Tags: manufacturing | economy | construction | spending

Manufacturing Continues to Expand Despite Warning Signs

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Monday, 01 Aug 2016 11:43 AM Current | Bio | Archive

  • INDICATOR: July Manufacturing Activity and June Construction Spending
  • KEY DATA: ISM (Manufacturing): -0.6 point; Orders: -0.1 point; Hiring: -1 point/ Construction: -0.6%
  • IN A NUTSHELL: “Manufacturing continues to expand and there are signs conditions may be firming.”


WHAT IT MEANS: Manufacturing has been the weakest link over the past year and the softness continues. The Institute for Supply Management’s reading on manufacturing activity eased in July. That said, the sector is growing, not declining. Indeed, the overall activity index was above the average for the past year and was the second highest since last August. Only the June reading was greater. That is good news and may be pointing to a rebound in the sector.

The new orders index was off a tick in July, but the level is still quite solid and only 15% of the respondents indicated demand fell. Both import and export orders remain in good shape, even if they are not growing faster. Production is also good and growing. Still, there were warning signs in the report. Backlogs declined and thinning order books don’t point to a future acceleration in activity. Worse, hiring is softening again. The sector has been shedding workers for much of the past year and it may be doing so again.

Construction is another area of concern as spending declined in June for the third consecutive month. That is the first time that has happened in 5½ years. Both public and private construction activity were down, but the real weakness was in nonresidential spending. Manufacturers reduced their spending sharply. Surprisingly, private health care and educational construction was also off a lot. These are areas where we would expect construction to be solid and that it isn’t, is a worry.

MARKETS AND FED POLICY IMPLICATIONS: The headline ISM number was down but the details of the report really don’t point to a softening in manufacturing. Of course, this has not been a sector that is strong, so any easing in momentum has to be watched carefully. For me, a growing manufacturing sector is the only thing I want to see and it is doing that. Unfortunately, the recent decline in energy prices is not going to help that sector or the manufacturers that supply machinery and equipment to it. Also, the dollar has started to trend upward slowly. That too is a worry for manufacturers.

For the Fed and investors, there are some important numbers released this week, such as spending and income, but the big number is, as usual, the employment report. So, while other numbers may cause some optimism or pessimism, don’t expect the markets to move sharply until we get the payroll data. After the June surge, it is expected that the gain will be back toward trend, which is somewhere in the 150,000 to 175,000 range. That is enough for the unemployment rate to decline slowly over time and we could see that happen in this report.

Regardless of the data, don’t expect any major reaction from the Fed until they see the job numbers. And then, the members seem to stuck in neutral, so even a second strong jobs report in a row is not likely to cause a sudden discussion about near-term rate hikes.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm. To read more of his blogs, CLICK HERE NOW.

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Manufacturing continues to expand and there are signs conditions may be firming.
manufacturing, economy, construction, spending
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2016-43-01
Monday, 01 Aug 2016 11:43 AM
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