U.S. Manufacturing Slows as Construction Flatlines

American manufacturing activity is growing at a slower pace, while deliveries to suppliers are slowing and construction remains near flat.

American manufacturing activity is growing at a slower pace, while deliveries to suppliers are slowing and construction remains near flat.

The Institute for Supply Management announced the October purchasing managers index, or PMI, fell 0.1 percentage points from September to 50.1, just barely registering growth. Backlog of orders are falling, at a 42.5 rate, indicating falling demand for inventory from consumer-faced businesses. The orders backlog indicator is often a sign of businesses’ expectation for consumer sales, and a decline indicates weakening expectations for demand from consumers.

The ISM noted “concern over the high price of the dollar and the continuing low price of oil” were driving weakness in orders, prices, and exports, indicating that America’s international competitiveness is on the decline.

However, new orders recovered to their highest level since July, with growth seen in printing, textiles, furniture, manufacturing, chemical products, food, computer and electronics, and fabricated metals.  In addition to wake orders, supplier deliveries also remained weak, at 50.4 and with the expectation of weakening deliveries in the future. Inventories have fallen to 46.5, indicating weak demand and pessimism in the short term.

Almost all commodities are seeing price declines, with only aluminum and copper rising in price. The widespread price weakness suggests weak demand is pressuring suppliers, who cannot raise prices amidst strong orders for goods and services.

Construction Flatlines

Total construction in the United States rose 0.6% month-over-month from August to September, with just over $1 trillion in construction spending throughout the country. The Department of Commerce reported that both public and private construction were up, but energy-related construction was down significantly on a year-over-year basis as energy investment has declined along with the lower price of oil.

Residential construction rose 0.6% from the prior month, while several categories of non-residential construction saw declines. The steepest declines in private building were in communication, power, commercial, and recreation.

Weak Employment

In addition to weak construction, falling supplies and orders, and growing pessimism regarding exports, the manufacturing is seeing declining employment in the United States. The ISM’s Employment Index for the month of October registered 47.6, 2.9 percentage points below September and indicating a decline in employment across the country.

The national unemployment rate fell to 5.1% in September, and expects to fall further in October as jobless claims continue to fall. The 4-week average of jobless claims fell to its lowest rate in 1973 by the end of October, although some economists warn that this is more to do with a rise in people on disability benefits, discouraged workers, and a broad fall in the labor participation for all age groups except for those over 54.

The rise in youth unemployment and discouraged youth workers expects to drag down aggregate demand and cause prices, orders, and sales to remain weak in the near term. Economist Larry Summers has repeatedly warned that this trend is likely to cause productivity gains to weaken and global growth to decelerate and remain low for the foreseeable future, which will also dampen inflation expectations. This economic environment, known as “secular stagnation,” has been a hot debate among economists even as growth rates have remained depressed for the 7 years since the Global Financial Crisis.