U.S. Factory Inventory Decumulation Eases Somewhat

An easing rate of inventory decumulation is now playing a part in improving the level of factory sector output. During June, factory sector inventories fell 0.8%, the same as they did in May and that compares with 1.0%+ declines extending back to December. During the last three months the 10.5% annualized rate of inventory decumulation was down from 15.9% this past Winter. Much of that deceleration is due, however, to lower oil prices. Excluding oil, factory inventories fell at a 12.4% three-month rate that was just a slight moderation from earlier.

In fact, moderation in inventory decumulation rates is fairly spotty amongst various industries. Showing very modest accumulation were inventories of transportation equipment after declining at a three-month rate of 9.3% as recently as March. In addition, inventories of electrical equipment & appliances have fallen at a slightly reduced 19.3% rate and machinery inventories fell at a somewhat reduced 14.8% rate. Conversely, steep production cuts lowered furniture inventories at a 28.6% rate which near its quickest. Inventories of primary metals also fell at a fairly stable 32.4% pace and computer inventory decumulation accelerated to a 15.1% rate during the last three months.

The reason for the modest improvement in inventory destocking has been an improved shipment picture. Factory shipments actually rose 1.4% during June and that was the first monthly increase in nearly one year. Increases in the transportation area and in the machinery industries accounted for much of the gain. Most elsewhere the rates of decline in shipments moderated substantially.

Finally, new orders have improved. The 0.4% June increase was the fourth in the last five months. It reflected a sharp monthly rise both in primary metals (-46.5% y/y) and machinery (-26.0% y/y) orders as well as a slight increase in electrical equipment (-30.8% y/y) orders. Bookings of transportation equipment and furniture continued to fall.

The Manufacturers' Shipments, Inventories and Orders (MSIO) data is available in Haver's USECON database.

The international dimension of productivity and demand shocks in the U.S. economy from the Federal Reserve Bank of San Francisco can be found here.

Deterioration in the U.S. labor market continued last month, just not at the same rate as it had. The latest report from the payroll processor ADP, in their National Employment Report, indicated that private nonfarm payrolls fell 371,000 during July after a revised 463,000 June decline that was slightly shallower than reported initially. The latest reading was the eighteenth consecutive monthly decline, but the monthly change was the smallest since October of last year and roughly half the worst this past March. The three-month annualized rate of decline in payrolls also eased to 4.6% from its March peak of 7.1%.

ADP compiled the estimate from its database of individual companies' payroll information. Macroeconomic Advisers, LLC, the St. Louis economic consulting firm, developed the methodology for transforming the raw data into an economic indicator.

The recent sharp improvement in service sector activity stalled last month, but not by much. The Composite Index for the nonmanufacturing sector from the Institute for Supply Management (ISM) slipped to 46.4 from an unrevised reading of 47.0 during June. Though below the break-even level of 50, the latest figure still was near the highest level since September of last year. It fell short of Consensus expectations for a reading of 48.0. A level of the ISM index below 50 indicates declining activity. Since the series' inception in 1997 there has been a 60% correlation between the level of the business activity index in the nonmanufacturing sector and the Q/Q change in real GDP for the services and the construction sectors.

ISM surveys more than 370 purchasing managers in more than 62 industries including law firms, hospitals, government and retailers. The nonmanufacturing survey dates back to July 1997.

The July decline in the overall index was broad-based amongst the component series. The employment index slipped to 41.5 but that still was near the highest level since October. Thirteen percent of firms reported higher employment levels while 26% reported lower levels. Since the series' inception in 1997 there has been a 56% correlation between the level of the ISM nonmanufacturing employment index and the m/m change in payroll employment in the service-producing plus the construction industries.

The overall business activity index for the service sector also fell to 46.1, but remained near its highest level since September. And slipping just slightly to 48.1 was the new orders series, though it remained well above last November's low of 35.6. Perhaps suggesting that the level of slack in the service sector has diminished, the supplier delivery index rose to the highest level since January.

The decline in service sector activity brought with it an easing of price pressure. The sharp 12.4 point m/m decline in the price index to 41.3 returned it to the lowest level since April. It was the sharpest one-month decline since last November. A much reduced 13% of firms reported higher prices while a significantly increased 28% reported lower prices. Since its inception ten years ago, there has been a 60% correlation between the price index and the q/q change in the GDP services chain price index.

Beginning with the January 2008 Nonmanufacturing Report On Business®, the composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector. It is a composite index based on the diffusion indices of four of the indicators (business activity, new orders, employment and supplier deliveries) with equal weights. The latest report from the ISM can be found here.

The outplacement firm of Challenger, Grey & Christmas indicated that job cut announcements picked up last month. They rose to 97,373 versus the 74,373 jobs lost during June. Nevertheless, the figures remain well below this cycle's peak level of layoffs which occurred this past January when there were 241,749 cuts. Challenger also reported that announced hiring plans remained near the cycle low.

Announcement of job cuts in the chemical, energy, telecommunications, transportation and financial sectors remained strong. Shallower declines elsewhere were broad-based including the auto, consumer goods, computer, electronics, government, retail and services.

During the last ten years there has been a 67% (inverse) correlation between the three month moving average of announced job cuts and the three month change payroll employment. Job cut announcements differ from layoffs. Many are achieved through attrition, early retirement or just never occur.

The Challenger figures are available in Haver's SURVEYS database.

Sales fall -Retail sales fell in the Zone in June. While the growth rat of sales is not decaying further, retail sales volumes have been dropping at a pace of -2.5% to -2.2% over the past twelve months. The year-over-year pace for retail sales seems to have finally stopped falling, based on the trend in the chart above.

The Good and Ugly of it all - Europe has not suffered the same sort of spurt in the rate of unemployment that we have in the US. But its level of unemployment remains high and it has become even more elevated than it was. Consumer confidence has been hit and consumers, even though better supported in Europe than in the US by government programs, have cut back spending. Various programs in Europe to spur auto sales have been successful as the auto registration data show. So even as retail sales volumes shrink there is a bright spot in the retail sector even if it is one aided by government actions. It is always good to see that when given an incentive the consumer can and does respond – that is not always the case.

Underlying trends are improving - The PMI index from Markit on the service sector shows some improvement in the service sector but not much. Services has improved to a reading of 44.82 in may then they slipped to 44.65 in June and in July they have risen to 45.69. German showed a rather sharp rise in July along with Italy while France has back-slipped in July along with Spain. The UK, an EU member not an EMU member, has just posted its third reading in a row above 50 for services and is the only large EU country showing service sector expansion.

Trends that matter are more favorable - Since most of the jobs are in services and since jobs determine spending we can be encouraged about prospects for retail sales progress from these developments. Retail sales remain the back bone of GDP growth.