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Drop in U.S. Factory Hours Is Overstated, Economist Carson Says

The drop in factory hours in June as reported by the Labor Department in its employment data last week probably overstated any slowdown in U.S. manufacturing, said economist Joe Carson.

The decline in the factory workweek, to 41 hours last month from 41.5 hours, was the biggest drop since December 2000, according to July 2 data from Labor Department on non-supervisory workers. Hourly earnings at manufacturers dropped 0.1 percent.

The figures stand in contrast to the 9,000 gain in manufacturing payrolls, the sixth straight increase in an industry that spearheaded the U.S. economic recovery. Carson said because factory workers aren’t counted as working overtime on holidays, and Memorial Day coincided with the period the government examines in putting together its jobs report, it’s possible the drop in hours was exaggerated.

“You can definitely see the potential impact from the holiday on the overtime hours,” Carson, director of economic research at AllianceBernstein LP in New York, said in an interview. “It doesn’t wipe out the decline but it makes it much smaller than was reported.”

Factory employees have been working an average 4 hours of overtime a week, or 0.8 hours a day, Carson said. Assuming no company changed its work schedule and excluding the effects of Memorial Day on overtime, factory hours worked would have averaged 41.5 in the first two weeks of June, before seasonal adjustment. That would have left the figure little changed from May on an adjusted basis.

Last Time in 2004

Bureau of Labor Statistics economist Steve Mance confirmed the government doesn’t include the Memorial Day holiday in its seasonal adjustment for June. That is because the odds of Memorial Day occurring during a two-week period covered by the June payroll report are slim, Mance said. The last time it occurred was 2004.

“It’s unusual to have a large drop in hours with an increase in employment,” Mance said.

Manufacturing has been a source of strength for the economy since last year. Recent figures have shown that the pace of growth in the industry is slowing to a more sustainable pace. The Institute for Supply Management’s factory survey for June fell to 56.2, lower than economists had forecast.

The drop in factory hours suggests industrial production probably declined, Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, said in a note to clients July 2. The Federal Reserve uses factory hours when calculating the change for manufacturing in the central bank’s industrial production report. The figures for output at factories, mines and utilities will be reported on July 15.

There was nothing in the June supply managers’ report “that would give you an indication there was a strong pullback in orders or production during the month, and that was what hours worked was suggesting,” Carson said.

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