Motor vehicle and parts production skidded 7.6 percent after surging 9.3 percent in July, the biggest output spike in almost five years. The blow of the slowdown in the manufacturing sector was softened by a 1 percent jump in utilities output and a 0.5 percent rebound in mining output, yielding an overall decline in industrial output of 0.1 percent last month. Economists widely predicted a 0.1 to 0.3 percent industrial expansion for August.
“It’s still a mixed bag, though overall conditions are improving,” Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, Fla., told Bloomberg before the report. “There was probably some giveback in August” for auto production so “the numbers should be taken with a grain of salt. It’s all part of a gradual recovery. We’ll see a moderate pace of growth.”
The Federal Reserve also revised down July’s industrial output to 0.2 percent, halving its previous estimate. July’s manufacturing growth was also scaled down from the previously reported 1 percent to 0.7 percent. The Fed’s latest report, which also revised figures from earlier in the year, shows uneven manufacturing and industrial output in the second quarter that has continued into the third quarter; manufacturing is the nation’s largest industrial sector, accounting for three-quarters of industrial production and 12 percent of the overall economy.
Analysts believe the drop in auto production will be short-lived, as a separate report on retail activity by the Commerce Department revised June’s auto sales from a 0.2 percent decline to 0.6 percent growth and showed August sales jumped by 1.5 percent (see story below). In August, total retail sales also showed their biggest growth since the spring, and a preliminary September reading of consumer sentiment continued to rise. This is leading economists to believe the economy will expand well above 3 percent if the nation’s job market keeps improving and wage gains pick up speed to support wider consumer spending. U.S. GDP surged 4.2 percent in the second quarter largely on the production and accumulation of goods by businesses.
August’s drop in auto production was a big drag on overall manufacturing production. Durables manufacturing declined 0.9 percent. Excluding autos, manufacturing rose 0.1 percent. Output at aerospace and transportation equipment manufacturing plans decreased 0.1 percent, but an unusually large number of aircraft orders in July is expected to significantly elevate manufacturing in the industry.
Except for computers and electronics, manufacturing in other durable goods segments slowed down in August, including fabricated metal products, machinery, furniture, and primary metals. Appliance and electrical equipment manufacturing showed no growth for the second straight month.
Total industrial capacity utilization fell 0.3 percent in August to 78.8 percent. Manufacturing capacity utilization dropped 0.4 percent to 77.2 percent.
Machine Tool Demand Is Bullish for Rest of ’14, ’15
Metalworking machinery demand plunged in July and new orders for cutting tools declined slightly, but market observers are forecasting next year to be the best for metalcutting machinery demand since the recession.
Metalcutting and metal forming and fabrication machinery sales of $354.6 million in July tumbled 11.5 percent, nearly negating all of the 12.6 percent sales gain in June, according to data from the U.S. Manufacturing Technology Orders report published by the Association For Manufacturing Technology (AMT). The July figure was down 1.4 percent compared with the same month in 2013, while year-to-date sales of $2.7 billion is 2.3 percent behind last year’s pace.
The Cutting Tool Market Report that AMT co-publishes with the United States Cutting Tool Institute, meanwhile, tracked July cutting tool demand at $170 million, 1.1 percent lower than the previous month but up 1.5 percent year-over-year. Sales of the consumables serve as a proxy for manufacturing activity.
The July total managed to retain most of the momentum from June’s year-high $181 million sales figure, leading to an upbeat assessment by Brad Lawton, chairman of AMT’s Cutting Tool Product Group. “Having remained strong for the sixth consecutive month, these figures reassure our confidence in the current market conditions.”
AMT President Doug Woods had a similarly positive outlook despite the down figures for July, noting that with “a strong PMI reading in July and a record high for U.S. exports, manufacturing shows no signs of slowing,” in reference to the Institute for Supply Management’s highest manufacturing index reading in more than three years.
However, the Federal Reserve’s August industrial production report released this morning shows a big decline in manufacturing as auto production skidded. Still, in a separate measure by the Commerce Department, factory orders in July soared on a huge demand spike for commercial aircraft and ships.
The well-attended International Manufacturing Technology Show held all last week in Chicago also bodes well for machine tool sales. The biennial trade show, which is organized by AMT, is a venue for machinery and equipment debuts for the machining industry and is usually followed by greater levels of machinery purchases. The 2,035 companies that exhibited at this year’s IMTS set a show record, along with 1,475 exhibitor booths and more than 113,000 registrants.
Woods expects to see “strong order activity in the months following IMTS” also because many factories are running old machinery and interest rates remain low. “We believe we are coming into an environment ripe for capital investment,” he noted.
Meanwhile, a separate report, the Gardner Research Capital Spending Survey and Forecast, predicts a 37 percent jump next year in machine tool demand to a total market of $8.8 billion. It would be the strongest year for machinery sales since 1998′s $9.6 billion total. The report also forecasts the United States to be the world’s largest machine tool market for the first time since 2000. The top five market segments, it predicts, are job shops, machinery/equipment manufacturers, automotive, pumps/valves/plumbing products, and forming/fabricating.
The Gardner forecast attributes the big demand growth to a healthy money supply, high capacity utilization, and all-time highs in durable goods production.
Small Businesses’ Outlook Is Positive but Measured
Small business confidence ticked up for the second straight month to its second-highest post-recession level in August, but small business owners who think business conditions will worsen still outnumber those who expect improvement while sales and business investments remain soft.
The National Federal of Independent Business’ Small Business Optimism Index rose 0.4 points to 96.1. The four “hard” measures — job creation, job openings, capital spending plans, and inventory investment plans — were collectively unchanged, and the six remaining sub-components produced a modest gain.
Last month, small business owners’ expectations around hiring and sales fell 3 and 4 percentage points, respectively. The fading job creation plans coincided with an average 0.02 workers per firm added in August, which the NFIB said despite an 11th straight positive month was “basically a ‘zero’ net gain” in employment in the sector.
Sales expectations among small businesses also weakened along with the payroll outlook, though sales in the sector over the last three months improved. The number of small business owners expecting greater sales volumes was a net 6 percent, representing a 4 point drop from July and 5 points lower than June. The net percent of all owners reporting higher nominal sales in the past three months compared to the prior three months rose 1 point to a net negative 2 percent.
The NFIB says small business owners are currently satisfied with their inventory levels and are not planning any significant inventory investment. More firms are reducing inventory than building stocks, as the inventory sub-index ticked in a net negative 2 percent last month. That contrasts with the large accumulation of stocks by businesses on the national level since the second quarter.
Noting that small businesses are “adding little to the accumulation of stocks,” Bill Dunkelberg, NFIB chief economist, said improving indicators in the national economy are not being reflected by the small business sector. “Job openings increased, anticipating a lower unemployment rate but not more jobs as job creation plans faltered,” he wrote in the release notes for the August report. “There just wasn’t a lot of good GDP news in the numbers, just a ‘more of the same’ picture.”
Dunkelberg acknowledged that manufacturing “is doing well,” but remarked that the small business and consumer segments “are not strong.” He also said that strong exports do not help most small businesses and expects the sector to keep plodding along.
Capital spending improved slightly, up 3 points from July to the second-best reading since January 2008. The percentage of small business owners planning capital outlays in the next three to six months rose 5 points to a net 27 percent, the best reading since the peak of the last expansion, according to the NFIB. But with sales at historically low levels, the NFIB commented that the gain may reflect the need to replace aging equipment rather than expansion.
Retail Sales Rise, Ease Consumer Spending Fears
U.S. retail sales improved by the best margin in four months in August while an upward revision to July sales figures fortified third-quarter expectations for consumer spending and the economy. Meanwhile, an important gauge of consumer confidence improved again to its highest level in more than a year in September.
Sales of big-ticket items such as cars, furniture and home furnishings, and electronics and appliances aided August’s 0.6 percent expansion, following 0.3 percent growth in July, which the Commerce Department changed from an earlier reading that showed a flat month. June was also revised to 0.4 percent growth, a doubling of the department’s earlier estimate. The strong August showing and the upgraded figures prompted many analysts and economists to raise their third-quarter GDP growth forecasts, which now range from 3.2 percent to as high as 3.6 percent, as retail sales account for two-thirds of U.S. economic activity.
Falling gasoline prices to their lowest levels in four years and a solid national job market were attributed to the improved consumer spending picture, as Americans are feeling better about the economy and have more money for discretionary purchases, it was widely reported. The pickup in retail sales eased what were growing fears of lagging consumer spending in spite of strong indicators in manufacturing and business spending. “You’re seeing evidence that the consumer may actually be becoming more engaged in the expansion,” said Michelle Girard, chief U.S. economist at RBS Securities Inc, to Bloomberg.
The July growth was in line with the median estimate of economists’ forecasts that ranged from 0.1 to 1.2 percent expansion. Retail receipts for the month were 4.8 percent higher year-over-year, while core retail sales, which exclude cars, gasoline, building materials, and food, climbed 0.4 percent and were 4.1 percent higher than August a year ago. Excluding automobiles, sales of retail and food gained 0.3 percent.
Motor vehicle sales rebounded in August with a 1.5 percent expansion, recapturing its spot as the major driver of retail activity this year. There were concerns of slowing car sales, but the Commerce Department’s June revision from a 0.2 percent sales decline to 0.6 percent growth and the August figure, the best monthly gain since March, dispelled worries. According to the auto industry’s own figures, car sales rose to a 17.5 million annualized rate in August after a 16.4 million pace in July.
But other retail segments also showed improvement, including a 0.7 percent growth rebound in furniture and home furnishings sales from a 0.1 percent retreat a month prior. Electronics and appliance store sales also grew 0.7 percent, meanwhile. Home improvement retailers saw a 1.4 percent surge in receipts, and sporting goods merchants showed a 0.9 percent jump.
Still, the retail sector is far from firing on all cylinders, and not all critical components to economic growth are pushing forward. Department stores suffered a 0.4 percent sales decline from July to August while clothiers saw a significant slowdown, from 0.9 percent to 0.3 percent.
“Clearly the rebound that we were all expecting in this year hasn’t happened,” Terry Lundgren, Macy’s chief executive, was reported as saying by Wall Street Journal. Stuart Hoffman, PNC Financial Services Group’s chief economist, remarked that the numbers show consumers “are not going hog wild.”
Some observers noted that sustained increases in consumer spending and retail sales will depend upon more consistent growth in wages among Americans. U.S. average hourly wages have risen just 2.1 percent year-over-year.
Separately, though, a gauge of income expectations hit its highest level since November 2008. And the Thomson Reuters/University of Michigan’s consumer sentiment index rose 2.1 points to 84.6 in early September, a preliminary figure but the highest reading since July 2013.
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