overall economy for a second straight year in 2005, what's 2006 going to look like? Well, check out the 4th quarter NAM/Fortune Manufacturing Index. This forward-looking quarterly survey of NAM members, which is published in Fortune Magazine, has been around for 8 years. Every quarter, our membership provides their 4-quarter outlook with respect to sales, pricing power, capital investment and inventories, and employment and wages.
Here are some of the 4th quarter 2005 highlights: For the first time in the 8-year history of the NAM/Fortune Manufacturing Index, more than 90 percent of both large (those that employee over 1,000 workers) and small company respondents were optimistic about their business outlook.
With respect to growth in 2006, the sales outlook for both large and small firms improved in the fourth quarter. Large firms expect their sales to rise by 5.5 percent over the coming year (the best outlook in 4 quarters). Small firms expect their sales to rise by 4.7 percent (the best outlook in 3 quarters).
To look at the rest of the survey, click on the link above.
Posted by Dave Huether at 9:24 AM
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Last week I spent several days in Idaho visiting an old friend in Boise, the state capital. Driving around the state, I was amazed at the number of ranches and farms that dominate the "high desert" landscape of this picturesque state. From this viewpoint, it was clear to me that Idaho is a state dominated by agriculture.
But there is more being made in Idaho than potatoes. In fact, agriculture makes up just 5% of Idaho's economy. As it turns out, manufacturing is Idaho's biggest industry, accounting for over 14% of the state GDP in 2004 (20% larger than Real Estate, the state's second-largest industry.) And what is exactly made in Idaho? High-end electronics as it turns out: 50% of Idaho manufacturing is comprised of Computer and Electronic Products manufacturing.
With the fast pace of computer/electronic manufacturing going on in the United States, it did not surprise me too much when I found out that Idaho's manufacturing sector has been driving the state's economic recovery since the 2001 recession. From 2002 through 2004, Idaho manufacturing GDP growth has averaged 10% per-year. Just by itself, manufacturing has amazingly accounted for 40 percent of the state's economic growth since the end of the recession.
As a result of its manufacturing recovery, the economy of Idaho stacks up pretty well compared to the nation overall: from 2002 through 2004, Idaho's economic growth has averaged 4.4% -- incredibly half again as fast (55%) as the 2.8% pace of the national economy.
This is proof positive that a growing manufacturing base should be a goal of every state!
Posted by Dave Huether at 11:03 AM
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Since mid-2000, U.S. manufacturing employment has fallen by 3 million. Half of that decline took place during the 2001 recession and the other half has taken place during the 4-year old recovery. Today, U.S. manufacturing output is at an all-time high, yet factory employment is at its lowest level in more than 50 years. What gives?
Some claim that jobs are going overseas. So where are manufacturing jobs growing? China, might be a knee jerk reaction. But it would be wrong. Since mid-2000, manufacturing employment in mainland China has fallen by 11%. Then what about our NAFTA partners? Nope. Both Mexican and Canadian factory employment have fallen since 2000, as has manufacturing employment in Japan, Germany , the UK, France, South Korea, the Netherlands, Sweden, Australia, Belgium, Indonesia, Ireland, and Poland.
In fact, of the top 28 manufacturing countries in the world (which account for 90 percent of global manufacturing output), just 5 have seen increases in manufacturing employment over the last 5 years: Argentina, Brazil, Spain, Thailand, and Turkey.
The fact is that a downturn in manufacturing employment has been a global phenomena over the past half decade.
In the case of the U.S., half of the job losses can be attributable to an acceleration in productivity growth, which during the current recovery is growing 72 percent faster than productivity growth during the prior 4 manufacuturing upturns. The other half of the job loss is due the fact that the current recovery has not been as robust as previous ones. This was especially true in 2002 and 2003, when manufacturing output averaged under 2% growth and when over 90% of the post recession job losses in manuacturing took place.
Posted by Dave Huether at 11:37 AM
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As expected, the Federal Open Market Committee increased the federal funds rate to 4 1/2 percent today. The Fed correctly pointed out that the economic expansion remains on a sold footing, but cautioned that volatile energy prices remain a concern on the inflation front.
Today marks the last day of Alan Greenspan's term as Chairman of the Federal Reserve. While at the helm of the Fed for more than 18 years, Chairman Greenspan successfully navigated our economy through some dangerous waters.
While his accomplishments are many, I think his most important act as Chairman was his recognition in the mid-1990s that changes in technology were enhancing underlying productivity growth and that the economy could grow faster than previously thought without igniting runaway inflation which the Fed worked so hard under Chairman Volcker to extinguish in the early 1980s.
By persuading other members of the FOMC to keep interest rates low, Chairman Greenspan enabled the economy to grow at a robust 4-percent pace for four consecutive years (1996-1999) - a first in over three decades. As a result, the economy created 12.4 million jobs - the largest 4-year surge in 20 years.
Chairman Greenspan deserves a sincere "thank you" for his dedication to public service from a grateful nation.
Thank you, Chairman Greenspan
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Manufacturers ended the year on a high note! New orders for manufactured durable goods rose a solid 1.3 percent in December to a record $228 billion. As I mention in a press release, this marks the third consecutive monthly rise in durable orders, which is a good indication that the acceleration that has taken place in manufacturing recently (durable goods production grew at an annual rate in excess of 13 pecent in the 4th quarter) will carry forward into 2006.
While the increases in October and November were fueled by high-flying aircraft orders, December's rise was driven by demand for machinery products, where the 6.5 percent rise in orders accounted for two-thirds of the overall monthly increase. This should be particularly welcomed in California, Texas and Illinois, where fully a quarter of U.S. machinery production resides.
At 8:30 tomorrow morning, the government's first estimate of GDP growth in the fourth quarter wil be issued. while I expect the pace of economic growth slowed last quarter due to rising energy prices, today's report is an early indication that the economy is presently on the rebound.
Posted by Dave Huether at 11:51 AM
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In his Economic View piece in last Sunday's New York Times, Exporting Expertise, If Not Much Else, Daniel Altman mixes fact and fiction to create a distorted view of modern manufacturing that needs to be corrected.
First, Mr. Altman correctly states that "You can look at the economy in two ways: by production, or by people. And the two aren't always the same" due in large part to productivity growth. He then goes on to say that this is clear when you look at the long-term trend of the decline in manufacturing. But long term decline in what: production or employment?
Mr. Altman attempts to explain whether manufacturers have become more productive by comparing changes in manufacturing's share of national employment to its share of the economy. While this methodology has some major flaws that I will describe below, some of Mr. Altman's assertions simply are not correct. For instance, he claims that manufacturers of nondurable products (like pharmaceuticals, food products and plastics) have not increased productivity enough to offset quality and price changes since their 9 percentage point drop in employment has been eclipsed by their 10 percentage point drop in their share of the economy since 1965.
In reality, nondurable manufacturing's share of GDP has fallen from 10 percent in 1965 to 5 percent in 2004 (latest year available) -- a 5 percent drop, not a 10 percent drop! So, what does this tell us about productivity? Well not too much actually. Productivity measures the output generated by a worker over a given period of time, such as an hour. As workers become more productive, through the use of technology for instance, the amount of output generated per-hour increases. To get an accurate measurement, the Labor Department adjusts the output measure in its productivity estimate for inflation, so that changes in output actually measure changes in the quantity of output, not just changes in prices.
This is at the heart of where Mr. Altman misses the mark. By comparing manufacturing's share of nominal GDP, he is not taking into account the fact that prices have increased at a much slower rate in manufacturing than in the economy as a whole. This distorts his assertion that productivity growth has not increased significantly. In fact, since the first quarter of 1965, nondurable manufacturing productivity growth has increased 167% -- nearly a third faster than overall business productivity growth during that time.
Mr. Altman's faulty analysis continues. He then claims that "The story for durable goods is more troubling. Half of the decline in production has been a legacy of the last recession: sales went down, and they have stayed down". If by "production" he is using durable manufacturing's share of GDP, well in 1965 it was 16%. In 2000, prior to the recession, it was 9%. In 2004, it was 7%. So the bulk of durable goods falling share of GDP (80% the drop) occurred before the 2001 recession.
Just as inaccurate is his assertion that there has been no recovery in the durable goods manufacturing since the recession. In fact, after durable goods production fell by nearly 8% in 2001, it grew at a modest 3.9% pace in 2002 and 2003 before accelerating to 7% growth in both 2004 and 2005. By the 4th quarter of 2005, durable production was 14% above its pre-recessionary peak in the 3rd quarter of 2000. Sales staying down? Hardly.
Now, it is true the the current manufacturing recovery got off to a very slow start and has thus not kept pace with previous upturns. Moreover, manufacturers face significant challenges both at home and abroad that need to be addressed for manufacturing to become more competitive internationally. However, Mr. Altman's analysis of the current state of manufacturing misses the mark.
Posted by Dave Huether at 9:59 AM
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A recent Washington Post article highlighted the fact that wages last year did not keep up with inflation for a third consecutive year, a very real concern to be sure. But what's behind this trend? Why are real wages not increasing? While trying to blame greedy companies may have some appeal to the class warfare crowd, that argument is as accurate as Billy Crystal's roping technique at the beginning of City Slickers. Through the first 3 quarters of 2005, two-thirds of our country's national income went to workers' pay. In fact, employee compensation has remained in a narrow band of between 64% and 66% of national income each and every year over past two decades. Claims that workers are getting squeezed by Corporate America simply have no standing in reality.
But real wages have been falling in recent years? So what's going on here? Three words identify the true guilty party : Health Care Costs.
Little changed from a decade earlier, wages made up 84 percent of worker pay in 2000, while supplements (unemployment insurance, health care, pension contributions, social security...) accounted for the remaining 16 percent. Fast forward just 5 years and we find that wages have fallen to just 80 percent of employee compensation (the smallest share going back over 50 years) while supplements have surged to 20 percent. Escalating health care costs (which alone have accounted for nearly half of the rise in non-wage supplements since 2000) have been the driving force behind the current wage crunch.
The sooner this is agreed to by all sides, the better. Rehashing the worn-out class warfare arguments of the past will not get our country one step closer to a solution, and higher wages for American workers. While there is no quick and easy policy solution to reign in health care costs in America, the NAM Healthcare Agenda offers a good starting point.
Posted by Dave Huether at 1:43 PM
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The Commerce Department reported today that the monthly trade deficit fell in November to $64 billion from $68 billion in October. The Washington Post correctly points out that even with this improvement, the overall trade deficit for 2005 will likely be a record. However, with the price of oil imports rising 43 percent for the year overall, is it any wonder that trade deficit expanded?
We here at the NAM have been saying for a while that one thing that is needed for the trade deficit to come down is for there to be a correction in the dollar after a 26 percent rise from 1997-2001. As it turns out, despite some upward movement last year, the dollar has fallen by 11 percent since early 2002. And, in fact, the path of exports and imports is starting to improve. As the chart below shows, the adjusting for changes prices, merchandise exports have actually grown faster (26%) than imports (20%) since the end of 2002. This has been true for capital goods, autos, and even consumer goods. Looking forward to 2006, when we expect the dollar correction to continue, exports will likely continue to outpace imports and we should expect to see the trade deficit begin to moderate in both dollar terms and as a share of GDP.
Posted by Dave Huether at 2:23 PM
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Good Friday to everyone. Let me introduce myself. My name is Dave Huether. I am the chief economist here at the NAM and I have joined the NAM blogging team. Whenever I find the "invisible hand" move me, I plan opining on the "dismal science" in an effort to get past what the talking heads are saying and tell you what is really going on in our economy.
Which leads me to today's job report, released today by the Labor Department. The economy created just 108,000 jobs in December. For the year overall, over 2 million jobs were added - not too shabby considering the turmoil caused by last year's hurricane season.
More broadly, how should we characterize the current expansion? The Democrats call for a need to "jump-start our economy" while the President calls the recovery "steady and strong". So which is it?
Here is what's really going on: Since the recession ended in November 2001, the economy has expanded over 15 quarters. During the first six quarters of recovery (through the first half of 2003), when the economy was plagued by accounting scandals and heightened insecurity as our country entered into new a war on terror, GDP growth averaged a dismal 2.2 percent - marking the slowest start to an economic recovery in 30 years.
However, thanks to well-timed tax cuts -- which stimulated domestic growth -- and a pickup in exports, the economy has rebounded smartly, with GDP growth averaging a robust 4.1 percent over the past 9 quarters - beating the pace of 2 of the prior 3 recoveries.
Tying it all together, the U.S. economy has increased by 13 percent over the past 15 quarters since the end of the 2001 recession. This is virtually identical to the 12.9 percent rise during the initial 15 quarters of recovery following the 1991 recession.
So while current expansion has not been as robust as the more cyclical recoveries following the deeper recessions in the 1970s and 1980s, calling for a jump start at this point ignores the fact that the expansion has been cruising a very solid speed over the past several years.
If you want to know what is in store for 2006, check out my forecast.
Posted by Dave Huether at 2:31 PM
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