NAM Monday Economic Report – February 9, 2015

Despite positive news on the employment front, much of the data released last week highlighted recent challenges, particularly in growing international sales. The Institute for Supply Management’s (ISM) manufacturing Purchasing Managers’ Index (PMI) decreased from 55.1 in December to 53.5 in January. Sluggish global growth has impacted demand negatively, with the pace of new orders falling to its lowest level in 12 months and exports contracting for the first time since October 2012. New factory orders data for December were also weak. On the positive side, year-over-year growth continues to reflect modest gains, and manufacturers remain mostly upbeat about the months ahead. Given this positive outlook, it should not be surprising that manufacturers have made significant increases in their construction spending of late. December’s pace, for instance, was the highest level since May 2009.

Looking more closely at international trade, December was a rough month for export growth. The U.S. trade deficit rose to its highest point of 2014, with goods exports down and goods imports up. Stronger relative growth in the United States has buoyed demand for more imports; yet, weaker demand abroad hurt export growth. The trade deficit in 2014 averaged $42.1 billion per month, up from the $39.7 billion monthly average of 2013. Nonetheless, U.S.-manufactured goods reached another all-time high in 2014, surpassing $1.4 trillion for the first time, according to Trade Stats Express. Still, the pace of growth for U.S.-manufactured goods exports continues to slow, up 1.95 percent in 2014. This was down from 5.8 percent and 2.6 percent growth in 2012 and 2013, respectively.

There were two other economic releases of note last week. First, personal incomes grew modestly in December. While manufacturing employees experienced a slight decline in December, the longer-term trend continued to reflect decent growth. Total wages and salaries in the sector averaged $776.7 billion in 2014, up 3.9 percent from the average of 2013. Yet, that same report also noted that Americans were still cautious in making purchases, with personal spending down for the first time in 12 months. This was true despite higher consumer confidence and lower gasoline prices.

The second release of note was the latest news on labor productivity. Manufacturing productivity increased 1.3 percent in the fourth quarter, its slowest quarterly pace of 2014. For the year as a whole, labor productivity in the sector rose 2.5 percent, up from 1.0 percent in 2012 and 2.0 percent in 2013. The increase in 2014 stemmed from better output data, which grew by 3.9 percent for the year. In general, manufacturers have benefited from improved productivity, helping to make the sector more competitive globally. Unit labor costs for the sector have fallen 6.4 percent since the end of the Great Recession, with a 16.7 percent decline for durable goods industries.

This week will be somewhat slower on the economic indicator front. We will get January retail sales figures on Thursday, which will be watched closely given cautiousness described above on the consumer front. At the same time, sentiment has moved higher, and there will be new data on small business optimism on Tuesday and consumer confidence on Friday. Each has reached multiyear highs in recent reports. Beyond these indicators, other highlights include the latest job openings figures on Tuesday and this month’s Global Manufacturing Economic Update on Friday.

Chad Moutray is the chief economist, National Association of Manufacturers.