U.S. manufacturing growth cooling; bottlenecks starting to abate

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. manufacturing activity grew at a slower pace in July for the second straight month as raw material shortages persisted, though there are signs of some easing in supply-chain bottlenecks.

The survey from the Institute for Supply Management (ISM) on Monday showed a measure of prices paid by manufactures fell by the most in 16 months, while the supplier deliveries index retreated further from a 47-year high touched in May.

Timothy Fiore, chair of ISM’s manufacturing business survey committee, noted that “supply and demand dynamics appear to be moving closer to equilibrium for the first time in many months.” Part of that could be because spending is rotating back to services from goods.

“Manufacturing is slowing from unsustainable boom to sustainable strength,” said Chris Low, chief economist at FHN Financial in New York.

“Moderation in supplier deliveries and prices paid indicate bottlenecks are alleviating, but both remain high enough to indicate supply-side problems persist. Still, from a markets and policy perspective, progress is important.”

The ISM’s index of national factory activity fell to 59.5 last month, the lowest reading since January, from 60.6 in June. A reading above 50 indicates expansion in manufacturing, which accounts for 11.9% of the U.S. economy. Economists polled by Reuters had forecast the index would be little changed at 60.9.

Seventeen out of 18 manufacturing industries reported growth in July, including machinery as well as computer and electronic products. Only textile mills reported a decline.

The ISM survey’s measure of prices paid by manufacturers fell to a reading of 85.7 last month from a record 92.1 in June, reflecting an easing in commodity prices. The drop – the largest pullback in the index since March 2020 – supports Federal Reserve Chair Jerome Powell’s contention that inflation will moderate as supply constraints abate.

The survey’s measure of supplier deliveries fell to 72.5 from a reading of 75.1 in June. The index vaulted to 78.8 in May, which was the highest reading since April 1974. A reading above 50 indicates slower deliveries.

Demand shifted to goods from services during the COVID-19 pandemic as millions of Americans were cooped up at home, straining the supply chain. Roughly half of the population has been fully vaccinated against the coronavirus, allowing people to travel, frequent restaurants, visit casinos and attend sporting events among services-related activities that were curbed early in the pandemic.

Government data last week showed spending on services accelerated sharply in the second quarter, helping to lift the level of gross domestic product above its peak in the fourth quarter of 2019.

U.S. stocks were trading higher, with the S&P 500 index near a record high as the U.S. Congress pushed ahead with a $1 trillion infrastructure bill.

The dollar fell against a basket of currencies. U.S. Treasury prices rose.

LEAN INVENTORIES

Still, anecdotes in the ISM survey suggested the supply chain was still a long way from normalizing. Machinery manufacturers said they are “having to place orders months ahead of time just to get a place in line.”

In the computer and electronics industry, manufacturers reported that “purchases continue to have long lead times due to shortages of raw materials.”

The scarcity of inputs has been well documented in the automobile industry, where a global semiconductor shortage has forced some car makers to idle assembly plants to manage their chips supply.

The ISM survey’s forward-looking new orders sub-index fell for a second straight month. But with inventories at factories very lean and business warehouses almost empty, the moderation in new orders growth is likely to reverse or remain minimal.

Businesses depleted inventories at a rapid clip in the second quarter. Stocks at retailers are well below normal levels. Economists at Goldman Sachs expect retail and auto inventories will return to normal levels in mid-2022.

Factories also hired more workers in July. A measure of factory employment rebounded after contracting modestly in June for the first time since November, though manufacturers continued to complain about the scarcity of workers.

Still, the rebound bodes well for July’s employment report, due to be released on Friday. According to a Reuters survey of economists, nonfarm payrolls likely increased by 880,000 jobs last month after rising by 850,000 in June.

The economy is facing a shortage of workers, with a record 9.2 million job openings. About 9.5 million people are officially unemployed.

Lack of affordable child care and fears of contracting the coronavirus have been blamed for keeping workers, mostly women, at home. There have also been pandemic-related retirements and career changes. Republicans and business groups have blamed enhanced unemployment benefits, including a $300 weekly payment from the federal government, for the labor crunch.

While more than 20 states led by Republican governors have ended these federal benefits before they were scheduled to run out in early September, there has been little evidence that the terminations boosted hiring.

The labor shortage is expected to ease in the fall when schools reopen for in-person learning, but a resurgence in new COVID-19 cases, driven by the Delta variant of the coronavirus, could make some people reluctant to return to the labor force.

(Reporting by Lucia Mutikani; Editing by Dan Burns, Nick Zieminski and Paul Simao)

U.S. manufacturing activity accelerates in early April; supply constraints worsening

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. factory activity powered ahead in early April, but manufacturers increasingly struggled to source raw materials and other inputs as a reopening economy leads to a boom in domestic demand.

Data firm IHS Markit said on Friday its flash U.S. manufacturing PMI increased to 60.6 in the first half of this month. That was the highest reading since the series started in May 2007 and followed a final reading of 59.1 in March.

Economists polled by Reuters had forecast the index rising to 60.5 in early April. A reading above 50 indicates growth in manufacturing, which accounts for 11.9% of the U.S. economy.

More than half of American adults have had at least one vaccine dose, according to the U.S. Centers for Disease Control and Prevention (CDC). A third of U.S. adults are fully vaccinated, as well as 26% of the population overall.

That, together with the White House’s $1.9 trillion COVID-19 pandemic rescue package, has allowed for broader economic re-engagement, unleashing pent-up demand.

“The U.S. economy is enjoying a strong start to the second quarter, firing on all cylinders as loosening virus restrictions, an impressive vaccine roll-out, a brighter outlook and stimulus measures all helped boost demand,” said Chris Williamson, chief business economist at IHS Markit.

But the strong demand is pushing against supply constraints. The pandemic, now in its second year, has disrupted labor at factories and their suppliers, causing shortages that are boosting prices of raw materials and other inputs.

The IHS Markit survey’s measure of prices paid by manufacturers jumped to the highest level since July 2008. It attributed the higher input prices to “severe supplier shortages and marked rises in transportation fees.”

The continued rise in input costs is one of many factors expected to drive inflation above the Federal Reserve’s 2% inflation target this year. Fed Chair Jerome Powell has expressed confidence that the supply chains will adapt and become more efficient, and prevent prices from remaining higher for a sustained period.

The raw material squeeze is most evident in the automobile industry, where a global semiconductor shortage has forced production cuts at motor vehicle assembly plants. According to IHS Market supply shortages were causing backlogs of uncompleted work “of a magnitude not surpassed for over seven years.”

The IHS survey’s new orders measure increased and as a result, factories boosted hiring.

The improvement in activity also spilled over to the services sector, which has been disproportionately impacted by the pandemic. The IHS Markit flash services sector PMI jumped to 63.1, the highest since the series started in October 2009, from a final reading of 60.4.

It said growth in the services sector, which accounts for more than two-thirds of U.S. economic activity, was driven by “stronger client demand and the reopening of many businesses amid the easing of restrictions.”

The strength in manufacturing and the services industries boosted overall business activity. The survey’s flash composite PMI output index, which tracks the manufacturing and services sectors, rebounded to 62.2. That was also the highest reading since the series started in October 2009 and followed 59.7 in March.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)

Rise in U.S. weekly jobless claims belies improving labor market conditions

By Lucia Mutikani

WASHINGTON (Reuters) -The number of Americans filing new claims for unemployment benefits unexpectedly rose last week, though the labor market recovery is gaining traction as economic activity picks up, driven by increased vaccinations and massive fiscal stimulus.

That was confirmed by other data on Thursday showing a measure of manufacturing activity soared to its strongest level in more than 37 years in March, with employment at factories the highest since February 2018. Layoffs announced by U.S. companies in March were also the fewest in more than 2-1/2 years.

Initial claims have been distorted by backlogs, multiple filings and fraud, making it difficult to get a clear signal on the labor market’s health from the weekly data.

“Higher jobless claims in the most recent week don’t detract from the strong downward trend, which will continue given the reopening of local and state economies, and the acceleration of vaccinations,” said Robert Frick, corporate economist at Navy Federal Credit Union in Vienna, Virginia.

Initial claims for state unemployment benefits jumped 61,000 to a seasonally adjusted 719,000 for the week ended March 27, the Labor Department said.

Data for the prior week was revised to show 26,000 fewer applications received than previously reported, pushing total filings down to 658,000 and below their 665,000 peak during the 2007-09 Great Recession. In a healthy labor market, claims are normally in a 200,000 to 250,000 range.

The government revised the claims data from 2016, which showed applications hitting a record 6.149 million in April 2020, instead of 6.867 million in March 2020.

A staggering 79 million claims were filed under the regular state (UI) programs since mid-March 2020 when mandatory closures of non-essential businesses such as restaurants, bars and gyms were being enforced across many states to slow the first wave of COVID-19 infections.

About 28 more million applications were submitted under the government-funded Pandemic Unemployment Assistance (PAU) program, which covers the self-employed, gig workers and others who do not qualify for the UI programs.

“Together, that equates to 70% of payrolls, or 67% of household employment, pre-pandemic and reflects duplicate filings and fraud,” said Sarah House, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

“But also the tremendous churn in the labor market since COVID, with some workers losing jobs more than once as restrictions and activity fluctuated this past year.”

Economists polled by Reuters had forecast 680,000 applications in the latest week. Virginia accounted for the bulk of the rise. There were also notable increases in California, Georgia, Kentucky, New Jersey and New York.

Including the PUA program, 951,458 people filed claims last week, remaining below one million for a second straight week.

U.S. stocks were higher. The dollar slipped against a basket of currencies. U.S. Treasury prices rose.

MANUFACTURING SHINES

Both the economy and the labor market appear to have turned the corner after hitting a ditch in December, thanks to the acceleration in inoculations, which is allowing more businesses to reopen. The White House’s massive $1.9 trillion pandemic relief package is sending additional $1,400 checks to qualified households and extending the government safety net for the unemployed through Sept. 6.

In a separate report on Thursday, the Institute for Supply Management (ISM) said its index of national factory activity jumped to a reading of 64.7 last month from 60.8 in February. That was the highest level since December 1983.

A reading above 50 indicates expansion in manufacturing, which accounts for 11.9% of the U.S. economy. Economists had forecast the index rising to 61.3 in March. The survey’s manufacturing employment gauge shot up to its the highest reading since February 2018.

According to the ISM, “significantly more companies are hiring or attempting to hire than those reducing labor forces.”

Indeed, a third report from global outplacement firm Challenger, Gray & Christmas showed planned layoffs by U.S.-based companies dropped 11% to 30,603 in March, the fewest since July 2018. Through the first quarter planned layoffs plunged 35%, compared the October-December period. At 144,686, job cuts last quarter were the fewest since the fourth quarter of 2019.

The labor market’s improving fortunes were underscored by a survey from The Conference Board this week showing its measure of household employment rebounding in March after three straight monthly decreases. That aligns with expectations that the government’s closely watched employment report on Friday will show a surge in job growth in March.

According to a Reuters survey of economists, nonfarm payrolls likely increased by 647,000 jobs last month after rising by 379,000 in February. That would leave employment about 8.8 million below its peak in February 2020, highlighting that a full labor market recovery is years away.

At least 18.2 million people were collecting unemployment checks in mid-March, a sign that long-term joblessness was becoming entrenched.

“But even at that rapid (hiring) clip, it would take the economy until January 2024 to get back to pre-pandemic trends,” said Andrew Stettner, senior fellow at The Century Foundation.

“This cold, hard math underscores the hurdles facing the millions of workers still on state or federal jobless aid as they seek to return to productive work.”

(Reporting By Lucia MutikaniEditing by Chizu Nomiyama)

U.S. factory activity cools; cost pressures mounting

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. factory activity slowed in early February likely as a global semiconductor chip shortage hurt production at automobile plants, while prices of inputs and manufactured goods soared, which could heighten fears of strong inflation growth this year.

The report from data firm IHS Markit on Friday also showed businesses in the services industry were experiencing higher costs related to the procurement of personal protective equipment, a greater proportion of which they were passing on to clients “through a marked rise in selling prices.”

Inflation is being closely watched amid concerns from some quarters that President Joe Biden’s proposed $1.9 trillion COVID-19 rescue package could cause the economy to overheat. The package would be on top of nearly $900 billion in additional fiscal stimulus provided at the end of December.

“A concern is that firms’ costs have surged higher, driving selling prices for goods and services up at a survey record pace and hinting at a further increase in inflation,” said Chris Williamson, chief business economist at IHS Markit.

IHS Markit’s flash U.S. manufacturing PMI dropped to 58.5 in the first half of this month from a final reading of 59.2 in January. Extreme weather in large parts of the United States was also blamed. The data was in line with economists’ forecasts.

A reading above 50 indicates growth in manufacturing, which accounts for 11.9% of the U.S. economy. Manufacturing has powered ahead as the pandemic left Americans grounded at home, shifting demand to household goods from services like airline travel and hotel accommodation.

But the coronavirus has disrupted labor at both suppliers and manufacturers, leading to shortages of goods critical to the production processes. Motor vehicle manufacturers have been hit by a semiconductor chip shortage, leading some to temporarily close assembly plants this month.

General Motors announced it would take down production entirely at its Fairfax plant in Kansas City during the week of Feb. 8. Ford Motor has reduced shifts at its Dearborn truck plant and Kansas City assembly plant.

The supply chain bottlenecks, which are widespread across the manufacturing sector as well as the services industry, have led to higher prices for inputs, including raw materials. The survey’s measure of prices paid by manufacturers shot up to its highest level since April 2011. A gauge of prices received by factories surged to its highest level since July 2008.

Though price pressures are expected to rise as last year’s low readings drop out of the calculation, there is no consensus among economists whether higher inflation would stick beyond the so-called base effects.

Federal Reserve Chair Jerome Powell said last week while he expected inflation to be boosted by base effects and pent-up demand when the economy fully reopens, that would be transitory, citing three decades of lower and stable prices.

The inflation outlook will likely hinge on the labor market, which is currently experiencing considerable slack, with at least 18.3 million Americans on unemployment benefits.

While the manufacturing expansion cooled, activity in the services industry gained traction this month.

The IHS Markit’s flash services sector PMI edged up to 58.9 from a final reading of 58.3 in January. The highest reading since March 2015 came as new COVID-19 infections and hospitalization rates dropped, allowing authorities to roll back some restrictions on consumer-facing businesses.

The services sector, which accounts for more than two-thirds of U.S. economic activity, has borne the brunt of the pandemic.

Cost burdens for services businesses increased at their steepest pace since October 2009, leading to firms boosting their selling prices at the sharpest rate on record.

Stocks on Wall Street were trading higher. The dollar fell against a basket of currencies. U.S. Treasury prices were lower.

STRONG HOUSING MARKET

Manufacturing and housing are leading the economy’s recovery from the pandemic recession. In a separate report on Friday, the National Association of Realtors said existing home sales rose 0.6% to a seasonally adjusted annual rate of 6.69 million units in January.

Economists polled by Reuters had forecast sales would fall 1.5% to a rate of 6.61 million units in January. The second straight monthly increase in sales was despite contracts to buy a home declining for four consecutive months. The NAR attributed the misalignment to different sample sizes.

Home resales, which account for the bulk of U.S. home sales, surged 23.7% on a year-on-year basis. The gains have defied tight supply, which has led to a surge in house price inflation. Sales last month were concentrated in the mid-to-upper price range of the market. Sales fell in the Northeast and West. They, however, rose in the South and the Midwest.

“Existing home sales will remain strong but will be unable to move significantly higher until more supply appears,” said David Berson, chief economist at Nationwide in Columbus, Ohio.

The housing market is being driven by still historically low mortgage rates, and demand for spacious accommodations for home offices and schooling.

There were a record-low 1.04 million previously owned homes on the market in January, down 25.7% from one year ago. The median existing house price shot up 14.1% from a year ago to $303,900 in January.

At January’s sales pace, it would take 1.9 months to exhaust the current inventory, down from 3.1 months a year ago. A six-to-seven-month supply is viewed as a healthy balance between supply and demand.

U.S. factory activity races to more than 13-1/2-year high in early January: IHS Markit

WASHINGTON (Reuters) – U.S. manufacturing activity surged to its highest level in more than 13-1/2-years in early January amid strong growth in new orders, but bottlenecks in the supply chain caused by the COVID-19 pandemic are driving up prices and signaling a rise in inflation in the months ahead.

Data firm IHS Markit said on Friday its flash U.S. manufacturing PMI accelerated to a reading of 59.1 in the first half of this month, the highest since May 2007, from 57.1 in December. Economists had forecast the index slipping to 56.5 in early January.

A reading above 50 indicates growth in manufacturing, which accounts for 11.9% of the U.S. economy. Manufacturing is being supported by businesses rebuilding inventories and a shift in demand towards goods from services because of the coronavirus crisis. Factories and the housing market are anchoring the economy as it battles a resurgence in the virus.

The IHS Markit survey’s measure of new orders received by factories raced to its highest level since September 2014. The surge in demand reflected both existing and new customers, “with some clients reportedly committing to orders previously placed on hold.”

But the pandemic is gumming up the supply chain, leading to higher prices for materials.

Manufacturers are also raising prices for their products. The survey’s gauge of prices received by factories vaulted to its highest level since July 2008. This mirrored other manufacturing surveys, suggesting inflation could pick up and remain elevated beyond the anticipated boost from the drop of weak readings in March and April from the calculation.

With orders soaring, manufacturers hired more workers early this month. The survey’s factory employment index increased to 54.8 from 52.2 in December.

The strength in manufacturing helped to lift business activity. The survey’s flash composite PMI Output Index, which tracks the manufacturing and services sectors, rose to a reading of 58.0 early this month from 55.3 in December. While its flash services sector PMI increased to 57.5 from 54.8 in December, the pace of new business growth softened at the start of 2021.

The services sector, which accounts for more than two-thirds of U.S. economic activity, has borne the brunt of the pandemic, with severe disruptions to restaurants, bars and other businesses that attract crowds. COVID-19 has infected more than 24 million people, with the death toll exceeding 400,000 since the pandemic started in the United States.

The survey’s measure of services industry employment fell to a six-month low in early January.

(Reporting By Lucia Mutikani; Editing by Chizu Nomiyama)

U.S. factory activity near 2-1/2-year high; COVID-19 disrupting supply chains

By Lucia Mutikani

WASHINGTON (Reuters) -U.S. factory activity accelerated to its highest level in nearly 2-1/2 years in December as the coronavirus pandemic continues to pull demand away from services towards goods, though spiraling new infections are causing bottlenecks in supply chains.

The strength in manufacturing reported by the Institute for Supply Management (ISM) on Tuesday likely helped to soften the blow on the economy in the fourth quarter from the relentless spread of COVID-19 and government delays in approving another rescue package to help businesses and the unemployed.

The ISM said the virus was “limiting manufacturing growth potential” because of absenteeism and short-term shutdowns to sanitize facilities at factories and their suppliers.

“U.S. manufacturing should fare reasonably well this winter as businesses need to restock inventories and the shift in consumer spending away from services to goods helps manufacturers,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.

The ISM’s index of national factory activity rebounded to a reading of 60.7 last month. That was the highest level since August 2018 and followed a reading of 57.5 in November. A reading above 50 indicates expansion in manufacturing, which accounts for 11.9% of the U.S. economy. Economists polled by Reuters had forecast the index would slip to 56.6 in December.

But some of the surprise rebound in the ISM index was due to an increase in the survey’s measure of supplier deliveries to a reading of 67.6 last month from 61.7 in November.

A lengthening in suppliers’ delivery times is normally associated with a strong economy and increased customer demand, which would be a positive contribution. But in this case slower supplier deliveries also indicate supply shortages related to the pandemic.

Nevertheless, demand for manufactured goods has been strong as the resurgence in new COVID-19 cases has led to fresh business restrictions across the United States, largely impacting the vast services sector.

A large section of the population continues to work and take classes at home, fueling a scramble for electronics, home improvement products and other goods like exercise equipment.

Computer and electronic products manufacturers said they continued to have “tailwinds from the COVID-19 pandemic research support for vaccines and treatments,” adding that “business picked up for us in the last month.”

Makers of miscellaneous products said “sales are now exceeding pre-COVID-19 levels.” Electrical equipment, appliances and components producers reported that business was stronger than expected, “with higher demand for many products.”

Despite strong demand, manufacturing output is still about 3.8% below its pre-pandemic level, according to the Federal Reserve. That could persist for a while as the new wave of infections causes disruptions to labor and the supply chain.

Food manufacturers complained the virus was “affecting us more strongly now than back in March.” Similar sentiments were echoed by transportation equipment makers who said the outbreaks were constraining suppliers. Plastics and rubber products also reported that their suppliers were having difficulty finding and retaining labor.

STRONG ORDERS GROWTH

The ISM report followed on the heels of data on Monday showing strong construction spending in November and October. Strength in the two sectors supports economists’ predictions that the economy grew at around a 5% annualized rate in the fourth quarter after a record 33.4% pace in the third quarter.

The manufacturing boost to gross domestic product would come through an accumulation of inventory by businesses.

The virus and depleted government pandemic money took a bite out of consumer spending in November. More than $3 trillion in government pandemic relief fueled growth in the July-September quarter after the economy contracted at a historic 31.4% rate in the second quarter. Nearly $900 billion in fiscal stimulus was approved in late December.

The ISM’s forward-looking new orders sub-index rose to a reading of 67.9 last month from 65.1 in November. Strong orders growth boosted manufacturing employment, which had contracted in November. The ISM’s manufacturing employment gauge rebounded to 51.5 from a reading of 48.4 in November.

But the supply chain gridlock is driving up costs for manufacturers. The survey’s prices paid index jumped to a reading of 77.6 last month, the highest since May 2018, from 65.4 in November. That raises the risk of higher inflation this year, though high unemployment could limit price pressures.

The labor market has lost steam in tandem with the economy since job growth peaked at a record 4.781 million in June.

According to an early Reuters survey of economists, nonfarm payrolls probably increased by 100,000 jobs last month after rising by 245,000 in November. That would mean the economy recouped about 12.5 million of the 22.2 million jobs lost in March and April. The government is scheduled to publish December’s employment report on Friday.

(Reporting by Lucia MutikaniEditing by Chizu Nomiyama and Paul Simao)

U.S. manufacturing near two-year high; road ahead difficult

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. manufacturing activity accelerated more than expected in October, with new orders jumping to their highest level in nearly 17 years amid a shift in spending toward goods like motor vehicles and food as the COVID-19 pandemic drags on.

The survey on Monday from the Institute for Supply Management (ISM) was the last piece of major economic data before Tuesday’s bitterly contested presidential election. But the outlook for manufacturing is challenging.

While the coronavirus crisis has boosted demand for goods complementing the pandemic life, a resurgence in new cases across the country could lead to authorities re-imposing restrictions to slow the spread of the respiratory illness as winter approaches, which could crimp activity. Government money for businesses and workers hit by the pandemic, which boosted economic growth in the third quarter, has dried up.

“Manufacturing rebounded strongly with fewer restrictions on economic activity and stimulus efforts, but the path forward will be more difficult as the economy continues to cope with the pandemic,” said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania.

The ISM said its index of national factory activity increased to a reading of 59.3 last month. That was the highest since November 2018 and followed a reading of 55.4 in September.

A reading above 50 indicates expansion in manufacturing, which accounts for 11.3% of the U.S. economy. Economists polled by Reuters had forecast the index rising to 55.8 in October.

The jump in activity, however, likely overstates the health of the manufacturing sector. A report from the Federal Reserve last month showed output at factories dropping 0.3% in September and remaining 6.4% below its pre-pandemic level.

Manufacturers and suppliers said last month they “continue to operate in reconfigured factories” and with every month were “becoming more proficient at expanding output.”

Though sentiment among manufacturers remained upbeat, there were two positive comments for every cautious comment, a slight decrease compared to September.

The outcome of Tuesday’s vote is expected to lead to a brief period of uncertainty. President Donald Trump is trailing former Vice President and Democratic Party candidate, Joe Biden, in national opinion polls.

Stocks on Wall Street were trading higher following their steepest weekly loss. The dollar was steady against a basket of currencies. U.S. Treasury prices rose.

NEW ORDERS SURGE

Fifteen industries, including apparel, food, furniture and transportation equipment reported growth last month. Textile mills and printing reported a contraction.

Manufacturing’s continued recovery will likely keep the economy floating, with growth expected to slow sharply in the fourth quarter after a historic 33.1% annualized rate of expansion in the July-September period.

Growth last quarter, which followed a record 31.4% pace of contraction in the April-June quarter, was juiced up by more than $3 trillion in government pandemic relief. There is no deal in sight for another round of fiscal stimulus.

A separate report from the Commerce Department on Monday showed construction spending rose a moderate 0.3% in September, slowing after a 0.8% increase in August.

The coronavirus crisis has pulled spending away from services towards goods that complement the changed life-style. Spending on goods has surpassed its pre-pandemic level.

Makers of chemical products reported “business continues to be robust.” Food manufacturers said they had “increased production due to stores stocking up for the second wave of COVID-19.” Manufacturers of computer and electronic products said the coronavirus continued “to have an effect on supplier support and operations, more from a decreased labor perspective rather than unavailable material.”

The ISM’s forward-looking new orders sub-index surged to a reading of 67.9 last month, the highest reading since January 2004, from 60.2 in September. Customers’ inventories remained too low for the 49th straight month and order backlogs steadily increased, which bodes well for future production.

“On the upside, social distancing efforts, which have been a factor in consumers pivoting spending away from services and toward goods, is showing no signs of abating, especially as virus case counts are surging again,” said Sarah House, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

“This shift to goods spending should continue to underpin orders, but is unlikely to go on with the same muster as it did earlier when an initial flurry of spending on manufactured goods aimed at setting up at-home offices and remote classrooms boosted goods spending.”

With orders booming, manufacturing employment expanded for the first time since July 2019. The ISM’s manufacturing employment gauge rose to a reading of 53.2 from 49.6 in September. That likely supported overall job growth in October.

According to a Reuters survey of economists, nonfarm payrolls probably increased by 700,000 jobs last month after rising 661,000 in September. Employment growth has cooled from a record 4.781 million in June. About 11.5 million of the 22.2 million jobs lost during the pandemic have been recovered.

The government is scheduled to publish October’s employment report on Friday.

(Reporting By Lucia Mutikani,; Editing by Chizu Nomiyama and Andrea Ricci)

Trump weighs executive orders on China, manufacturing, immigration, aide says

WASHINGTON (Reuters) – U.S. President Donald Trump is considering several executive orders targeting China, manufacturing and immigration, his chief of staff Mark Meadows told reporters at the White House on Monday, though he offered few details.

“It’s dealing with a number of executive orders that may go all the way from dealing with some of the immigration issues that we have before us, to some of the manufacturing and jobs issues that are before us, and ultimately dealing with China, in what we need to do there in terms of resetting that balance,” Meadows said.

Since taking office in 2017, Trump has tried to rescind a program that shields from deportation hundreds of thousands of immigrants living in the United States illegally after entering as children – a group often called “Dreamers.”

The U.S. Supreme Court last month blocked Trump’s effort to end the Deferred Action for Childhood Arrivals (DACA) policy put in place by former President Barack Obama, which protects roughly 649,000 immigrants from deportation.

Earlier on Fox News, Meadows said, “We’re going to look at a number of issues as it relates to prescription drug prices, and we’re going to get them done when Congress couldn’t get them done.”

It was not clear what any executive order on China or manufacturing would entail.

(Reporting by Doina Chiacu and Susan Heavey; Editing by Catherine Evans and Nick Zieminski)

U.S. consumer spending strong; manufacturing struggling

FILE PHOTO: People tour The Shops during the grand opening of The Hudson Yards development, a residential, commercial, and retail space on Manhattan's West side in New York City, New York, U.S., March 15, 2019. REUTERS/Brendan McDermid

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. retail sales surged in July as consumers bought a range of goods even as they cut back on motor vehicle purchases, which could help to assuage financial market fears that the economy was heading into recession.

The upbeat report from the Commerce Department on Thursday, however, will likely not change expectations that the Federal Reserve will cut interest rates again next month as news from the manufacturing sector remains dour, underscoring the darkening outlook for the economy against the backdrop of trade tensions and slowing growth overseas.

A key part of the U.S. Treasury yield curve inverted on Wednesday for the first time since June 2007, triggering a stock market sell-off. An inverted Treasury yield curve is historically a reliable predictor of looming recessions.

Financial markets have fully priced in a 25-basis-point rate cut at the U.S. central bank’s Sept. 17-18 policy meeting. The Fed lowered its short-term interest rate by a quarter of a percentage point last month, citing the acrimonious U.S.-China trade war and slowing global economies.

But the data could push markets to dial back expectations of a 50-basis-point rate cut next month.

“So yes, consumers are lifting economic growth and easing pressure on the Federal Reserve to cut more aggressively, but the trade war itself, and the rhetoric that accompanies it will push for more rate cuts,” said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto.

Retail sales increased 0.7% last month after gaining 0.3% in June, the government said. Economists polled by Reuters had forecast retail sales would rise 0.3% in July. Compared to July last year, retail sales increased 3.4%.

Excluding automobiles, gasoline, building materials and food services, retail sales jumped 1.0% last month after advancing by an unrevised 0.7% in June. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product.

U.S. stock index futures extended gains after the release of the data. U.S. Treasury yields rose while the dollar <.DXY> was slightly weaker against a basket of currencies.

STRONG LABOR MARKET

July’s gain in core retail sales suggested strong consumer spending early in the third quarter, though the pace will likely slow from the April-June quarter’s robust 4.3% annualized rate. Consumer spending, which accounts for more than two-thirds of the economy, is being underpinned by the lowest unemployment rate in nearly half a century.

While a separate report from the Labor Department on Thursday showed an increase in the number of Americans filing applications for unemployment benefits last week, the trend in claims continued to point to a strong labor market.

Solid consumer spending is blunting some of the hit on the economy from the downturn in manufacturing, which is underscored by weak business investment. There are, however, red flags for the labor market coming from manufacturing.

The sector’s struggles were highlighted by a third report from the Fed on Thursday showing factory production dropped 0.4% in July. Output at factories has declined more than 1.5% since December 2018. Manufacturing, which makes up about 12% of the economy, is also being weighed down by an inventory overhang, especially in the automotive sector.

Manufacturing productivity tumbled at its fastest pace in nearly two years in the second quarter, with factories cutting hours for workers, another report from the Labor Department showed.

Manufacturing’s troubles appear to have persisted into the third quarter. Though a report from the Philadelphia Fed on Thursday showed factory activity in the mid-Atlantic region slowed less than expected in August amid an increase in new orders, manufacturers reported hiring fewer workers.

A measure of factory employment dropped to its lowest level since November 2016. The weakness in factory employment in the region that covers eastern Pennsylvania, southern New Jersey and Delaware was mirrored by another survey from the New York Fed. Activity in New York state was little changed this month, with employment measures deteriorating further.

“The health of factories is still an important driver of growth and the soft patch for production remains a factor that is keeping economic growth in the slow lane,” said Chris Rupkey, chief economist at MUFG in New York.

The economy grew at a 2.1% rate in the second quarter, decelerating from the first quarter’s 3.1% pace. Growth estimates for the third quarter are below a 2.0% rate.

In July, auto sales fell 0.6% after rising 0.3% in June. Receipts at service stations rebounded 1.8%, reflecting higher gasoline prices. Sales at building material stores gained 0.2%.

Receipts at clothing stores increased 0.8%. Online and mail-order retail sales jumped 2.8%, the most in six months, after rising 1.9% in June. They were likely boosted by Amazon.com Inc’s <AMZN.O> Prime Day.

Receipts at furniture stores rose 0.3%. Sales at restaurants and bars accelerated 1.1%. But spending at hobby, musical instrument and book stores dropped 1.1% last month.

(Reporting by Lucia Mutikani; Editing by Paul Simao)

‘AI’ to hit hardest in U.S. heartland and among less-skilled: study

WASHINGTON (Reuters) – The Midwestern states hit hardest by job automation in recent decades, places that were pivotal to U.S. President Donald Trump’s election, will be under the most pressure again as advances in artificial intelligence reshape the workplace, according to a new study by Brookings Institution researchers.

The spread of computer-driven technology into middle-wage jobs like trucking, construction, and office work, and some lower-skilled occupations like food preparation and service, will also further divide the fast-growing cities where skilled workers are moving and other areas, and separate the high- skilled workers whose jobs are less prone to automation from everyone else regardless of location, the study found.

But the pain may be most intense in a familiar group of manufacturing-heavy states like Wisconsin, Ohio and Iowa, whose support swung the U.S. electoral college for Trump, a Republican, and which have among the largest share of jobs, around 27 percent, at “high risk” of further automation in coming years.

At the other end, solidly Democratic coastal states like New York and Maryland had only about a fifth of jobs in the high-risk category.

The findings suggest the economic tensions that framed Trump’s election may well persist, and may even be immune to his efforts to shift global trade policy in favor of U.S. manufacturers.

“The first era of digital automation was one of traumatic change…with employment and wage gains coming only at the high and low ends,” authors including Brookings Metro Policy Program director Mark Muro wrote of the spread of computer technology and robotics that began in the 1980s. “That our forward-looking analysis projects more of the same…will not, therefore, be comforting.”

The study used prior research from the McKinsey Global Institute that looked at tasks performed in 800 occupations, and the proportion that could be automated by 2030 using current technology.

While some already-automated industries like manufacturing will continue needing less labor for a given level of output – the “automation potential” of production jobs remains nearly 80 percent – the spread of advanced techniques means more jobs will come under pressure as autonomous vehicles supplant drivers, and smart technology changes how waiters, carpenters and others do their jobs.

That would raise productivity – a net plus for the economy overall that could keep goods cheaper, raise demand, and thus help create more jobs even if the nature of those jobs changes.

But it may pose a challenge for lower-skilled workers in particular as automation spreads in food service and construction, industries that have been a fallback for many.

“This implies a shift in the composition of the low-wage workforce” toward jobs like personal care, with an automation potential of 34 percent, or building maintenance, with an automation potential of just 20 percent, the authors wrote.

(Reporting by Howard Schneider; Editing by Andrea Ricci)