July’s milder employment rise fell short of economists’ forecasts of 230,000 to 233,000 new jobs, following a 298,000 payroll expansion in June that the Labor Department upwardly revised by 10,000 jobs in its latest report. The department also revised May’s job gains by 5,000 more jobs to 229,000. The national labor market has averaged 245,000 new jobs per month in the last three months, and the half-year streak of at least 200,000 jobs per month is the first such occurrence since 1997.
Economists described the employment report as another sign that the economy is fundamentally sound and remains poised to pick up momentum in the third quarter. The report follows an earlier one by the Federal Reserve indicating that U.S. manufacturing production grew at an annual rate of 6.7 percent in the second quarter, while Institute for Supply Management released its July manufacturing index that shows manufacturing is gaining speed. Economist Joshua Shapiro, as reported by the Wall Street Journal, described the economy as being “well underpinned.”
After the nation’s economic output shrank by 2.1 percent in the first three months of the year, hampered by harsh winter weather, U.S. GDP grew by 4 percent in the second quarter on strong business inventory building and improved consumer spending. The first-quarter contraction was also milder than the 2.9 percent decline the Commerce Department reported earlier, while the second-quarter expansion was better than the 3 to 3.5 percent growth economists predicted.
Still, slow wage growth and stubborn numbers of both unemployed and long-term unemployed have economists and policymakers concerned. Last week, the Fed, in a statement, said there remains “significant underutilization of labor resources,” and the Labor Department reported that average hourly earnings, after rising 6 cents in June, rose just 1 cent in July and just 2 percent over the past 12 months. A separate report newly released by the Commerce Department shows income growth stagnated in June at 0.4 percent, the same as in May.
The unemployment rate marginally increased last month as a result of more Americans rejoining the workforce and seeking jobs, with the labor force participation rate ticking up to 62.9 percent from 62.8 percent. The Labor Department counted 9.7 million Americans as actively looking for work and one-third of them, 3.2 million, as having been doing so for more than six months. The department also recorded 2.2 million discouraged individuals who can work but have stopped looking for jobs. Not counted as unemployed, this number of people who are marginally attached to the workforce is 200,000 more than June’s total and essentially unchanged from earlier this year.
Manufacturing added a robust 28,000 jobs in July, following 23,000 additions to sector payrolls in June. Both of those numbers are significantly greater than the 12,000 new jobs per month the sector averaged from June 2013 to June 2014, according to Labor statistics. Construction employment expanded by 22,000, while supply-chain-related industries added just below 8,000 positions in July.
ISM: Manufacturing Picked Up Again in July
U.S. manufacturing reaccelerated last month on the strength of new orders and employment, according to the latest purchasing managers index data from the Institute for Supply Management. ISM’s July PMI grew by 1.8 points to 57.1, its highest level in a year, as the manufacturing sector has expanded for 14 straight months, says the trade group.
Manufacturers raised production levels, accompanied by a drawdown in raw material inventories, while order backlogs shrank for a second straight month. However, input prices once again accelerated after softening in pace in June, and supplier deliveries slowed down significantly. While only wood pallets were reported to be in short supply, prices for chemicals, metals such as aluminum and stainless steel, and plastics such as polypropylene all went up.
Rising prices and longer delivery times of supplies and raw materials could add pressure to margins and operations for manufacturers, especially if the pace of demand for goods quickens. That was reflected in the 4.5-point jump in ISM’s new orders sub-index to 63.4 last month, in tandem with a 4.5-point drop in inventories to 48.5, the first inventory contraction in six months.
Last week, the Commerce Department’s newest GDP report revealed that the U.S. economy rebounded in the second quarter, with the nation’s output growing by a better-than-expected 4 percent. Much of that growth was attributed to heavy business stockpiling in anticipation of greater demand.
ISM’s production index rose 1.2 points in July to 61.2. It was the highest reading in four months, rebounding from a June slowdown in output, which in turn followed a production growth burst in May. The July expansion helped companies chip away at their bookings, as backlogs contracted to a 49.5 sub-index reading.
Manufacturing employment surged in July, with a 5.4-point increase to 58.2 in the sub-index. According to ISM, manufacturing payrolls are at their headiest levels in more than three years. This was in line with Labor Department figures, which showed a jump of 28,000 manufacturing jobs last month (see story above).
That is an encouraging sign of a pickup in skilled employment, which could help push average wages upward past the current 2 percent annual growth pace that is considered sluggish and just in line with inflation. One ISM survey respondent said salaries for engineering labor are rising above inflation due to shortages in specialty skills and competition among employers. Although jobs growth in recent months has been broad based, much of the expansion has been supported by service sectors.
Export growth remained subdued for manufacturers, which have seen a softening pace of foreign shipments since April. The Commerce Department will release its trade report for June later this week.
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U.S. Companies Struggle with Working Capital
U.S. companies made only marginal improvements in their ability to collect from customers and pay suppliers in 2013, while showing no improvement in how well they managed inventory, according to the 16th annual working capital survey from REL, a division of the Hackett Group and CFO Magazine. The amount tied up in excess working capital at nearly 1,000 of the largest public companies in the U.S. is over $1 trillion, according to the REL/CFO research.
The REL/CFO research found that gross margins decreased by 0.3 percent, indicating that companies are spending more internally to generate revenue. And companies are continuing to borrow to improve their cash position, with cash on hand increasing by 12 percent, or $110 billion. At the same time, companies continued to ramp up capital expenditures, which have risen by 43 percent over the past three years.
The value of total net working capital rose by 3.2 percent in 2013, and days working capital improved by less than 1 percent. While days sales outstanding and days payable outstanding improved only slightly, days inventory on hand showed no change at all.
Cash conversion efficiency, or the time companies take to convert sales into cash, improved somewhat in 2013, after two years of declines. In addition, free cash flow — which is a key indicator of the health of corporate cash flows and represents the cash companies are able to generate after laying out money to maintain or expand their asset base — improved dramatically, rising by 23 percent over the previous year and indicating an improvement in cash flow management.
“The good news is that U.S. companies aren’t getting any worse at managing their working capital,” said Analisa DeHaro, associate principal for REL. “In fact, the number of companies that improved working capital performance for three years in a row increased significantly in 2013. But for most companies, working capital remains a low priority.
“With easy access to low-interest cash, there’s little motivation for companies to deal with complex issues like how to collect from customers faster without alienating them, what can be done to optimize payments to suppliers, or how to maintain just the right inventory levels given today’s complex supply chains,” DeHaro added.
The REL/CFO research found that the largest U.S. public companies still have over $1 trillion in excess working capital. This amount is equal to nearly 6 percent of the U.S. gross domestic product, and excess inventory represents the largest share of the working capital management gap — $423 billion.
Top performers in the REL/CFO analysis operate with about half the working capital of typical companies. They collect from customers in just over three weeks, more than three weeks faster than typical companies. They also take about 36 days to pay suppliers, over 10 days longer than typical companies.
Finally, they hold just over two weeks of inventory, less than half that of typical companies.
Construction Spending Tumbles in June
Construction spending weakened significantly in June, falling 1.8 percent from mostly declines in publicly funded projects, according to the Commerce Department. Residential construction spending fell 0.2 percent in the month.
Total private construction spending fell 1 percent, precipitated by drops in residential and commercial construction investment. The poor performance has much to do with a separate report on housing starts that continued to fall short of expectations. New home builds fell for the second straight month in June, sinking 9.3 percent to its slowest pace in nine months. Manufacturing construction ticked down by 0.1 percent.
Public construction spending shrank 4 percent, meanwhile. The decline was largely attributed to the 10.4 percent plunge in spending on highway and street projects. That was followed by a 3.7 percent decline in park projects and a 4.4 percent fall in water supply works investment. Total nonresidential public construction declined by 4.2 percent.
The Commerce Department report comes as Congress passed an $11 billion highway spending bill that would extend funding for 10 months if signed by President Barack Obama, in lieu of a long-term transportation spending plan. The measure is reported to impact about 100,000 construction sites across the country.
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This article was originally published on ThomasNet News Industry Market Trends and is reprinted in its entirety with permission from Thomas Industrial Network. For more stories like this please visit Industry Market Trends.