Plus: Manufacturing Expands in October, Factory Orders Increase, Companies Feeling Fiscal Cliff Effect, Unemployment Rate Climbs and Consumer Confidence Hits New Peak.
Manufacturing Sector Expands
The United States manufacturing sector grew again in October, marking the second consecutive month of expansion following three months of contraction, according to the Institute for Supply Management’s (ISM) latest manufacturing Report on Business. The pace of growth also accelerated last month due to strong increases in demand and production.
ISM’s purchasing managers’ index (PMI), a key monthly gauge of the factory sector, rose to 51.7 in October, up from 51.5 in September. Readings above 50 indicate overall expansion for the sector. The latest PMI was slightly below the 12-month average of 52.2. The new orders index rose to 54.2 last month, up from 52.3 in September, while the production index climbed to 52.4 from 49.5 the prior month, rebounding from contraction.
“The details of the report showed that better consumer spending is helping some industries, while weaker business investment is slowing others,” the Associated Press reports. “The industries that reported rising new orders are oriented to consumers. Those industries include furniture, food and beverage, paper products and computers and electronics. The industries reporting falling orders generally depend more on spending by U.S. and overseas businesses. Those industries included machinery, electrical equipment, steel and other metals, and chemical products.”
Despite the overall improvement, there were signs of lingering challenges for U.S. manufacturers. The employment index fell to 52.1 in October, down from 54.7 in September and indicating a slowdown in the rate of growth. Meanwhile, imports fell from 48.5 to 48 and exports dropped from 49.5 to 47.5, reflecting contraction in both indicators.
“The current pace of growth in manufacturing is modest and should be much stronger,” Daniel J. Meckstroth, chief economist for the Manufacturers Alliance for Productivity and Innovation (MAPI), noted. “There is pent-up demand for motor vehicles and housing and the capital stock of equipment and structures needs to be replenished. A potential capital spending boom is being held back by the uncertainty concerning the ‘fiscal cliff,’ the uncertainty about the severity of the recession in Europe, a lack of clarity on future business tax policy and the lack of business confidence that policymakers can come up with a credible plan for federal deficit reduction.”
U.S. Auto Sales Rise Despite Hurricane Sandy’s Impact
As the Northeast recovers from Hurricane Sandy, several major automakers report that October sales remained strong, despite a modest dip at the end of the month due to the storm.
While Hurricane Sandy affected some auto sales and dealerships, October sales for Volkswagen increased by 22.4 percent — its best October in 40 years. Meanwhile, Cadillac posted a 37 percent sales increase, Buick’s sales rose 27 percent and Chevy saw a 12 percent gain in sales, according to MarketWatch. Toyota benefited from a 15.8 percent rise and Chrysler reported a 10 percent jump in sales. Other companies that reported increases include General Motors (4.7 percent) and Ford (0.4 percent).
Meanwhile, Nissan Motor Company, whose top-selling region is the Northeast U.S., an area ravaged by the storm, reported a 3.2 percent decline in sales. During the last day of October, 65 Nissan dealerships were closed in the tri-state area due to storm related aftermath, including power loss, according to the Associated Press.
Across the industry, auto sales have improved from last year as the economy recovers and consumers are more willing to purchase vehicles due to lower interest rates. According to Autodata Corp, U.S. auto industry sales have reached an annual rate of 14.3 million, an increase from the 12.8 million rate in 2011.
In the immediate aftermath of the storm, November sales are projected to decline, according to TIME. Yet as consumers look to replace cars damaged by the storm, some automakers, including Ford, Toyota and GM, are offering discounts and revised repayment plans to attract residents of the regions affected by the storm.
Factory Orders Increase
New orders for U.S. manufactured goods increased 4.8 percent in September, following a 5.1 percent decline in August and marking the largest single-month gain since March 2011, according to the U.S. Department of Commerce. The value of new orders rose by $22 billion to a total of $475.5 billion for the month.
Orders for manufactured durable goods, up four of the last five months, increased 9.8 percent to $218.9 billion following a 13.1 percent drop in August. Transportation equipment posted the largest gain, increasing 31.3 percent to $69.4 billion. Excluding the often volatile transportation category, new orders actually rose 1.4 percent in September. Orders for primary metals jumped 3.9 percent, while machinery orders surged 9.2 percent and non-durable goods demand rose 1 percent.
Core capital goods orders, which are used as an indicator of future business investment, rose 0.2 percent in September and 0.3 percent in August. However, these modest increases came on the heels of major declines of 5.6 percent in July and 2.7 percent in June, suggesting that companies remain cautious about their spending plans.
“Companies from Caterpillar Inc. to General Electric Co. have cut forecasts, a reminder that business investment will no longer bolster the world’s largest economy as it did earlier in the recovery,” Bloomberg News notes. “The outlook for manufacturers may remain dim as overseas demand cools and concern mounts that the so-called fiscal cliff may not get averted by the end of 2012.”
Manufacturing Already Feeling Fiscal Cliff Effects
The new report claims the U.S. will suffer a 0.6 percent loss in GDP growth by the end of 2012 due to business owners’ fears about the fiscal cliff, a set of policy changes and spending cuts (including expiring tax credits) that will go into effect automatically at the end of the year if Congress does not act. NAM also reports that, according to recent surveys, 55 percent of manufacturers and other small business owners state they would not start their business today over fears of fiscal catastrophe.
Although the effects are already being felt, NAM warns that plunging over the cliff could also present the country with disastrous long-term consequences: a loss of 6 million jobs and an unemployment rate above 11 percent; a 12.8 percent drop in GDP; a 10 percent loss in household income; and a recession that would kick in around 2013 and impede growth through 2014.
“The fiscal cliff has forced manufacturers to plan for a future in which business is down and their tax bills are up,” NAM President and CEO Jay Timmons noted. “Manufacturers have had to put off plans to expand and hire new workers to protect themselves against an increasingly negative business climate—resulting in slowing economic growth and job loss in the manufacturing community. If we fall off the fiscal cliff, another recession is almost guaranteed, and we will see 6 million more people out of work. Manufacturers will lose the workers needed to drive American innovation, and the industry may suffer an irreparable setback.”
Unemployment Rate Inches Up
Although the U.S. labor market added 171,000 non-farm jobs in October, the national unemployment rate rose to 7.9 percent, slightly up from the three-year low of 7.8 percent rate in September, according to the U.S. Department of Labor.
Despite the better-than-expected job creation numbers last month, unemployment rose largely due to the fact that discouraged employees have re-entered the workforce.
“The quickened pace of hiring last month exceeded market expectations,” MarketWatch reports. “Economists surveyed by MarketWatch had forecast an increase of 120,000 jobs, based on the Labor Department’s survey of about 440,000 business establishments. The survey was conducted before [Hurricane] Sandy and the storm did not affect the numbers.”
The largest employment gains last month were in professional and business services, which added 51,000 jobs, followed by retail trade, which added 36,000 jobs, and health care, which added 31,000 jobs. Manufacturing employment was relatively unchanged in October, but the construction industry increased by 17,000 jobs and mining shed 9,000 jobs.
Consumer Confidence Hits Five-Year Peak
The Conference Board’s Consumer Confidence Index increased 3.8 points to 72.2 in October, the highest level since February 2008, as Americans have grown more optimistic about current and future economic conditions.
The findings reflect a widespread improvement in consumer perceptions. The percentage of people surveyed who said business conditions are “good” rose to 16.5 percent in October from 15.3 percent the prior month, while those who consider business conditions to be “bad” edged down to 33.1 percent from 33.8 percent. Those who said jobs are “plentiful” increased to 10.3 percent from 8.1 percent, while those claiming jobs are “hard to get” declined to 39.4 percent from 40.7 percent.
“Consumers were considerably more positive in their assessment of current conditions, with improvements in the job market as the major driver,” Lynn Franco, director of economic indicators at the Conference Board, noted. “Consumers were modestly more upbeat about their financial situation and the short-term economic outlook, and appear to be in better spirits approaching the holiday season.”
The percentage of consumers who believe there will be an improvement in business conditions over the next six months increased last month to 21.4 percent from 17.9 percent. However, those expecting business conditions to worsen also increased, inching up to 15.1 percent from 14.5 percent.