Recent indicators hint that the economy might have worked its way past a “soft patch.”
The unemployment rate dropped a tenth of a percent to 5.4% as nonfarm payroll expanded by 144,000 for last month, the Bureau of Labor Statistics (BLS) said today.
The manufacturing and construction sectors, which drive freight volumes, are showing strength as the segments added 22,000 and 15,000 jobs, respectively. The truck transportation sector shed an unrevised 700 jobs.
Hurricane Charlie’s full effect on jobs may yet crop up when the September report is published. “Our examination of the survey data suggests that there were no discernable weather-related effects on national payroll employment as measured by the establishment survey,” BLS stated in a release. “This was likely due to the fact that the storm hit late in the reporting period for most of our survey respondents.”
Consumer spending shot up in July, according to a separate report released by the Bureau of Economic Analysis (BEA). Personal disposable income, or combined national income less taxes, increased 0.1% to $11 billion. However, relatively few jobs were added in proportion to spending as disposable personal income, or national income less taxes, grew 0.1% to $11 billion.
“That [level of consumer spending] is not sustainable,” said Chris Brady, president of Commercial Motor Vehicle Consulting (CMVC). “That’s because households have relatively high debt levels. What this is pointing to is moderate growth in consumer spending.”
Manufacturing Growth Continues
In addition to solid employment gains, the manufacturing sector is showing strength across the board.
Order backlogs are continuing to expand as unfilled orders were up 1.2% to $533.6 billion in July, the U.S. Census Bureau said. Backlogs have grown in 11 of the past 12 months.
Inventories increased 0.8% to $458 billion, and inventories-to-shipments ratio was 1.23. “That says even though inventories are up, it’s relatively lean,” CMVC’s Brady said. “What’s being shipped out of the factory and what’s in stock remains lean despite higher stock levels.”
Because of this, freight volumes should continue to grow, Brady said. “Basically I think freight volumes are going to grow at a slightly higher rate than the general economy,” he explained. “That’s due to stocks being lean throughout the supply chain. Additionally the exports sector is expanding. Exports affect industrial production, which drives line-haul trucking.”
Despite the all-around good indicators for freight so far, sustainable growth will ultimately depend on consumer spending growth— which may slow in the future. “If there’s a slowdown in consumer and business spending, what’s considered to be lean stocks could become excessive,” Brady said. However, so far there is little indication that there will be a negative consumer-spending trend yet.
New orders for manufactured goods in July increased a brisk 1.3% to $369.6 billion, following a strong 1.2% June increase.
BLS in a separate report revised the second-quarter productivity data. Manufacturing productivity was revised downward to a 6.9% increase, from an advance estimate of 7.5%-- still a very favorable indicator compared to a 2.5% increase in the nonfarm business sector.
Fuel Costs Applying the Economic Brakes
“I think the high energy prices have sapped some of the strength from the economy,” Brady said. “This affects personal spending, and industries that are a consumer off high energy products are being squeezed,” he said. “They probably aren’t able to pass on costs fully, so they may be squeezing margins and this would affect business spending.”
Fortunately, in the case of the manufacturing sector, the stout productivity gains appear to mitigate this. “It’s good to offset high energy prices to keep profit margins stable,” Brady said. “Even with high fuel prices, the economy continues to generate jobs.”
