The U.S. Economy:
The October ISM manufacturing index fell by 0.3 of a percentage point to 60.8%, as the measure of new orders dropped to a 16-month low and factories continued to experience delays with deliveries of raw materials. The new orders index came in at 59.8 percent on October, down 6.9 percentage points from September. Fourteen out of eighteen industries reported growth in new orders. The production index registered at 59.3 percent, down 0.1 of a percentage point from September. 10 industries reported greater production in October. The employment index registered 52% in October, up 1.8 of a percentage point from September. 11 out of 18 industries reported greater employment during the month. The inventories index registered 57 in October, up 1.4 percentage points form the month preceding. 14 industries reported higher inventories. The supplier deliveries index came in at 75.6 percent, 2.2 percentage points higher than in September. All 18 industries reported slower deliveries. Backlogs fell by 1.2 percentage points to 63.6, with 15 industries reported growth in backlogs. New export orders improved by 1.2 percentage points to 54.6, with 10 industries reporting higher export orders. The import index came in at 49.1, the first contraction after 15 months of expansion.
The ISM report shows that manufacturing continues to grow for a 17th consecutive month with demand and consumption registering month-over-month gains. Manufacturers still face unprecedented hurdles to meet rising demand. All segments continue to deal with record-long raw material lead times, continued shortages of critical materials, rising commodity prices and difficulties in transporting products. In addition, labor shortages and labor churn are limiting production. COVID infections have hurt manufacturing and movement of goods, particularly in Southeast Asia. Despite the problems, confidence is high.
Construction spending fell 0.5% in September but remained 7.1% above its year earlier level. Residential construction spending declined 0.4% in September and nonresidential construction spending fell 0.6%. The public construction sector saw a 0.7% decline for the month. Single-family construction spending dropped 0.6% and the multi-family sector saw a0.3% drop. For the residential sector, it was the first decline since February and that sector was up 19% from a year earlier. The non-residential sector was down 1.3% from a year earlier. In the non-residential sector, office construction spending climbed 0.1% m/m and was down 2.9% from a year ago. Lodging construction spending fell 0.7% m/m and was down 32.8% from a year earlier. On the public side, highway and street construction spending fell 0.5% in September but was up 49.6% from a year earlier. Residential construction fell for a second consecutive quarter in Q3, Shortages of labor and building materials are slowing construction activity.
New orders for U.S.-made goods unexpectedly rose in September, although manufacturing remains constrained by input shortages. Factory orders increased 0.2% in September. Data for August showed orders increased by 1.0%, instead of the 1.2% original projection. Manufacturing, which accounts for roughly 12% of the economy, is being driven by still strong demand for goods, despite spending shifting back to services. The September increase in orders was led by machinery, primary metals and fabricated metals. However, the orders for computers and electronic products, transportation equipment, electrical equipment and appliances all fell from August, likely because of a shortage in microchips. Shipments increased 0.6% after a 0.1% gain in August. Inventories shot up 0.8%. Unfilled orders increased 0.7%, after rising 0.9% in August. Core capital goods orders increased 0.8% in September. This suggests a potential rebound on business spending on equipment after it contracted in the third quarter after four straight quarters of double-digit growth.
The ISM services index rose to another all-time high of 66.7 percent, up 4.8 percentage points above the September reading of 61.9 percent. The business activity index rose by 7.5 of a percentage point to 69.8%. 17 out of 18 industries reported stronger business activity. The new orders index rose by 6,2 percentage points to 69.7%. Sixteen industries out of eighteen, reported growth in new orders. Employment fell by 1.4 percentage points to 51.6, with 12 industries reporting higher employment. The supplier deliveries index rose by 6.9 percentage points to 75.7, with 17 industries reporting slower deliveries. The pricing index rose by 5.4 percentage points to 82.9%. All 18 industries reported higher prices. The report suggests that demand is still strong, despite rising prices and uncertain supply chains. Respondents report widespread delays caused by input shortages, high backlogs from supplier and container shortages. Labor shortages are widespread. Despite the challenges, optimism is strong and executives expect strong demand to continue.
U.S. auto sales came in at a 13.1 million annualized rate in October up from 12.3 million in September and about equal to the August rate. Total vehicle sales were 20.8% below that of October 2020. Seasonal adjusted annualized sales of light trucks and SUVs increased 9.1% from September but were down 17.4% from October 2020. Car sales decreased 3.5% for the month and down 32% from a year ago. There was a cautious increase in vehicle inventories, but that did not stop the increase in prices. Used vehicle prices accelerated in October after several months of slower growth. The average price of a new vehicle is hovering at $45,000, up more than 20% from a year ago. The average used vehicle price is around $30,000, up 30% from a year ago. Deutsche Bank projects full year sales at 15.5 million for 2021. RBC Capital analyst Joseph Spak expects the first half of 2-21 will still be restrained from supply, limiting the SAAR, but as the year progresses, supply improves and the SAAR will improve.
The international trade balance widened less than expected in September, but net exports will be a significant drag on third quarter growth. The nominal trade deficit widened from a revised $72.8 billion in August to $80.9 billion in September. Nominal exports fell 3% after sing the last few months. Nominal imports were up 0.6%, the second consecutive monthly gain. The petroleum deficit widened by more than $3 billion to $3.38 billion. The goods deficit widened from $101.5 billion to $111 billion. Imports on goods like computers increased by $1.2 billion and industrial supplies and materials saw a $1 billion increase. Imports are being supported by strong consumer demand and increased goods to keep supply chains flowing. Export decreases were led by the automotive industry and parts and a loss in pharmaceutical preparations. He deficit will likely be large for a time as economic growth in the U.S. is fueling demand for imports. Global growth is uneven and rising at a slower pace as the pandemic is still a big factor in some parts of the globe. Trade volumes are still rising and port congestion is still continuing.
As expected with the Delta variant receding, employment growth rebounded in October, with payrolls up by 531,000. Data for September was revised up from the original projection of 194,000 to 312,000. Job growth was widespread, with notable gains in leisure/hospitality (+164,000) and professional and business services (+100,000). Manufacturing increased by 60,000, led by a 28,000 advance in the motor vehicle and parts sector. Transportation and warehousing increased by 54,000 in October and construction added 44,000. Overall government payrolls fell 73,000, led by state and local government education, which shed 65,000, as seasonal adjustments have distorted normal patterns hurt by the pandemic. The unemployment rate edged down to 4.6%. The number of unemployed at 7.4 million continued to trend down but remain above their pre-pandemic levels. The average workweek decreased by 0.1 to 34.7 hours. Average wages increased by 0.4%, up 4.9% year-on-year. Only 104,000 people entered the workforce and the labor participation rate was unchanged at 61.6%. Employment growth has averaged 582,000 per month so far this year. The report is good news for the economy and suggests that the labor shortage that is affecting many businesses is starting to ease.
Euro zone manufacturing activity remained strong last month but was curtailed by supply chain bottlenecks and logistical problems which sent input costs soaring. Markit’s final manufacturing PMI dipped to a eight-month low of 58.3 in October from September’s 58.6. The index measuring output dropped to 53.3 in October, down from 55.6 in September., the lowest reading since June last year. Overall demand remains strong but input shortages and transportation problems are continuing to hurt the manufacturing sector. Supply chain problems and rising inflation hit the French, German and Spanish factories but Italy recorded the strongest expansion since last June.
China’s factory activity contracted more than expected in October to shrink for a second month, hurt by persistently high raw material prices and softer domestic demand, pointing to economic disquiet in the final quarter of 2021. The official manufacturing PMI fell to 49.2 in October, down from 49.6 in September. China’s manufacturing sector has steadily slowed this year, with output in September growing at its most feeble pace since March 2020, due to environmental curbs, power rationing and higher raw material prices. The production index slipped to 48.4 in October from 49.5 in September. New orders came in at 48.8. About a third of surveyed companies listed insufficient demand as their biggest difficulty.
Important Data Releases This Week
- The October ISM NFIB report will be released on Tuesday, November 9 at 6:00 AM. The labor market tightness continues to be the biggest problem facing small businesses and little relief will be reported in October. We still expect that the increase in overall activity will raise the index slightly from 99.2 to 99.6.
- The October producer prices report will be released on Tuesday, November 9 at 8:30 AM. A key question on the inflation front to look for is signs of leveling off in some industries. There has been some stabilization in the used and new car areas, but inflation has bee broadening in the housing sector. Inflation has bee very strong in the goods sectors but has been following historical normal in the service sector. We do expect goods inflation to slow down and service sector to pick up in the long term. In the short run, there will be little relief until the supply chains untangle. We look for the PPI index to rise 0.6% and the core index 0.4% for October.
- The October consumer prices report will be released on Wednesday, November 10 at 8:30 AM. Consumer prices rose 0.4% in September and there will be little relief in October. We look for the CPI and the core index to rise 0.6% for October.