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NAM Weekly Economic ReportSeptember 15, 2014
The latest NAM/IndustryWeek Survey of Manufacturers found that businesses are generally upbeat about the coming months. Manufacturing respondents expect 4.4 percent growth in sales on average over the next 12 months, the fastest pace of expected growth in new orders since the first quarter of 2012, when the sector was expanding more robustly. Indeed, nearly half of those taking the survey anticipate sales growth of at least 5 percent. Capital investment and hiring trends have also moved in the right direction, with manufacturers planning to increase capital spending and employment by 2.5 percent and 1.9 percent, respectively. The hiring figure represents substantial progress from the lackluster pace of job growth in 2013, which averaged just 0.8 percent. Overall, 87.3 percent said that they were positive in their outlook, the highest reading in two and a half years.
Nonetheless, the more positive attitude needs to be balanced against other issues. First, enthusiasm for expanded new orders and production is often nuanced by anxieties that events might prevent the economy from gaining traction—much as it has time and again in this recovery. Certainly, many of them are disappointed with the slow economic growth in the first half of 2014, even if they remain hopeful about the second half.
Second, manufacturers—like many Americans—continue to be frustrated with Washington. The top business challenges remain rising health insurance costs and an unfavorable business climate, cited by 77.1 percent and 73.1 percent, respectively, in the survey. Along those lines, the NAM released a study showing the disproportionate burden placed on small businesses and manufacturers when complying with federal regulations. Total federal compliance costs in 2012 were estimated to be $2.028 trillion, with an average cost of $19,564 per employee for manufacturers, or twice the level of all businesses.
Beyond these issues, there was encouraging news on the consumer front. Retail sales rose 0.6 percent in August, rebounding from softer increases in the previous three months. Prior to this release, there were worries that a more cautious consumer might derail brighter prospects for growth. This data suggests that the public might be more willing to spend. Retail sales have risen 3.8 percent year-to-date, or 5.0 percent over the past 12 months. Moreover, the consumer also appears to be less hesitant about borrowing, with July consumer credit up 9.7 percent in July. This included a sizable pickup in revolving credit, which includes credit cards. Another positive was the increase in consumer sentiment from the University of Michigan and Thomson Reuters, ending a lull in that measure throughout 2014 and marking its highest point since July 2013.
This morning, we will get new data on industrial production. Production in the sector jumped one percent in July, and the expectation is for modest gains in manufacturing output in August. It is also anticipated that housing starts and permits will once again exceeding one million annualized units when August figures are released on Thursday. This would suggest that residential construction activity has begun to recover from softness earlier in the year. Beyond those figures, the biggest headlines will come from the Federal Open Market Committee meeting this week, which is not expected to make any major shifts in monetary policy. Quantitative easing should end in October, with the largest focus being uncertainty over when the Federal Reserve will start raising short-term rates. With that said, new consumer and producer price data should reflect the recent easing in inflationary pressures, particularly from lower energy costs.
Other data releases this week include the latest findings on manufacturing activity in the New York and Philadelphia Federal Reserve Banks’ districts and data on home builder confidence, leading indicators and state employment.
Chad MoutrayChief EconomistNational Association of Manufacturers
Monday, September 8Consumer Credit NAM/IndustryWeek Survey of Manufacturers
Tuesday, September 9Job Openings and Labor Turnover SurveyNFIB Small Business Survey
Wednesday, September 10Wholesale Trade
Thursday, September 11None
Friday, September 12Retail SalesUniversity of Michigan Consumer Sentiment
Monday, September 15Industrial Production NY Fed Empire State Manufacturing Survey
Tuesday, September 16Producer Price Index
Wednesday, September 17Consumer Price IndexFOMC Monetary Policy StatementNAHB Housing Market Index
Thursday, September 18Housing Starts and PermitsPhiladelphia Fed Manufacturing Survey
Friday, September 19Conference Board Leading Economic IndicatorsState Employment Report
Summaries of Last Week's Economic Indicators
The fastest growth continues to be in nonrevolving credit, including auto and student loans. In July, this type of credit increased by an annualized 10.6 percent, a significant acceleration from June’s 8.8 percent rate. At the same time, revolving credit, which includes credit cards and other lines of credit, rose 7.4 percent at the annual rate. This was also a pickup from past months, with 1.8 percent and 6.3 percent annualized growth in the first and second quarters of 2014, respectively. This seems to indicate that more Americans are using their credit cards to make purchases, ending a more cautious approach to borrowing that has been prevalent since the recession. Job Openings and Labor Turnover SurveyThe Bureau of Labor Statistics said that manufacturing job openings declined slightly, down from 302,000 in June to 296,000 in July. Still, June’s figure was a two-year high, and job postings remain higher than earlier in the year. In February (six months earlier), for instance, there were 258,000 job openings in the sector.
The Job Openings and Labor Turnover Survey (JOLTS) data also show a disparity between durable and nondurable goods. Durable goods manufacturers increased the number of job openings for the second straight month, up from 194,000 in June to 201,000 in July. In contrast, nondurable goods firms reduced their postings once again, down from 108,000 to 95,000, pulling the headline figure lower. A similar trend was observed in the hiring data.
Manufacturers hired 259,000 additional employees in July, down somewhat from 268,000 in June. The decrease was the result of reduced hiring for nondurable goods manufacturers (down from 113,000 to 102,000), which was enough to offset a small increase in hiring for durable goods businesses (up from 155,000 to 157,000). At the same time, manufacturing separations—including layoffs, quits and retirements—decreased from 241,000 to 226,000. Overall, net hiring (or hires minus separations) in the manufacturing sector increased from 27,000 to 33,000, illustrating the rebound in hiring seen since the winter and spring months.
In the larger economy, the number of job postings were essentially unchanged (down slightly from 4,675,000 in June to 4,673,000 in July). This continues to reflect significant growth from January’s pace of 3,874,000. Note that the June rate was the highest since February 2007, meaning that those gains were mostly sustained. There were more job postings in July for accommodation and food services, health care, professional and business services and retail trade, in addition to durable goods manufacturers.NAM/Industry Week Survey of ManufacturersThe most recent NAM/IndustryWeek Survey of Manufacturers captured the nuance that we see in much of the market, with a mostly optimistic outlook but also frustration with Washington. Overall, 87.3 percent of respondents were either somewhat or very positive about their own company’s outlook, continuing an upward trend that began in the first quarter of 2013. The underlying data were also encouraging, with many at paces not seen since early 2012. For example, sales are expected to grow 4.4 percent on average over the next 12 months, up from 4.1 percent in the June survey and 2.0 percent in December 2013.
Capital investment and employment also moved in the right direction. Manufacturers plan to increase capital spending by 2.5 percent over the next 12 months, up from 1.4 percent in December and 2.3 percent in June. Meanwhile, 46 percent of survey respondents plan to hire more workers over the next year, with 7 percent anticipating employee declines. On average, firms plan to increase their employee levels by 1.9 percent in the next year, a significant improvement from the lackluster pace of job growth in 2013, which averaged just 0.8 percent.
The current model is very encouraging and suggests that manufacturing production should continue to accelerate, growing 3.1 percent over the next two quarters.
Yet, the top business challenges remain rising health insurance costs and an unfavorable business climate, cited by 77.1 percent and 73.1 percent, respectively, in the survey. In the manufacturing sector, businesses see benefit costs rising an average of 6.3 percent over the next 12 months (a new question starting with this report), with health insurance premiums anticipated to increase 9.6 percent on average in 2015. Respondents were also asked about a number of new labor regulations being proposed by the Administration, and it was clear that there was at least a moderate degree of concern regarding many of these changes.NFIB Small Business SurveyThe National Federation of Independent Business (NFIB) said that small business sentiment ticked higher in August, rising to its second-highest level in seven years. The Small Business Optimism Index increased from 95.7 in July to 96.1 in August. After peaking at 96.6 in May, the index eased somewhat in June, and August’s reading suggests that confidence has once again begun to climb back. Over a longer time frame, it is clear that small business owners have become more positive over the past six months, with the index at just 91.4 in February.
With that said, the underlying data were slightly mixed. On the positive side, the percentage of small business owners with job openings right now increased from 24 percent to 26 percent, continuing an upward trend. Along those lines, the percent planning to make capital expenditures over the next 3 to 6 months rose from 23 percent to 27 percent, its fastest pace since November 2007 (the month before the official start of the recession). On the topic of inflation, pricing pressures have decelerated a bit, with the net percentage of those predicting price increases over the next 3 months declining from 22 percent to 19 percent.
Yet, the report also reflected some soft spots. For instance, sales expectations over the next 3 months dipped from a net percentage of 10 percent to 6 percent. In addition, the percentage suggesting that the next 3 months were a “good time to expand” was off slightly from 10 percent to 9 percent. Nonetheless, the outlook data do reflect an upward trend overall, rising from 6 percent in February. For those saying that it is not a good time for expansion, the top reasons cited continue to be economic conditions and the political climate. Taxes were listed as the “single most important problem” by 24 percent of respondents, followed by government regulations (19 percent), poor sales (13 percent) and labor quality (11 percent).Retail Sales: After Cautiousness in July, Retail Sales Pick Up in AugustThe Census Bureau said that retail sales rose 0.6 percent in August, rebounding from a revised 0.3 percent increase in July. The July figure was originally reported as being unchanged. As such, this is a sign that consumer spending has picked up in August after cautiousness over much of the summer. Still, the longer-term trend for retail sales has been mostly favorable, particularly after strong growth this spring, with 3.8 percent growth since December and a 5.0 percent increase year-over-year.
Healthy gains in spending on motor vehicles helped to lift August retail sales, with auto sales up 1.5 percent. It was the second straight increase in auto purchasing levels after being stagnant in June. Year-to-date, motor vehicle sales have risen by a healthy 7.7 percent, or 8.9 percent over the past 12 months.
Beyond autos, consumer spending also increased at decent levels, up 0.3 percent in August or 4.1 percent year-to-date. Therefore, we have seen modest gains for retail sales in the broader market. Excluding autos, other segments with strong increases in retail spending in August included miscellaneous store retailers (up 2.5 percent), building materials and garden supplies (up 1.4 percent), sporting goods and hobbies (up 0.9 percent), electronics and appliances (up 0.7 percent) and furniture and home furnishings (up 0.7 percent).
In contrast, gasoline stations (down 0.8 percent) and department stores (down 0.4 percent) were two areas with softer spending levels for the month. For gasoline stations, the decline stemmed from reductions in petroleum costs, with the price of West Texas intermediate crude falling from $106.07 per barrel on the last day of July to $98.23 a barrel on the last day of August. (It has fallen further since then, closing at $92.15 on Friday.)
Overall, retail sales figures were encouraging. With softer spending levels from May to July, there were worries that cautiousness on the part of the consumer could serve to be a downside risk to the economy moving into the second half of the year. This data suggests that Americans might be loosening up a little in terms of their willingness to spend—a good sign perhaps.
The subcomponents in the University of Michigan data continue to reflect some anxieties on the part of the consumer. For instance, the index for the current economic environment slipped a bit this month, down from 99.8 to 98.5, even as it represents an improvement from earlier in the year. Americans remain concerned about labor market and income growth, and this is likely responsible for the decline in the present figure. Geopolitical events might also play into this. Still, the future-oriented index rose strongly, up from 71.3 to 75.6, its highest level in over one year, suggesting more optimism moving forward.
We will get final data on September consumer sentiment from the University of Michigan on September 26. The Conference Board will also release its survey data on consumer confidence on September 30.