Manufacturing Performs Well Through June

New Orders for Durable Goods: Figure 2 shows the 3MMA of monthly orders for durable goods since January 2010 with the percent change y/y. The abnormal peak of August 2014 was a surge in civil aircraft orders. November 2016 was the first month since April 2015 to have positive y/y growth. There has been an improving trend since September 2015 with a positive surge in the most recent month of data for June this year.

The Durable Goods portion of GDP: The third estimate of Q1 GDP was released late last month. A sub-component of the quarterly data is durable goods, which is part of the personal consumption calculation. It therefore contains no military hardware or civil aircraft data. This is shown in Figure 3 and presumably because of the exclusions just mentioned looks nothing like Figure 2. Durable goods manufactured for personal consumption have been on a healthy growth curve ever since the end of the recession with a slight blip at the end of 2015 and another in Q1 2017.

Auto Production in NAFTA was still experiencing a 1.5 percent y/y growth rate through June, which considering output is at an all-time high is good (Figure 4). However, all the recent growth was in Mexico with the U.S. component declining by 7.1 percent, Canada declining by 2.1 percent and Mexico expanding by 11.8 percent on a rolling three months through June y/y. This data comes from Wards Automotive. There is a huge movement of components and sub assemblies in both directions across the southern border, therefore it is not known whether the Wards data exaggerates or deflates the national differentials.

Manufacturing Employment dived during the recession and gradually improved from the spring of 2010 through 2014. Growth was flat in 2015 and declined slightly in 2016 when 23,000 jobs were lost in the year as a whole. There was a turnaround in the six months through June this year when 53,000 manufacturing jobs were created, mostly in the first quarter (Figure 5).

Manufacturing Productivity: In Q1 2017, the Bureau of Labor Statistics revised the manufacturing labor productivity results back to sometime before Q1 2000. This dropped the four quarters of 2016 average from a 0.63 percent gain y/y to 0.19 percent (Figure 6). The gain in Q1 2017 was 0.3 percent. Net gains in manufacturing productivity have been zero since Q4 2012.

The ISM Manufacturing Index is a diffusion index. The Institute of Supply Management states that “diffusion indexes have the properties of leading indicators and are convenient summary measures showing the prevailing direction of change and the scope of change. An index value above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally declining.” Figure 7 shows the 3MMA of the ISM index from January 1997 through June 2017 with an improving trend since December 2015. There was a decline in April and May and a slight pickup in June. The index is currently signaling future expansion with a 3MMA value of 55.8 in June. March at 56.97 was the best result since November 2014.

SMU Comment: On balance, the various measures of the health of manufacturing are good and portend well for the balance of this year. We give the ISM index the most credence, and it is also the only leading indicator of the group. Auto assemblies and its supplier industries are doing well in NAFTA, but the U.S. and Canada are losing share to Mexico. Manufacturing employment has had positive growth in six of the last seven months through June and the employment component of the ISM index has had positive growth in each of the last nine months. The most disappointing indicator is manufacturing productivity, which we would have expected to be better than reported.