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Major Contributing Factors for Manufacturers Not Increasing Capital Spending

By Tom Morrison posted 09-22-2016 01:42 PM

  

Much of the data out last week continued a trend of disappointing releases about the current state of the economy, particularly for August. This included manufacturing production, which fell by 0.4% for the month and, coincidently, year over year. Output in the sector had declined in both June and July, providing some indications that manufacturing activity might have stabilized. Instead, just five of the 19 major sectors within manufacturing experienced increased production in August. In addition, capacity utilization for manufacturers decreased from 75.2% to 74.8%, a three-month low. As such, this report highlights the tremendous challenges in the sector. Nonetheless, we can hope that the August figures were an outlier, with manufacturers cautiously optimistic about modest sales growth over the coming months.

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For their part, surveys from the New York and Philadelphia Federal Reserve Banks found mixed news on activity in their districts. The Empire State’s report contracted for the second straight month; whereas activity accelerated to its fastest pace in six months in the Philly Fed region. At the same time, the latest NAM Manufacturers’ Outlook Survey reflects progress from earlier in the year but with ongoing challenges. Overall, one could characterize manufacturers’ current economic outlook as cautiously encouraging, but still less-than-desired and highly varied by firm size and export sales growth expectations. In this survey, 61.0% of manufacturers are either somewhat or very positive about their own company’s outlook, easing slightly from 61.7% who said the same thing in June. Large manufacturers were more upbeat about their company’s outlook this quarter, but small and medium-sized manufacturers experienced declines in their outlook in this survey.

In the NAM survey, sales and production were seen growing by 1.9% and 2.1% over the next 12 months, respectively, up from 1.6% and 1.5%. In addition, one’s capital investment plans tended to increase with size. Smaller entities expected capital spending to decline by 0.3% in the next year; whereas, medium-sized and large manufacturers predicted capital investment growth of 0.8% and 1.5%, respectively. In special questions on capital expenditures, one-quarter of respondents expect to increase their capital spending levels this year relative to last year, with an almost identical percentage noting declines in their investment levels. The attached figure to this report provides possible reasons for not increasing capital expenditures right now, led by reduced or slowing demand (46.6%).

Beyond manufacturing, one of the other disappointing indicators last week was retail sales, which fell for the first time since March, down 0.3% in August. Spending was pulled lower by weaknesses for motor vehicle and parts dealers (down 0.9%), which cooled a little after a relatively strong month in the prior release. Excluding automobiles, sales were off by 0.1%. Despite the sub-par data in August, Americans have largely increased their consumer spending modestly, up 1.9% over the past 12 months. Meanwhile, Americans continued to be anxious about the economy, according to preliminary data from the University of Michigan and Thomson Reuters. The Index of Consumer Sentiment was unchanged at 89.8 in September, with confidence slowing in the past two months to their lowest levels since April, largely on pocketbook issues. Small business owners were also somewhat cautious in their outlook, with soft sales and lingering economic and political uncertainties.

Much of the economic focus next week will center on the Federal Reserve, which will decide on Wednesday whether to hike short-term rates now or wait until later. The consensus is that the Federal Open Market Committee will opt for later, likely at its December meeting. In the NAM survey discussed above, 45.5% of respondents felt that the Federal Reserve would hike short-term interest rates at its December 13-14 meeting, with just 5.7% thinking that they would act in September. Fortunately for the Fed, relatively minimal consumer and producer inflation provides it flexibility in making its decision. There will also be additional reports on the manufacturing sector, with surveys from Markit and the Kansas City Federal Reserve Bank. Other highlights next week include the latest figures for housing starts and permits, leading indicators and state employment.

Economic update provided by Chad Moutray, PhD, CBE, Chief Economist for NAM.

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