Manufacturing Update through April 2017

The three month moving average (3MMA) declined every month from October 2015 through December 2016 as shown by the brown bars in Figure 1. January this year was the first month of positive growth in the 3MMA since September 2015. Growth improved and accelerated in each of the first four months of 2017.

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 October last year.

The Durable Goods portion of GDP: The second estimate of Q1 GDP was released on Friday. A subcomponent 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 1.9 percent y/y growth rate through April which considering output is at an all-time high is good (Figure 4).

However all the growth was in Mexico with the US component declining by 1.2 percent and Canada by 1.3 percent on a rolling 12 months through April y/y.

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. However there was a turnaround in the five months through April this year when 71,000 manufacturing jobs were created (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 averaged from a 0.63 percent gain y/y to 0.19 percent (Figure 6).

The gain in Q1 2017 was 0.3 percent. Manufacturing productivity has been basically flat since Q1 2013.

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. A PMI reading 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 April 2017 with an improving trend for over a year.

There was a slight decline in April. The index is currently signaling future expansion with a 3MMA value of 56.6 in April. March at 56.97 was the best result since November 2014.

SMU Comment: On balance the various measures of the health of manufacturing are encouraging. 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 NFTA but the US and Canada are losing share to Mexico. Manufacturing employment has had positive growth for five months through April and the March and the April employment component of the ISM index were the highest since September 2014. The most disappointing indicator is manufacturing productivity which we would have expected to be better than reported.