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Economic Watch: Silver Lining for Manufacturing? Employment Gains, Service Sector Slows

February 4, 2016

By Evan Lockridge

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Orders and shipments of factory-made goods were down in a report out Thursday, but earlier reports based on more recent activity indicates conditions may be on the verge of brightening.

A U.S. Commerce Department final report indicates new orders fell in December by 2.9% from the month before, following a 0.7% drop in November. The December decline is the largest since December 2014 and is the fourth decrease in the last five months.

New orders for capital goods (excluding defense and aircraft), seen as a measure of business confidence and investment plans, posted a 4.3% downturn in December, unchanged from an initial report. In contrast, shipments of these items increased 0.2%, up from an initially reported 0.2% downturn.

Overall shipments of manufactured goods posted the eighth drop out of the last nine months, falling back 1.4% in December following a November drop of 0.1%

Both shipments and orders of durable goods (those designed to last at least three years), along with those for nondurable goods, posted declines in the final month of last year. The declines in durables was led by downturns in the transportation equipment sector.

Inventories of durable factory goods rose after five straight months of declines, while inventories of nondurable goods posted the fifth drop in the last six months.

Manufacturing isn’t as big of a piece of the country’s economic pie as it used to be.

The continued decline in U.S. manufacturing, which makes up a little more than 10% of the overall economy, has led some to worry the country could be heading for an economic recession, but that’s no necessarily so. Manufacturing isn’t as big of a piece of the country’s economic pie as it used to be, according to a recent Wall Street Journal story, slipping from more than 20% in the 1980s and from just over 16% in 1997.

The recent declines in manufacturing numbers, according to many analysts, is largely due to the appreciation of the U.S. dollar against some foreign currencies (making goods produced here more expensive overseas and thus fewer exports), as well as the reduced oil and gas production caused by the collapse in crude oil prices.

In the meantime, two other recent reports indicate U.S. manufacturing has picked up some energy this month, though there seems to be no consensus if this sector of the economy is still expanding or contracting.

Employment Keeps Increasing

Thursday’s economic reports follow one from the day before showing continuing improvements in the nation’s employment picture, while another reports shows the service sector of the economy apparently losing momentum.

Payroll processor ADP reported there were 205,000 job gains at private companies in the U.S. in January. That follows the company revising its report on the December total of jobs added upward 257,000 to 267,000. The report is advance of government numbers for employment and unemployment due out Friday.

Goods-producing employment rose by 13,000 jobs in January, well off from December’s upwardly revised 30,000 gain. The construction industry added 21,000 jobs, which was roughly in line with the average monthly jobs gained during 2015. Manufacturing neither added nor lost jobs.

“Job growth remains strong despite the turmoil in the global economy and financial markets," saud Mark Zandi, chief economist of Moody’s Analytics. "Manufacturers and energy companies are reducing payrolls, but job gains across all other industries remain robust. The U.S. economy remains on track to return to full employment by mid-year.”

Service/Nonmanufacturing Sector Growth Eases

The addition of jobs in the nation’s service sector was reflected in the headlines of two reports, both surveys of the nation’s purchasing executives and managers.

The Institute for Supply Management’s measure registered 53.5% in January, 2.3 percentage points lower than the seasonally adjusted December reading of 55.8%. This represents continued growth in the non-manufacturing sector for the 72nd month but at a slower rate than the monthe before.

“The majority of the respondents’ comments are positive about business conditions; however, there is a concern that exists relative to global conditions, stock market volatility, and the effect on commercial and consumer confidence,” said Anthony Nieves, chair of the ISM Non-Manufacturing Business Survey Committee.

A final reading on the sector for January from the financial information services Markit Economics showed a similar decline. The weakest pace of activity growth since the current period of expansion began in late 2013, this number fell in January to a reading of 53.2 from 54.3 in December.

Although still above the crucial 50.0 no change value, the latest index reading was also below the average recorded since the survey began in October 2009.

“Deteriorating financial market conditions, global growth uncertainties and the upcoming election are all taking their toll, not to mention the strong dollar, which is not only hurting manufacturing but is also hitting the service sector through reduced tourism and travel,” said Chris Williamson, chief cconomist at Markit.

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