Monday Economic Report - November 21, 2016

A Publication of the National Association of Manufacturers

MONDAY ECONOMIC REPORTNAM/IndustryWeek Survey of Manufactures Business Outlook by Quarter, 2012-2014

In the post-election economic environment, financial markets have expressed a sense of cautious optimism. Equity markets have reached all-time highs, largely on a belief that the new administration will bring needed tax and regulatory reforms and a significant infrastructure package. At the same time, markets are also sensing that additional federal spending might bring about greater debt. Hence, the slumping bond market has sent yields up notably over the past week, even before the Federal Reserve likely raises interest rates in December. To best illustrate this shift, Freddie Mac reported that the average interest rate on a 30-year fixed-rate mortgage jumped from 3.57 percent on November 10 to 3.94 percent on November 17, and it should exceed 4 percent this week for the first time this year.

Likewise, the U.S. dollar has continued to strengthen, up nearly 23 percent since June 2014 against major currencies, and the U.S. dollar index hitting a 13-year high on Friday. While stronger economic growth would be entirely welcome for manufacturers, an appreciating dollar will continue to be a headwind for exports. Fortunately, core consumer and producer inflation remains modest for now, even as we have seen pricing pressures pick up somewhat in recent months.

Turning to economic releases out last week, there was a lot to be thankful for. First of all, retail sales rose strongly, up 0.8 percent in October and extending the 1.0 percent gain seen in September. This suggests that Americans have opened their pocketbooks in a big way in the autumn months, and it serves as a stark contrast to the more-cautious approach to purchases seen earlier in the year. More importantly, the accelerated pace of spending is good news for retailers — and by extension, manufacturers — headed into the all-important holiday season. The year-over-year data help to put an explanation point on this. Retail spending has risen 4.3 percent over the past 12 months, a healthy rebound from the 1.7 percent pace observed in March. It was also the fastest year-over-year rate of growth since November 2014, or nearly two years.

The housing data were also quite encouraging. New housing starts jumped 25.5 percent in October to the fastest monthly pace since August 2007. New residential construction increased from an annualized 1,054,000 in September to 1,323,000 in October. To be fair, both of those figures are outliers to the year-to-date average of 1,169,100, with September’s surprising fall in activity followed by the strong rebound in October. In addition, housing permits edged up from 1,225,000 to 1,229,000. That was the highest level since November 2015 and the second time so far in 2016 that permits have exceeded 1.2 million units at the annual rate. Since permits serve as a proxy of future activity, this data is heartening, and this is echoed by data from homebuilders, who are very upbeat in their sales outlook moving forward.

Meanwhile, the Federal Reserve said that manufacturing production expanded modestly for the second straight month, up 0.2 percent in October. With that said, manufacturers continue to grow at a much slower pace than desired, as production in the sector was down 0.2 percent on a year-over-year basis. Along those lines, manufacturing capacity utilization inched up from 74.8 percent to 74.9 percent, but that remained well below the 75.6 percent utilization rate seen one year ago. Beyond the national data, manufacturing activity expanded in all three of the regional Federal Reserve Bank surveys out last week, including Kansas City, New York and Philadelphia. Sentiment eased in both Kansas City and Philadelphia but rebounded in the Empire State Manufacturing Survey after three straight months of declines. All of the regional releases found weaknesses in the labor market, but more positively, respondents remained optimistic about demand and output in the months ahead.

We will get further evidence of possible stabilization in the manufacturing sector this week with a number of economic reports. This includes flash surveys of manufacturing activity for the United States and Eurozone from Markit, and the Richmond Federal Reserve Bank’s latest report will provide a regional perspective. We will be looking for stronger durable goods orders and shipments data in the October release, hopefully rebounding from some softness in both August and September. We will also see reports with new figures for consumer confidence, existing and new home sales and the Chicago Federal Reserve’s National Activity Index.

Chad Moutray, Ph.D., CBE
Chief Economist
National Association of Manufacturers

P.S. If you have not already done so, please take a moment to complete the latest NAM Manufacturers’ Outlook Survey. This 25-question survey will help us gauge how manufacturing sentiment has changed since September’s survey. The survey includes special questions on monetary policy, shareholder activism, infrastructure, supply chain management and your company's get-out-the-vote efforts. To complete the survey, click here. Responses are due by Monday, November 28, at 5:00 p.m. EST. As always, all responses are anonymous.

Economic Indicators

Last Week’s Indicators (Summaries Appear Below)

Monday, November 14
None

Tuesday, November 15
New York Fed Manufacturing Survey
Retail Sales

Wednesday, November 16
Industrial Production
NAHB Housing Market Index
Producer Price Index

Thursday, November 17
Consumer Price Index
Housing Starts and Permits
Philadelphia Fed Manufacturing Survey

Friday, November 18
Conference Board Leading Indicators
Kansas City Fed Manufacturing Survey
State Employment Report

This Week’s Indicators

Monday, November 21
Chicago Fed National Activity Index

Tuesday, November 22
Existing Home Sales
Richmond Fed Manufacturing Survey

Wednesday, November 23
Durable Goods Orders and Shipments
Markit Flash PMIs for the U.S., Eurozone
New Home Sales
University of Michigan Consumer Sentiment (Revision)

Thursday, November 24
THANKSGIVING DAY HOLIDAY

Friday, November 25
None

Summaries for Last Week’s Economic Indicators

Conference Board Leading Indicators
The Conference Board’s Leading Economic Index (LEI) increased 0.1 percent in October, slowing a little but extending the 0.2 percent gain seen in September. Over the past six months, the LEI rose just 0.7 percent, illustrating a sluggish pace of growth for the U.S. economy this year. Manufacturing provided a slight drag on the LEI, with soft new orders growth; yet, there was a positive contribution from a longer workweek for production workers. Building permits, the interest rate spread and overall lending conditions were other contributors to growth in the headline number. At the same time, average weekly unemployment claims, consumer confidence and the S&P 500 somewhat offset those positives in this month’s LEI report.

Meanwhile, the Coincident Economic Index (CEI), which assesses current conditions, also rose 0.1 percent in October. All four components of the CEI — industrial production, nonfarm payrolls, personal income and manufacturing and trade sales — were positive contributors to the index in October. For its part, manufacturing output increased for the second straight month.

Consumer Prices Increased for the Third Straight Month, Lifted by Higher Energy Costs
The Bureau of Labor Statistics said that consumer prices rose 0.4 percent in October, extending the 0.2 percent and 0.3 percent gains seen in August and September, respectively. It was also the fastest pace of monthly price growth since April. The jump in consumer inflation in October stemmed largely from higher energy prices, up 3.5 percent, with gasoline costs up 7.0 percent. Still, increases in energy prices in September and October followed declines in both July and August, and energy costs were up just 0.1 percent year over year. In addition, food prices were unchanged for the fourth straight month. Over the past 12 months, food prices have edged lower, down 0.4 percent since October 2015. Overall, the consumer price index increased 1.6 percent year over year in October, a two-year high and up from 0.9 percent in July.

Core consumer prices also moved higher, up 0.1 percent, in October. There were higher prices for apparel, medical care commodities, new vehicles and shelter, but lower costs for transportation services and used vehicles. Excluding food and energy costs, consumer prices have risen 2.2 percent since October 2015, essentially the same year-over-year rate seen for all of 2016 so far. Yet, even though core consumer price inflation has exceeded the Federal Reserve’s stated goal of 2 percent for 12 consecutive months, overall price pressures remain modest and under control for now.

Housing Starts and Permits
The Census Bureau and the U.S. Department of Housing and Urban Development said that new housing starts jumped 25.5 percent in October to the fastest monthly pace since August 2007. New residential construction increased from an annualized 1,054,000 in September to 1,323,000 in October. To be fair, both of those figures are outliers to the year-to-date average of 1,169,100, with September’s surprising fall in activity followed by the strong rebound in October. Yet, the upward movement in this latest report is encouraging. Indeed, both single-family (up from 785,000 to 869,000) and multifamily (up from 269,000 to 454,000) made healthy gains in October, with single-family construction starts reaching a nine-year high. While I would expect a pullback in the November data to something closer to trend, housing starts should exceed 1.2 million by year’s end, which is positive.

The housing permits data were promising, as well, with permitting for new residential units up from 1,225,000 to 1,229,000. That was the highest level since November 2015 and the second time so far in 2016 that permits have exceeded 1.2 million units at the annual rate. Since permits serve as a proxy of future activity, this data is heartening. Single-family permitting increased from 742,000 to 762,000, its highest level since November 2007. In contrast, multifamily activity dropped from 483,000 to 467,000 but remained elevated, up from a year-to-date low of 352,000 in March. Over the course of the past 12 months, housing permits have risen 4.6 percent, with single-family and multifamily activity up 5.1 percent and 3.8 percent year over year, respectively.

Industrial Production
The Federal Reserve said that manufacturing production expanded modestly for the second straight month. Output in the sector was up 0.2 percent in October, which was the same as seen in September and consistent with consensus expectations. Despite the increase, manufacturers continue to grow at a much slower pace than desired. Along those lines, manufacturing production was down 0.2 percent on a year-over-year basis. Manufacturers have struggled to increase demand over the past couple years, with a strong dollar and global headwinds dampening overall activity. Indeed, manufacturing capacity utilization inched up from 74.8 percent to 74.9 percent, but that remained well below the 75.6 percent utilization rate seen one year ago.

Looking more closely at the October manufacturing data, durable goods production increased by 0.4 percent, but output from nondurable goods firms was unchanged. The largest increases for the month were in the primary metals (up 1.6 percent), computer and electronic products (up 1.2 percent), wood products (up 1.0 percent), motor vehicles and parts (up 0.9 percent) and furniture and related products (up 0.7 percent) sectors, among others. At the same time, there were a number of sectors with declining output, including miscellaneous durable goods (down 1.4 percent), paper (down 0.8 percent), apparel and leather (down 0.5 percent) and aerospace and miscellaneous transportation equipment (down 0.4 percent).

Meanwhile, total industrial production was flat in October, improving after declining in both August and September. In addition to manufacturing, mining output was also higher, up 2.1 percent; whereas, utilities production was off for the second straight month, down 2.6 percent. Over the past 12 months, mining and utilities production have decreased 7.0 percent and 0.1 percent. Overall, total industrial production fell 0.9 percent year over year, remaining in negative for the 14th straight month largely on the drag from mining activity. Capacity utilization edged lower, down from 75.4 percent to 75.3. One year ago, the utilization rate was 76.3 percent.

Kansas City Fed: Manufacturing Activity Slowed in November but Continued to Expand Slightly
The Kansas City Federal Reserve Bank said that manufacturing activity slowed in November but continued to expand ever so slightly. The composite index of general business conditions declined from 6 in October to 1 in November; yet, it was also the third straight month with this measure positive after two years of struggles. Indeed, manufacturers in the district have faced tremendous challenges due to global headwinds and reduced commodity prices, especially for crude oil. The underlying data in November mirrored the headline figure, with easing expansions for new orders (down from 14 to 6), production (down from 18 to 9) and shipments (down from 20 to 7). Export growth (down from 3 to zero) was stagnant in November after slightly improving in October for the first time since January.

The labor market data were mixed. The index for employment (down from 7 to 1) decreased but stayed in positive territory. This would indicate that manufacturers were quite cautious in their hiring for the month, even as employment continued to expand a bit on net. At the same time, the average workweek (down from 8 to -8) narrowed for the first time in six months. Looking at the sample comments, the skills gap was once again mentioned. As one respondent put it, “Finding quality applicants is our biggest restraint in hiring new employees. Raised wages to attract employees, but this has lowered our already slim profit margin.”

Meanwhile, manufacturers continue to be somewhat upbeat about the next six months, albeit with a slight pullback from the prior release. The forward-looking composite index dropped from 18 to 12. It has now been positive in each month since April. At least 44 percent of those completing the survey expect increased orders, production and shipments in the months ahead, with one-quarter hopeful for more hiring and 30 percent seeing additional capital spending. One encouraging sign in this report was exports (up from 1 to 6), which are seen growing modestly moving forward.

NAHB Housing Market Index
The National Association of Home Builders and Wells Fargo reported that the Housing Market Index (HMI) was unchanged in November at 63. It was the third straight month (and the fourth in the past six months) that the HMI has exceeded 60, which would indicate relatively strong optimism among homebuilders in their economic outlook. Index values greater than 50 indicate builders are more confident in their outlook than not, with numbers greater than 60 suggesting strong expectations for activity. Respondents were mostly upbeat in every region, with improvements noted in November in both the Northeast and the West.

Builders continue to report increased confidence about single-family home sales over the next six months. With that said, the index for expected sales dropped from 71 in October to 69 in November.

New York Fed Manufacturing Survey
The Empire State Manufacturing Survey said that manufacturing activity expanded somewhat in November, rebounding after three straight months of declines. The composite index of general business conditions increased from -6.8 in October to 1.5 in November. The stabilization in activity in the New York Federal Reserve Bank’s district stemmed from improvements in new orders (up from -5.6 to 3.1) and shipments (up from -0.6 to 8.5). Nearly one-third of respondents reported higher sales in November, up from 26.7 percent in October. That was an encouraging sign for a sector that has been significantly challenged over the past two years. Yet, it was not all good news. Employment continued to lag behind, with indices for the number of employees (down from -4.7 to -10.9) and the average employee workweek (down from -10.4 to -10.9) still in strong contraction territory. That suggests that firms remain quite cautious for now, even with better demand figures.

Despite some lingering weaknesses in the labor market, manufacturers in the New York region remained mostly upbeat about the next six months, albeit with some softening in this report. The forward-looking composite index decreased from 36.0 to 29.9, even as it remained quite elevated. At least 42 percent of those completing the survey anticipate stronger growth for new orders and shipments in the months ahead, with one-quarter expecting increased hiring and capital spending. Technology spending is seen growing more modestly; whereas, inventories should continue to edge lower.

Philly Fed: Manufacturing Activity Expanded for the Fifth Time in the Past Six Months
The Federal Reserve Bank of Philadelphia said that manufacturing activity expanded for the fifth time in the past six months. The composite index of general business activity declined from 9.7 in October to 7.6 in November. This marks notable improvement for manufacturers after weaknesses last year and in the spring months. Despite the easing in this month’s headline number, both new orders (up from 16.3 to 18.6) and shipments (up from 15.3 to 19.5) were higher in November. The percentage of respondents saying that new orders were lower for the month declined from 24.1 percent in October to 17.7 percent in November, with the largest shift among those saying that there was no change in sales, up from 33.7 percent to 45.9 percent.

The labor market variables were mixed in this report. The decline in hiring (up from -4.0 to -2.6) slowed in November but remained negative. It was the 11th straight month with contracting levels of employment in the sector in the Philly Fed district.

Moving forward, manufacturers in the Philadelphia Fed district continued to be cautiously optimistic, albeit with some easing in confidence in the latest survey. The forward-looking index declined from 32.6 to 29.3, but remained quite elevated. More than 42 percent of those completing the survey predict higher levels of new orders and shipments over the next six months, with one-quarter expecting more hiring and capital spending.

Producer Price Index
Producer prices were unchanged in October, slowing after a rebound in the September data. The flat growth in the headline number stemmed from reduced producer prices for final demand services, down 0.3 percent. In contrast, producer prices for final demand goods increased 0.4 percent in October, extending the 0.7 percent gain seen in September. Higher inflation for goods came largely from a jump in energy costs, up 2.5 percent; whereas, food prices were off by 0.8 percent. Food costs have been on a downward trend over the longer-term, down 3.5 percent over the past 12 months. On the other hand, energy prices have edged up 0.2 percent year over year.

Overall, producer prices for final demand goods and services have increased 0.9 percent since October 2015, its highest year-over-year rate in 22 months. Excluding food and energy costs, core inflation edged down 0.1 percent in this report. Core producer prices grew 1.2 percent year-over-year in October, essentially unchanged from the prior report. The year-over-year pace of core inflation for producers have moved gradually higher over the course of 2016 so far, up from 0.2 percent in December.

The bottom line is that inflationary pressures continue to remain mostly in check, even with upward movement in the trend line. Core inflation on a year-over-year basis has remained below the Federal Reserve’s stated goal of 2 percent for 29 straight months (since May 2014). Prices are likely to accelerate somewhat moving forward, likely exceeding the two percent threshold in the coming months. Nonetheless, the Federal Open Market Committee continues be mostly accommodative in its monetary policy statements, largely on a desire to improve economic growth with little concern for inflation, at least for now.

Retail Sales
The Census Bureau said that retail sales rose strongly, up 0.8 percent in October and extending the 1.0 percent gain seen in September. This suggests that Americans have opened their pocketbooks in a big way in the autumn months, and it serves as a stark contrast to the more-cautious approach to purchases seen earlier in the year. More importantly, the accelerated pace of spending is good news for retailers – and by extension, manufacturers —headed into the all-important holiday season. The year-over-year data help to put an explanation point on this. Retail spending has risen 4.3 percent over the past 12 months, a healthy rebound from the 1.7 percent pace observed in March. It was also the fastest year-over-year rate of growth since November 2014, or nearly two years.

The underlying October data were mostly higher. Retail segments with the fastest growth included miscellaneous store retailers (up 2.4 percent), gasoline stations (up 2.2 percent), non-store retailers (up 1.5 percent), sporting goods and hobby stores (up 1.3 percent) and motor vehicle and parts dealers (up 1.1 percent), among others. In contrast, there were just two major categories with reduced sales in October: department stores (down 0.7 percent) and food services and drinking places (down 0.7 percent).

Since October 2015, the largest gains in retail spending were for non-store retailers (up 12.9 percent), miscellaneous store retailers (up 9.5 percent), health and personal care stores (up 8.3 percent), building material and supplies (up 6.5 percent) and motor vehicle and parts dealers (up 5.4 percent).

State Employment Report
Ohio created the most net new manufacturing jobs in October, according to the Bureau of Labor Statistics, adding 3,500 workers for the month. Kentucky (up 2,400), Michigan (up 2,400), Wisconsin (up 2,400), Texas (up 2,000) and Illinois (up 1,600) also topped the list of manufacturing employment gains in last month. In addition, Florida topped the list for the greatest job gains over the past 12 months, with manufacturing employment in the state up 14,300 since October 2015. Other states with the fastest manufacturing job growth year over year included Michigan (up 11,100), Tennessee (up 6,900), Utah (up 3,800) and Wisconsin (up 3,200).

The national unemployment rate declined from 5.0 percent in September to 4.9 percent in October. The lowest unemployment rate in the country was seen in both New Hampshire and South Dakota, at 2.8 percent. A number of states were not far behind, including North Dakota (3.0 percent), Hawaii (3.2 percent), Utah (3.2 percent), Massachusetts (3.3 percent), Nebraska (3.3 percent) and Vermont (3.3 percent). In contrast, Alaska (6.8 percent), New Mexico (6.7 percent), Louisiana (6.3 percent) and the District of Columbia (6.1 percent) had the highest unemployment rates.

Questions or Comments?

Contact Chief Economist Chad Moutray at cmoutray@nam.org.

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