Economic Data and Growth

Owing to Beijing’s “Covid Zero” policy, China’s economy may be facing slowed growth that mimics a recession, according to The Wall Street Journal (subscription).

What’s happening: “Millions of new graduates are struggling to find a job. Business confidence has fallen. Imports have plummeted, and nervous Chinese are socking away more savings.”

• Purchasing manager indices released last weekend by China’s government showed contractions in factory and service-sector activity for April, the second straight month of declines.
• Also dropping are cement production, smartphone shipments and intra-country sales of excavators.
• Youth unemployment is reported at 16%.

Beyond lockdowns: Fallout from the war in Ukraine has increased costs for Chinese businesses and led to less demand for China’s exports.

• Meanwhile, “[r]eal estate, a primary driver of the nation’s economy, went into free fall last year as developers buckled under heavy debts and home sales slumped.”

Why it matters: Long-term slowdowns in China are felt internationally.

• “China was projected to account for a quarter of global economic growth in the five years through 2026, according to data released by the International Monetary Fund last year.”

How to fix it: Loosened “Covid Zero” policies, which have hamstrung supply chains and kept consumers home, would be likely to jumpstart a partial recovery, according to the Journal.

• However, “Chinese officials are pledging to get the economy back on track, without abandoning their tough Covid-control policies. President Xi Jinping … has called for an all-out campaign to rev up growth through more infrastructure spending.”

Manufacturing job openings inched down in June, U.S. Bureau of Labor Statistics data showed, and manufacturers continued to see business challenges in July, according to the ISM® Manufacturing Purchasing Managers’ Index®.

What’s going on: Open positions in the manufacturing sector declined approximately 4.28%, to 582,000 in June from 608,000 in May. Meanwhile, economic activity in the manufacturing industry declined for the ninth month in a row in July.

• While the Manufacturing Purchasing Managers’ Index was 46.4 in July, up from 46.0 in June, any number under 50 indicates contraction.
• In employment, durable goods job openings decreased to 356,000 in June from 379,000 in May. In nondurable goods, openings fell to 226,000 from 229,000 in the same period.

The details: New orders (up to 47.3 from 45.6) and production (up to 48.3 from 46.7) declined more slowly in July, according to the ISM®.

• However, employment fell to 44.4 from 48.1, and exports declined to 46.2 from 47.3.

Hiring: Manufacturing’s net hiring—hires minus separations—in June was 6,000, the same as the pace in May.

• Job openings in the sector remained above pre-pandemic levels.

With a recession so far failing to materialize and inflation showing signs of weakening, manufacturers may begin to grow less wary about the economy. Recent data suggests that despite continuing risks, the bright spots may win the day.

Growth: GDP grew at a 2.4% annual rate in the second quarter of 2023. This number is notably higher than the 2.0% growth that analysts had expected for the quarter.

Employment: The overall employment rate sits at a very low 3.6%, defying expectations that the Fed’s inflation-reduction moves might create a surge in unemployment. Meanwhile, women in particular are enjoying an employment renaissance, including in manufacturing.

• Manufacturing had about 3,786,000 female employees in June, meaning that women made up 29.1% of the industry’s workforce, according to NAM Chief Economist Chad Moutray.
• That number is just slightly lower than the 3,788,000 found in May, which was the highest number of female workers in manufacturing since September 2009.

Wages: At the same time that overall economic strength is growing, the United States is also seeing positive signs in wage inequality, with average income for the lowest-earning 50% of Americans increasing  faster than all other population groups except for the ultra-wealthy.

Inflation: Inflation has been a significant pain point for manufacturers, but it now seems to be moderating. According to the latest Consumer Price Index data, inflation rose 3% in June from a year earlier—a big drop from the whopping 9.1% annual inflation rate in June 2022.

The last word: “Real GDP data suggests that while demand and output in the manufacturing sector remain challenged, there are other pockets of strength in the larger macroeconomy,” said Moutray.

• “The Federal Reserve is working to navigate a ‘soft landing’—something that is possible, even as recession risks continue to permeate the conversation.”

The Federal Reserve on Wednesday raised interest rates to their highest level in more than two decades, according to NBC News.

What’s going on: The central bank increased the target range for the federal funds rate by 25 basis points to 5.25% to 5.5%, the highest level since 2001.

Why it’s important: “Though consumer prices have declined for 12 straight months, in June, consumer prices increased 3% year on year. Even though that’s the lowest the annual inflation rate has been in more than two years, it’s still too high for the Fed, which is looking to wrestle increases down to about 2%.”

• “Supercore” inflation, which excludes shelter, gas and food costs, has remained at the 4% annual rate—far too high for the Fed’s liking—for more than two years.
• The bank’s aim in raising interest rates is to make borrowing and investing costlier, reducing demand for labor, goods and services in the economy.

Recession revision: “After Wednesday’s interest rate announcement, [Federal Reserve Chairman Jerome Powell] affirmed the central bank no longer expects a recession to occur as a result of the increases, adding that it could bump up the key interest rate even further.”

The challenge: U.S. workers are relying on the Fed to “balanc[e] unemployment and inflation. … The Fed believes it can slow the economy to reduce inflation without causing people to lose their jobs en masse.”

Sales of new single-family homes dropped 2.5% in June after increasing for three consecutive months, according to U.S. Census Bureau data.

What’s going on: New construction sales fell to a seasonally adjusted 697,000 units last month from a revised May rate of 715,000 units.

• The median sales price of new homes in June was $415,400, down from $416,300 in May.
• Purchases of new homes declined in Midwest and West, but continued to grow in the Northeast and South.

Still higher than 2022: However, June’s sales rate is 23.8% above last June’s estimated rate of 563,000 units.

Supply: June also saw a new-home supply of 7.4 months, up from May’s 7.2 months.

The NAM’s take: “The housing market continued to be challenged by affordability issues and an uncertain economic outlook,” NAM Chief Economist Chad Moutray said. “Still, with inventories low, tremendous demand and need exist for more housing.”

The International Monetary Fund raised its growth forecast for the international economy on Tuesday despite slowing activity in China, according to CNBC.

What’s going on: “In the latest update to its World Economic Outlook, the IMF raised its 2023 global growth prediction by 0.2 percentage points to 3%, up from 2.8% at its April assessment. The IMF kept [its] 2024 growth forecast unchanged at 3%.”

• The IMF expects inflation to improve, too, and sees core inflation “declining more slowly to 6% this year, from 6.5% last year.”
• IMF Chief Economist Pierre-Olivier Gourinchas wrote in a blog post Tuesday that “the signs of progress are undeniable.”

However … Global economic challenges remain on the horizon, the IMF cautioned, citing a less-than-robust Chinese economic recovery from the pandemic, weakness in China’s real-estate market and an expected contraction of Germany’s economy.

• In Germany, manufacturing output declined in Q1 2023.
• Across nations that use the euro, “[d]ata released Monday showed business activity shrinking at a faster pace than expected.”

Our take: “While there continue to be significant challenges in the manufacturing sector globally, it is encouraging to see signs of resilience—not just in the U.S. economy, but in other markets as well,” said NAM Chief Economist Chad Moutray.

Manufacturing activity in July has contracted for the eighth time in nine months, though the pace of decline has slowed markedly. The S&P Global Flash U.S. Manufacturing PMI rose to 49.0 in July from June’s 46.3.

The details: Output increased to 50.2 in July, from 46.9 in June. New orders rose to 48.5 from 42.9.

• Export demand saw significant progress (up to 48.7 from 44.9).
• Hiring increased to 52.8 from 52.3
• Future output picked up speed, increasing to 69.8 from 63.6.

However … The S&P Global Flash U.S. Services Business Activity Index dipped to a five-month low of 52.4, down from June’s 54.4, indicating a decline in business activity among service providers.

Across the pond: Manufacturing activity continues to decline in Europe, particularly in Germany, according to the S&P’s HCOB Flash Eurozone Manufacturing PMI.

• The headline Eurozone index fell to 42.7 in July from June’s 43.4, signaling a post-COVID-19 low.

Which manufacturing sectors experienced the most growth in job openings over the past year? We used Lightcast™ to dive into the 789,969 unique job postings for the past 12 months (May 2022 to May 2023) and organized by North American Industrial Classification (NAICS) codes. In this case, we are better able to understand what sectors are experiencing the most growth. As a reminder, the data get more granular with increased digits.

The top manufacturing sectors over the past 12 months at the 3-digit NAICS level, ordered by the number of unique postings, were:

1. Computer and Electronic Products (NAICS 334) – 103,507 unique postings
2. Transportation Equipment (NAICS 336) – 93,075
3. Food Manufacturing (NAICS 311) – 78,397
4. Machinery (NAICS 333)– 74,193
5. Chemicals (NAICS 325) – 72,254

The top manufacturing sectors over the past 12 months at the 4-digit NAICS level, ordered by the number of unique postings:

1. Navigational, Measuring, Electromedical, and Control Instruments Manufacturing (NAICS 3345) – 66,411 unique postings
2. Beverage Manufacturing (NAICS 3121) – 54,837
3. Aerospace Products and Parts (NAICS 3364) – 40,541
4. Pharmaceuticals and Medicines (NAICS 3254) – 27,442
5. Motor Vehicle Manufacturing (NAICS 3361) – 25,006

➔   The takeaway: Though growth in manufacturing has been broad-based, many of the sectors leading job creation over the past year require advanced skills and yield high salaries. Looking at only the top five 4-digit NAICS manufacturing sectors list above, the median advertised salaries for those five sectors over the past 12 months was $36.12 per hour.  

* Lightcast™ data accessed on June 16, 2023.

Industrial production declined 0.5% in June for the second month in a row, the Federal Reserve reported today, according to Bloomberg (subscription).

What’s going on: “The June index of production at factories, mines and utilities decreased 0.5% for a second [consecutive] month, Federal Reserve data showed Tuesday. Manufacturing output declined 0.3% in June, the most in three months.”

• The central bank’s index of manufacturing output has dipped 0.3% from June 2022, with production hamstrung “by lackluster export markets, efforts to work down inventories and more limited consumer spending on merchandise.”

The details: Consumer goods output declined 1.3% in June, the biggest drop in more than two years and a reflection of decreased production across a wide swath of categories, including automotive vehicles, apparel and appliances.

• Materials output also declined, while production of business equipment was flat.

Some good news: “[M]anufacturing may benefit some in coming months as retailers get inventories more in line with sales and the pace of goods inflation slows. Separate data on Tuesday showed retail sales rose by less than forecast, while an underlying measure of household spending pointed to a more resilient consumer at the end of the second quarter.”

The U.S. economy grew more robustly in Q1 of 2023 than previously calculated, according to a large upward revision from the Commerce Department on Thursday, CNBC reports.

What’s going on: “Gross domestic product increased at a 2% annualized pace for the January-through-March period, up from the previous estimate of 1.3% and ahead of the 1.4% Dow Jones consensus forecast. This was the third and final estimate for Q1 GDP. The growth rate was 2.6% in the fourth quarter.”

Why it’s important: The news may indicate that the U.S. is not headed toward economic recession.

• A separate report released this week shows that layoffs were below expected levels, “indicating that labor market strength has held up even in the face of the Federal Reserve’s 10 interest rate hikes totaling 5 percentage points.”
• Unemployment claims were down last week, too, according to the Labor Department.

The NAM says: “While the latest NAM Manufacturers’ Outlook Survey  revealed that most manufacturers predict a recession in the next 12 months, it is also possible that the U.S. economy could achieve the ‘soft landing’ that the Federal Reserve and other policymakers have been seeking,” said NAM Chief Economist Chad Moutray.

• “This is particularly true if the labor market remains solid and if spending continues to hold up. The current outlook is for the U.S. economy to expand 1.7% in 2023, with 1.2% growth in 2024.”