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NAM Economic Update: Change in Manufacturing Output

By Tom Morrison posted 07-21-2016 09:10 AM

  

Economic data was mixed last week, but there was encouraging news related to manufacturing production, which rebounded in June after a disappointing May report. Output in the sector rose by 0.4% in June, following a decline of 0.3% in May. Strong growth in the motor vehicles and parts segment, up 5.9%, helped to boost the headline number. Despite some progress in June, it is safe to say that manufacturing activity remains quite challenged. Over the past 12 months, manufacturing production has risen by just 0.4%. That is an improvement from the year-year over year decline of 0.2% seen in May, but such sluggish growth was indicative of recent struggles that manufacturers have had in light of global headwinds.


There were also signs of lingering weaknesses in the sector in the Empire State Manufacturing Survey. Manufacturing activity in the New York Federal Reserve Bank’s district slowed to a crawl in July after rebounding in June, with new orders declining and shipments easing. With that said, respondents to that survey remained cautiously upbeat about growth over the next six months. One exception to this was the labor market data, which continued to be discouraging. Along those lines, manufacturing job openings pulled back in May after achieving an all-time high in April. Still, the April figures appear to be a bit of an outlier, and the current postings data are likely more consistent with recent trends. Moving forward, if demand and production accelerate, we would expect stronger employment growth, but for now, net hiring remains a significant challenge. Net hiring (or hiring minus separations) fell by 14,000 in May, decreasing for the fourth consecutive month.

Meanwhile, there was also mixed news on the consumer front. On the positive side, retail sales picked up in June, increasing by 0.6% and rising for the third straight month. Spending rose by 2.0% in the second quarter, a nice improvement from being down 0.6% in the first quarter. This suggests that Americans were more willing to open their pocketbooks in recent months — progress after a more cautious stance at the end of last year and earlier this year. Retail sales have increased by 2.7% over the past 12 months, up from 2.2% in the prior report. Nonetheless, there were also signs that Americans remain quite anxious about the economy. The University of Michigan and Thomson Reuters said that consumer confidence unexpectedly fell sharply in July in preliminary figures. Sentiment has been highly volatile year-to-date, shifting from month to month as the public processes mixed reports on growth and global news headlines, including Brexit, the recent UK vote to leave the European Union.

For their part, small business owner optimism edged slightly higher in June to its highest level since December. The National Federation of Independent Business (NFIB) report marked some continued improvement from March’s two-year low in optimism, even as small firms continue to be concerned about the overall economic outlook. In other news last week, consumer and producer prices both picked up somewhat, boosted by increased energy prices. Yet, overall core inflation remains modest for now.

Residential construction has been one of the brighter spots in the economy, and this week, we will get another read on how well the sector fared with housing starts and permits data for June. In addition, there will be a number of surveys released on the current state of the manufacturing sector, including reports from the Philadelphia Federal Reserve Bank and from IHS Markit. The Bureau of Economic Analysis will also provide manufacturing’s contribution to real GDP in the first quarter, along with other industries. Beyond those releases, other highlights next week include the latest figures on leading economic indicators, the Chicago Federal Reserve Bank’s National Activity Index and state employment.

Update provided by Chad Moutray PhD, CMB – NAM Chief Economist


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