There were a few encouraging economic reports released last week, with each suggesting that activity has picked up after struggling earlier in the year. Friday’s job numbers were relatively strong for the second straight month. Non-farm payrolls rose by 255,000 in July, extending the gain of 292,000 in June. As a result, the country has averaged 273,500 net new workers over the past two months, a decent jump over the 151,000 average across the first five months of 2016. The unemployment rate was unchanged at 4.9%. In the manufacturing sector, employers added 9,000 workers in July, following an increase of 15,000 in June. With that said, manufacturing employment has declined by 15,000 on net year-to-date, indicating that the sector is not out of the woods yet. On the positive side, manufacturers have added 852,000 workers since the Great Recession.
Beyond jobs, sentiment among manufacturers has also improved of late. The Institute for Supply Management’s Manufacturing Purchasing Managers’ Index reported that manufacturing activity expanded for the fifth straight month in July, albeit with a slight easing. This report would suggest that manufacturers are doing better today than the contracting activity levels seen in the October to February time frame. The boost has come from relatively strong expansions in new orders and production, with the latter growing at its fastest pace in 12 months. That bodes well for a stronger second half of 2016, assuming it can be sustained.
In addition, it appears that Americans have begun to open their pocketbooks again. Personal spending increased 0.4% in June and jumped 7.5% at the annual rate in the second quarter. Over the past 12 months, personal spending has increased 3.7%, a healthy pace that makes consumption one of the bright spots in the economy. With a pickup in spending, the saving rate has dropped from 6.2% in March to 5.3% in June. These findings are consistent with the most recent real GDP estimates, with consumers being one of the few positive contributors to growth in an otherwise disappointing report. Personal incomes were also higher in June, up 0.2%, with year-over-year growth of 2.7%.
Even with some progress, there were also indications of lingering challenges for manufacturers, suggesting that better sentiment reports have not fully translated into the “real” data just yet. Along those lines, new factory orders fell for the second straight month in June, down 1.5% in this report after being off 1.2% in May. Much of that decline stemmed from volatility in aircraft sales, which can experience wide swings from month to month. Excluding transportation equipment, factory orders rose 0.4% in June. New orders for manufactured goods have been quite weak over the past 12 months, with a year-over-year decline of 5.6%. Excluding transportation, new factory orders were off 4.4% since June 2015. This suggests broader softness for manufacturers in terms of demand, perhaps highlighting why business leaders in the sector continue to be so cautious. These anxieties help to explain why private manufacturing construction spending slowed to an 18-month low in June.
One of the larger areas of weakness continues to be the global economic environment. For its part, the U.S. trade deficit rose to a four-month high in June, and manufacturers continue to struggle with international demand. Using non-seasonally adjusted data, U.S.-manufactured goods exports totaled $522.62 billion year-to-date in June, down 7.3% from $563.99 billion in June 2015. The softness in exports extended to the top-five markets for U.S.-manufactured goods, which also have been lower year-to-date so far this year.
This week, we will be looking to see if the healthy gains in personal spending will carry through to the retail sales data. Our first read of consumer confidence for August will also be important to capture the current mood of the public following mixed readings in July. In addition to gauging consumer strength, other measures to look for this week include the latest figures on job openings, labor productivity, producer prices and small business optimism.
Economic update provided Chad Moutray PhD, CBE - Chief Economist for NAM.