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)

Utilities, mining boost U.S. industrial production

Robotic arms spot welds on the chassis of a Ford Transit Van under assembly at the Ford Claycomo Assembly Plant in Claycomo, Missouri April 30, 2014.

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. industrial production increased more than expected in December as unseasonably cold weather at the end of the month boosted demand for heating, but manufacturing output barely rose, pointing to moderate growth in the industrial sector.

Strong demand for utilities bolsters expectations of an acceleration in consumer spending in the fourth quarter, which could prompt analysts to raise their economic growth estimates for the October-December period.

The Federal Reserve said on Wednesday industrial output surged 0.9 percent last month also buoyed by robust gains in mining production after slipping 0.1 percent in November.

Economists polled by Reuters had forecast industrial production advancing 0.4 percent in December. Industrial production rose at an annual rate of 8.2 percent in the fourth quarter, the biggest gain since the second quarter of 2010.

For all of 2017, industrial output rose 1.8 percent, the first and largest increase since 2014.

The industrial sector is being supported by a strengthening global economy and a weakening dollar, which is helping to make U.S. exports more competitive relative to those of the nation’s main trading partners. A survey early this month showed an acceleration in factory activity in December, with a measure of new orders recording its best reading since January 2004.

The dollar maintained gains versus a basket of currencies after the data, while prices for U.S. Treasuries were little changed.

Mining production increased 1.6 percent in December amid a rebound in oil and gas well drilling. Utilities production accelerated 5.6 percent last month after declining 3.1 percent in November.

Bitter cold gripped a large part of the country at the end of December. The surge in utilities demand added to strong December retail sales in supporting expectations of an acceleration in consumer spending in the fourth quarter.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 2.2 percent annualized rate in the third quarter.

But manufacturing output gained only 0.1 percent in December, putting a wrinkle on the report, after rising 0.3 percent in the prior month. Manufacturing production jumped 1.5 percent in October.

Manufacturing output was last month held back by a 1.5 percent drop in the production of primary metals. Motor vehicle and parts production increased 2.0 percent. Manufacturing production rose at a 7.0 percent rate in the fourth quarter.

With output accelerating last month, capacity utilization, a measure of how fully industries are deploying their resources, increased to 77.9 percent, the highest since February 2015, from 77.2 percent in November.

Capacity utilization is 2 percentage points below its long-run average. Officials at the Fed tend to look at capacity use as a signal of how much “slack” remains in the economy and how much room there is for growth to accelerate before it becomes inflationary.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

U.S. private employment growth eases but manufacturing shines: ADP

U.S. private employment growth eases but manufacturing shines: ADP

NEW YORK (Reuters) – U.S. private-sector employment growth eased in November even as the manufacturing sector added the most jobs in at least 15 years, a report by a payrolls processor showed on Wednesday.

Private employers added 190,000 jobs last month, down from an unrevised 235,000 in October, the ADP National Employment Report showed. That was roughly in line with expectations for a gain of 185,000 jobs in a Reuters poll of economists, with estimates ranging from 150,000 to 240,000.

The report is jointly developed with Moody’s Analytics.

“The job market is red hot, with broad-based job gains across industries and company sizes. The only soft spots are in industries being disrupted by technology, brick-and-mortar retailing being the best example,” Mark Zandi, chief economist of Moody’s Analytics, said in a statement. “There is a mounting threat that the job market will overheat next year.”

Among goods-producing sectors, manufacturing added 40,000 jobs, the most in the ADP series history dating back more than 15 years, while construction shed 4,000.

Services-sector employment gains led the advance, with the largest increase coming in education and health services at 54,000, followed by professional and business services at 47,000.

Midsized businesses, defined as employing between 50 and 499 people, added 99,000 jobs, while small-employer employment rose by 50,000 and large companies increased their workforces by 41,000.

The ADP figures come ahead of the U.S. Labor Department’s more comprehensive non-farm payrolls report on Friday, which includes both public and private-sector employment.

Economists polled by Reuters are looking for U.S. private payroll employment to have grown by 190,000 jobs in November, down from 252,000 the month before. Total non-farm employment is expected to have risen by 200,000.

The unemployment rate is forecast to stay steady at the 4.1 percent recorded a month earlier.

(Reporting by Dan Burns; Editing by Chizu Nomiyama)

Trump to talk manufacturing with executives, meet labor leaders

President Donald Trump

WASHINGTON (Reuters) – U.S. President Donald Trump planned to hold meetings on Monday with business and labor leaders at the start of his first full week in office, seeking to work quickly on his campaign promise to boost the American manufacturing sector and deliver more jobs.

The Republican, who took office on Friday after eight years of a Democratic White House, was scheduled to meet with business leaders at 9 a.m. EST (1400 GMT) and then hold an afternoon meeting with labor leaders and U.S. workers, according to his schedule.

The White House, which announced the meetings in a schedule released late on Sunday, did not name company executives or union leaders who would take part. White House officials did not immediately respond to a request for more details.

Trump said on Twitter early on Monday that he planned to discuss U.S. manufacturing with executives but gave no other details.

“Busy week planned with a heavy focus on jobs and national security,” Trump said in a tweet. “Top executives coming in at 9:00 A.M. to talk manufacturing in America.”

The morning gathering will include Dow Chemical Co Chief Executive Officer Andrew Liveris, according to a person briefed on the meeting.

Trump named Liveris in December to lead a private-sector group on manufacturing that will advise the U.S. secretary of commerce. Trump’s designated commerce secretary, billionaire investor Wilbur Ross, is known for backing tariffs and fighting to protect U.S. manufacturers but has also sent jobs abroad.

Before taking office, Trump hosted a number of U.S. CEOs in meetings in New York, including business leaders from defense, technology and other sectors. He also met with leaders of several unions, including the AFL-CIO.

Trump, a real estate developer, has particularly focused on manufacturing, lamenting during his inaugural address on Friday about “rusted-out factories scattered like tombstones across the landscape of our nation” and vowing to boost U.S. industries over foreign ones.

(Reporting by Susan Heavey, Roberta Rampton and David Shepardson; Editing by Angus MacSwan, Lisa Von Ahn and Frances Kerry)

Factory activity slows worldwide in February despite price discounting

LONDON/SYDNEY (Reuters) – World manufacturing sector growth stagnated in February as falling prices failed to stimulate new orders, pushing factories to trim workforces, and dealing a blow to policymakers who are struggling to stimulate their economies.

Manufacturing output across much of Asia shrank in February while waning throughout Europe and remaining sluggish in the U.S., according to surveys of purchasing managers on Tuesday.

JPMorgan’s Global Manufacturing Purchasing Managers’ Index (PMI), produced with data vendor Markit, slipped to 50.0 last month, right on the level that separates growth from contraction, and down from 50.9 in January.

“Inflows of new business and production volumes barely rose, while the trend in international trade deteriorated,” said David Hensley, a director at JPMorgan. “Market conditions will need to improve in the short run if global manufacturing is to avoid falling back into contraction.”

The global PMI combines survey data from countries including the United States, Japan, Germany, France, Britain, China and Russia.

“If you were looking for evidence of manufacturing growth stabilising then this isn’t it. There were a couple of low spots that are quite surprising,” said Philip Shaw at Investec.

“(But) to get a fuller picture of what is going on we will have to see evidence from the service sector.” Monthly service industry surveys are due later this week.

Tuesday’s downbeat data may sharpen the focus of officials from the world’s leading economies who declared at a weekend G20 meeting they needed to look beyond ultra-low rates and printing money to reanimate growth.

ASIAN FACTORY ACTIVITY CONTRACTS

Chinese manufacturing suffered a seventh straight month of contraction in February.

China’s official Purchasing Managers’ Index (PMI) stood at 49.0 in February, down from the previous month’s reading of 49.4 and below the 50-point mark that separates growth from contraction on a monthly basis.

A private survey also showed China’s factories shed jobs at the fastest rate in seven years in February, raising doubts about the government’s ability to reduce industry overcapacity this year without triggering a sharp jump in unemployment.

The Caixin/Markit China Manufacturing Purchasing Managers’ Index (PMI) fell to 48.0 in February from January’s 48.4.

Sluggish demand and years of overexpansion fueled by debt have weighed on China’s manufacturers, leaving many with large amounts of idle capacity and helping to drag China’s broader economic growth to 25-year lows.

Activity in China’s services industry expanded in February but at a slower pace than in the previous month. The official non-manufacturing Purchasing Managers’ Index (PMI) stood at 52.7 in February, down from the previous month’s reading of 53.5.

“The big question is do we see a pick up in the second quarter once China does pass through the seasonal disruption, but at the moment there is little hope for that to happen in any significant way,” said Angus Nicholson at brokerage IG.

On Monday, China’s central bank announced it was cutting the amount of cash banks must hold as reserves for the fifth time since February 2015 yet analysts expect it will have to do more, including cutting interest rates this year.

“Risks to our 6.0 percent baseline GDP growth forecast in 2016 remain tilted to the downside,” analysts at Barclays Capital wrote to clients.

Japan’s factories saw their weakest growth in eight months, while Indonesia and Malaysia contracted for the 17th and 11th month respectively, according to private data vendor Markit.

The Markit/Nikkei Final Japan Manufacturing Purchasing Managers Index (PMI) fell to 50.1 in February from 52.3 in January.

India was perhaps the only standout in Asia, and for merely maintaining modest growth driven by cutting prices to attract demand.

EUROPEAN MANUFACTURING EXPANDS AT SLOWER PACE

Euro zone manufacturing activity expanded at its weakest pace for a year last month as deep price discounting failed to put a floor under slowing order growth.

Markit’s manufacturing PMI for the euro zone dropped to 51.2 from January’s 52.3.

Although the overall expansion was slightly better than previously thought, Markit’s euro zone PMI will make gloomy reading for the European Central Bank, coming little more than a week before its next policy setting meeting.

“Concerns are growing that the region is facing yet another year of sluggish growth in 2016, or even another downturn. Lacklustre domestic demand is being compounded by a worsening global picture,” said Chris Williamson, Markit’s chief economist.

An additional cut to the ECB’s deposit rate is almost certain on March 10 and there is an even chance the central bank increases the size of its 60 billion euro a month bond buying programme, a Reuters poll found last month. [ECILT/EU]

German manufacturing hardly grew in February with activity falling to its lowest in 15 months.

British factories had their weakest month in nearly three years in February as demand at home slowed and export orders fell.

“The near-stagnation of manufacturing highlights the ongoing fragility of the economic recovery at the start of the year and provides further cover for the Bank of England’s increasingly dovish stance,” Rob Dobson, a senior economist at Markit, said.

U.S. FACTORIES SLUGGISH

U.S. manufacturing activity slowed for a fifth straight month in February, but there were signs the embattled sector was stabilizing, with new orders growth steady and inventories improving.

Markit’s final reading of its U.S. manufacturing sector PMI for Feb was 51.3, down from 52.4 in January. Markit’s manufacturing output index for Feb fell to 51.2 from 53.2 in January and was the lowest since October 2013.

An alternative reading from the U.S. Institute of Supply Management (ISM) showed factory activity contracted in February but at a slower pace than the previous month. ISM said its U.S. PMI rose to 49.5 from 48.2 the month before.

Canadian factory activity was little changed in February though the industry shrank for the seventh month in a row.

Canada was in a mild recession in the first half of 2015 and has struggled to regain momentum as oil prices continue to fall.

Brazil’s manufacturing downturn accelerated in February as higher inflation increased costs across the production chain, suggesting the country’s recession continued to worsen in the first months of 2016.

Brazil’s economy is headed to its worst recession in more than a century, and will return to its pre-crisis size only in 2019, according to a Reuters poll.

However, growth in Mexico’s manufacturing sector accelerated in February to its fastest pace in nine months despite uneven U.S. demand for Mexican factory exports and tanking oil prices which have hit economic growth in Latin America’s no. 2 economy.

(Additional reporting by Nathaniel Taplin in Shanghai, Stanley White in Tokyo, Michael Nienaber in Berlin, William Schomberg in London, Silvio Cascione in Sao Paulo, Leah Schnurr in Ottawa, Chuck Mikolajcak in New York and Alexandra Alper in Mexico City; editing by Richard Borsuk and Clive McKeef)