US manufacturing struggles but rising income boosts economic outlook

A gauge of US business investment plans fell in November and the prior month’s increase was revised sharply lower as the drag on manufacturing from a strong dollar and spending cuts in the energy sector showed little sign of abating.

But the outlook for the economy remains encouraging, with other data on Wednesday showing personal income increased for an eighth straight month in November, which should help to support consumer spending next year.

“The gain in income should prove a tailwind to fourth-quarter GDP growth as consumption remains the most prominent driver of domestic growth activity,” said Gennadiy Goldberg, an economist at TD Securities in New York.

The Commerce Department said non-defence capital goods orders excluding aircraft, a closely watched proxy for business spending plans, dropped 0.4 per cent last month. October’s increase in orders for these so-called core capital goods was revised down to 0.6 percent from 1.3 per cent.

Manufacturing, which accounts for 12 per cent of the economy, has also been hit by efforts by businesses to reduce an inventory bloat and sluggish global demand, which has curtailed new orders growth.

The dollar has gained almost 20 per cent against the currencies of the United States’ main trading partners over the last 18 months.

Plunging crude oil prices, which on Monday plumbed their lowest levels since 2004, have put pressure on oilfield services firms like Schlumberger and Halliburton, forcing them to slash capital spending budgets.

A survey early this month showed manufacturing contracted in November for the first time in three years. Economists polled by Reuters had forecast core capital goods orders dipping 0.1 per cent.

Core capital goods shipments fell 0.5 per cent last month after October’s downwardly revised 1.0 per cent drop.

Shipments of these goods are used to calculate equipment spending in the government’s gross domestic product measurement. They were previously reported to have declined 0.5 per cent in October.

In another report, the Commerce Department said income increased 0.3 percent last month after gaining 0.4 per cent in October. Wages and salaries advanced 0.5 per cent, adding to a 0.6 per cent gain in October.

Prices of US government debt slightly pared losses after the data, while the dollar pared gains against a basket of currencies. US stock index futures were trading higher.

A tightening labour market, marked by an unemployment rate that is in a range some Federal Reserve officials consider consistent with full employment, is starting to lift wages.

That in turn could gradually push inflation toward the Fed’s 2 per cent target and enable it to further raise interest rates next year. The US central bank hiked its benchmark overnight interest rate last week by 25 basis points to between 0.25 per cent and 0.50 per cent, the first increase since mid-2006.

Last month, a price index for consumer spending was unchanged after nudging up 0.1 per cent in October. In the 12 months through November, the personal consumption expenditures(PCE) price index was up 0.4 per cent, the largest increase since December, after rising 0.2 per cent in October.

Excluding food and energy, prices nudged up 0.1 per cent after being unchanged in October. The so-called core PCE price index rose 1.3 per cent in the 12 months through November, for the 11th straight month.

The Commerce Department’s Bureau of Economic Analysis inadvertently released part of the consumption portion of its report late on Tuesday. It showed consumer spending increased 0.3 per cent last month after being unchanged in October.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose 0.3 per cent when adjusted for inflation after holding steady in October.

Reuters