Still, the out-of-ordinary headline figure was welcomed by economists, especially alongside the Institute for Supply Management’s highest manufacturing index reading in nearly three-and-a-half years. ISM’s manufacturing PMI reached 59 in August, while the new orders sub-index of 66.7 was the highest in more than decade, suggesting that the July dip in the non-transportation federal data may be short-lived. “It reinforces the current narrative of improving domestic economic fundamentals,” Millan Mulraine, deputy chief economist at TD Securities, told Reuters.
Closely monitored orders for motor vehicles and parts rose 7.3 percent. When the transportation sector is accounted for, overall orders for durable goods jumped 22.6 percent in July. The wave of bookings for automobiles, aircraft, and marine craft more than negated setbacks in all other major goods categories defined by the Commerce Department, including primary metals, machinery, computers and electronic products, and electrical equipment and appliances.
However, U.S. manufacturing facilities are expected to continue to roll, as they are working on all-time-high backlogs and shipped out a record $249.3 billion of durable goods in July. In a separate report released earlier by the Federal Reserve, the U.S. manufacturing sector expanded 1 percent in July, the largest monthly increase since February, and capacity utilization at durable goods plants was well above their long-run average. ISM’s August production sub-index rose a solid 3.3 points to 64.5, showing continued strength in manufacturing activity through last month.
Manufacturing and business spending have been credited for the nation’s second-quarter rebound in gross domestic product, which the Commerce Department now estimates to be a 4.2 percent expansion. The federal government reported earlier that investment in new equipment by businesses grew at an annual rate of 10.7 percent from April through June. GDP growth estimates for the third quarter currently are between 3 and 3.5 percent.
The 10.5 percent spike in new factory orders was 9 points over June. The Census Bureau revised its June new orders figure from a 1.1 percent increase to a 1.5 percent expansion. It also revised its June reading for core capital goods bookings from an already solid 3.3 percent rise to a sizable 5.4 percent gain. While orders for core capital goods contracted in July, some bright spots in business equipment orders included a 14.8 percent increase for industrial machinery, an 8.6 percent rise in mining and oil and gas machinery, a 2.8 percent increase in metalworking machinery, and an 11.2 percent surge in communications equipment.
Durable goods manufacturers’ backlogs ballooned 5.4 percent to another record high after increasing 1 percent in June. Inventories at durable goods factories grew 0.5 percent, following a 0.4 percent rise the previous month. Manufacturers accelerated their shipment volumes with a 1.2 percent increase, which was faster than the 0.8 percent pace in June.
These data differ from those in ISM’s manufacturing report, which showed inventory and backlog contractions in July. But unfilled orders and unmoved product at manufacturing facilities both reversed trajectory in August, growing 3 percent and 3.5 percent, respectively, according to the trade group. The PMI headline number grew 1.9 points last month, and ISM said the nation’s manufacturing sector expanded for the 15th month in a row.
Trade Gap Continues to Shrink on Record Exports
An all-time-high in export shipments in July helped narrow the U.S. trade deficit to its smallest margin in six months, driven by foreign demand for American automobiles, industrial supplies, and capital goods. Exports grew by nearly $2 billion to reach $198 billion, bolstering sentiments of a strong economic third quarter fueled by manufacturing.
The nation’s goods and services shortfall shrank from a revised $40.8 billion in June to $40.5 billion, a 0.6 percent improvement. Exports rose 0.9 percent while imports rebounded 0.7 percent from a sharp contraction in June to $238.6 billion, though that signaled better U.S. demand for goods. The Commerce Department upgraded June’s trade gap from an earlier reading of $41.5 billion.
Economists had forecast the trade deficit to widen to between $42.2 billion and $42.5 billion. The strong trade report, combined with other reports showing strength in economic activity, could compel analysts to upgrade third-quarter GDP forecasts, which currently hover between 3 and 3.5 percent growth. “The gains in both exports and import activity points to continued positive momentum in U.S. economic activity, and also indicates some improvement in global activity and demand,” TD Securities economist Millan Mulraine said in a note.
The trade gap has been shrinking since hitting a 17-month high of $46 billion in April, and trade could play a major role in bolstering the nation’s third-quarter output. Economists already have said that trade helped the nation rebound to 4.2 percent GDP growth in the second quarter, a reversal of fortune from being a significant drag on the economy in the first quarter. Business spending and manufacturing also aided the economic expansion from April through June, and trade data showing strong imports of industrial supplies portends continuing domestic manufacturing and industrial activity.
The nation’s energy resurgence continued to enable the drop in reliance on foreign imports. The trade deficit in energy-related petroleum products shrank to its lowest level since May 2009, as a result of greater exports and a decrease in imports since the beginning of the year, despite a large increase in crude oil imports in July. The petroleum trade deficit is running about 17 percent lower year over year.
However, the trade gap with China widened to the biggest margin on record, expanding 2.7 percent in July to $30.9 billion. Deficits with the European Union, Germany, Japan, and Canada also grew, among other major trade partners. Although the trade gap is at its narrowest point since January, it is running 4.4 percent higher than 2013 through the first seven months of the year.
In July, exports were led by industrial machinery and telecommunications equipment among capital goods and cell phones and household goods among consumer goods. Exports of automobiles hit a record high. Imports were led by industrial machinery, civilian aircraft, and computer accessories among business goods. Imports of cell phones and household goods chilled by a significant 4.2 percent, leading to a drop in overall consumer goods imports.
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Jobs Growth Cools Down Significantly in August
U.S. employers hit the brakes on hiring in August, as the nation’s employment growth skidded to its lowest pace this year. The 142,000 jobs brought on last month ended a six-month streak of at least 200,000 positions added monthly and were significantly below economists’ forecast of 225,000 job additions. Meanwhile, the national unemployment rate fell one-tenth of a point to 6.1 percent, but mostly due to Americans dropping out of the labor force.
In the Labor Department’s latest report, June and July payroll data were recalculated to reflect 28,000 fewer jobs than reported earlier. Although the department revised upwardly July’s figure from 209,000 to 212,000, it lowered June’s total from 298,000 to 267,000. Because of the heady employment growth earlier in the year, the job market still averaged 215,000 new jobs per month through eight months this year and 212,000 per month over the last 12 month. However, employment growth has cooled off significantly since June.
The tempered employment market did little to dissuade expectations of a strong economic third quarter among economists, who noted that August is a notoriously quirky month for employment figures due to seasonal fluctuations while anticipating the August number will be upwardly revised by the Labor Department. Analyst confidence is also being supported by other strong economic reports. “The number was a surprise and a disappointment but we do not believe that it indicates a slowdown in the U.S. economy,” Joseph Lake, of the Economist Intelligence Unit, commented in an analyst note.
Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC, told Wall Street Journal he was “skeptical” the weak employment report indicates a downward shift in the economy. “The fundamentals in the economy remain solid, this is one month, and the economy should continue to expand at a decent pace in the second half of 2014,” Gus Faucher, senior economist at PNC Financial Services, said to Reuters.
However, sluggish consumer spending so far this year remains troublesome in spite of the overall job gains and strong consumer confidence, and some have pointed out that weak wage growth, which is expanding at barely above the pace of inflation, has kept household expenditures on a tight rein. Average hourly earnings rose 6 cents in August but is only 2.1 percent higher year over year. “Never before in U.S. history have so many new jobs done so little to boost household expenditures,” remarked John Lonski, of Moody’s Capital Markets, to WSJ.
In July, 60,000 people pulled out of the labor force as they gave up looking for work, dragging down the national labor force participation rate one-tenth of a point to 62.8 percent. The rate compares to a pre-recession level of 66 percent and is the lowest since 1978, suggesting that there remains significant slack in the labor market. The Labor Department said this rate has been “essentially unchanged since April.”
Other broader measures of employment showed small improvements in August. The number of long-term unemployed declined by 192,000 persons last month to 3 million and to a ratio under one in three unemployed Americans. The number of people who were working part-time because their hours were cut or they couldn’t find full-time work fell by 200,000 to 7.3 million.
August employment gains were led by business services with 47,000 new jobs and health care with 34,000. Construction added 20,000 jobs, but mining sector payroll grew by just 2,000. Supply chain-related employment ticked up by 1,200 jobs. Manufacturing employment was flat, as employment growth of 2,000 among durable goods factories was negated by a drop of 2,000 positions among non-durable-goods manufacturers.
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