Monday Economic Report - April 3, 2017

A Publication of the National Association of Manufacturers

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

In the latest NAM Manufacturers’ Outlook Survey, which was released in conjunction with a listening session at the White House with President Donald Trump, 93.3 percent of manufacturers are either somewhat or very positive about their own company’s outlook, up from 56.6 percent one year ago and 77.8 percent in December. That represents a new all-time high in the survey’s 20-year history. As a result, the NAM Manufacturers’ Outlook Index also soared to a new high, up from 53.3 in December to 63.7 in this report. It was the second straight quarter where the outlook exceeded its historical average, which would equate to 50 in the index, and there were strong gains in confidence for all firm sizes.

Respondents are predicting sales growth of 4.9 percent on average over the next 12 months, its fastest pace since the second quarter of 2011 and a healthy rebound from the more paltry 0.4 percent gain forecasted at this time last year. The production data were similar, with 4.8 percent growth in the coming year, up from 3.0 percent in the prior survey. Firms are less cautious about hiring and capital spending than they have been in prior quarters. Business leaders in the sector are predicting 2.3 percent and 2.1 percent growth in full-time employment and capital investments, respectively, in this survey. Both figures were negative in the first quarter of 2016, so we have seen a nice turnaround since then. In terms of top challenges, an unfavorable business climate fell to third place on the list, with rising health insurance costs and the ability to attract and retain a quality workforce ranking just above it as concerns.

Other manufacturing reports also indicate that activity is moving in the right direction, especially given the headwinds in the sector over the past two years. For instance, surveys from the Dallas and Richmond Federal Reserve Banks continued to reflect expansion in the industry, building on progress in recent months. The Richmond headline number rose to levels not seen since April 2010, with growth in demand at its briskest pace in nearly seven years. In each case, the underlying data provide some encouragement moving forward, with manufacturing leaders very positive about the next six months.

Perceptions have also been higher for average Americans. For instance, the Consumer Confidence Index from the Conference Board increased to its highest level since December 2000 in March. This continued to represent a mostly positive assessment of the economy relative to attitudes just a few months ago, with better expectations about future employment and income. Likewise, the Index of Consumer Sentiment from the University of Michigan and Thomson Reuters continues to indicate improved confidence over the past four months. With that said, Richard Curtin, the Surveys of Consumers chief economist, said that confidence has remained sharply divided along partisan lines since the election. Overall, the data are consistent with 2.7 percent growth in consumer spending in 2017, according to the University of Michigan release.

Despite the burst in consumer optimism, personal spending increased 0.1 percent in February, slowing for the second straight month. Reduced spending on goods helped to explain much of this easing, with slight declines for both durable and nondurable goods. Even with somewhat weaker figures in February, Americans have been more willing to open their pocketbooks in recent months relative to a more cautious approach seen at this time last year. Along those lines, personal spending grew 4.8 percent year-over-year in this release, down from 5.0 percent in January but up from 3.4 percent in February 2016. With the easing in spending, the saving rate edged higher, up from 5.4 percent in January to 5.6 percent in February. At the same time, personal income grew 0.4 percent in February, with year-over-year growth of 4.6 percent.

Along those lines, strong consumer and business spending helped to prop up the U.S. economy in the fourth quarter, according to the most recently revised data. Real GDP grew 2.1 percent at the annual rate in the fourth quarter, up from earlier estimates of 1.9 percent. The upward revision stemmed from better data on private inventories and spending on nondurable goods and services. This was somewhat offset, however, by a larger decline than previously reported from net exports and slightly weaker contributions from nonresidential fixed investments. Indeed, net exports subtracted 1.81 percentage points from the headline number, highlighting once again the tremendous challenges that we have seen in growing international demand over the past two years.

With that said, according to advance statistics, the goods trade deficit declined from $68.84 billion in January, its highest level since March 2015, to $64.79 billion in February. The reduction in the goods trade deficit in February was largely the result of a drop in goods imports for the month. Final data will be released April 4. Note that the U.S. trade deficit is also assisted by a surplus in service-sector activity, which was $21.19 billion in January. 

Manufacturing production has now expanded for six straight months, and we are hopeful that new data out this week will show continued growth. Today we will get March data on manufacturing activity from the Institute for Supply Management; sentiment expanded at its fastest rate since August 2014 in the prior release. The other big highlight this week will be the latest employment figures; with new orders and output stronger, this should lead to more jobs. Manufacturers have created 57,000 net new jobs during the past three months, and we will be looking for additional job creation moving forward. Other data releases this week include new numbers for construction spending, factory orders and shipments and international trade.

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

Economic Indicators

Last Week’s Indicators (Summaries Appear Below)

Monday, March 27
Dallas Fed Manufacturing Survey

Tuesday, March 28
Conference Board Consumer Confidence
Internal Trade in Goods
Richmond Fed Manufacturing Survey

Wednesday, March 29
None

Thursday, March 30
Gross Domestic Product (Second Revision)

Friday, March 31
NAM Manufacturers' Outlook Survey
Personal Spending and Income
University of Michigan Consumer Sentiment (Revised)

This Week’s Indicators

Monday, April 3
Construction Spending
ISM Manufacturing PMI

Tuesday, April 4
Factory Orders and Shipments
International Trade Report

Wednesday, April 5
ADP National Employment Report

Thursday, April 6
None

Friday, April 7
BLS National Employment Report

Summaries for Last Week’s Economic Indicators

Conference Board Consumer Confidence
The Conference Board reported that consumer confidence rose again, with sentiment now at its highest level since December 2000. The Consumer Confidence Index increased from 116.1 in February to 125.6 in March. This continued to represent a mostly positive assessment of the economy relative to perceptions just a few months ago. For instance, the index stood at 96.7 as recently as July 2016. Better perceptions about both current (up from 134.4 to 143.1) and future (up from 103.9 to 113.8) conditions in March boosted the headline index. The acceleration in confidence in this report came from a pickup in those respondents saying business conditions were “good,” up from 28.3 percent to 32.2 percent. There was also a slight easing in those suggesting conditions were “bad,” down from 13.4 percent to 12.9 percent. As such, Americans were mostly upbeat in their outlook.

Along those lines, the percentage of respondents expecting their incomes to increase edged up from 19.2 percent to 21.5 percent, with the percentage feeling their incomes would fall in the months ahead dropping from 8.1 percent to 7.0 percent. This view extended to the labor market. In this release, those expecting more jobs moving forward rose from 20.9 percent to 24.8 percent, whereas those feeling there would be less jobs dropped from 13.6 percent to 12.2 percent.

Dallas Fed Manufacturing Survey
The Dallas Federal Reserve Bank reported that manufacturing activity expanded in March for the sixth straight month, even as it pulled back somewhat from its fastest rate since April 2006. The composite index of general business conditions decreased from 24.5 in February to 16.9 in March. While the headline number eased a bit, the composite index has averaged 18.7 over the past five reports, which would indicate significant progress from contracting conditions as recently as September. The recent gains in business confidence can be attributed largely to better energy commodity prices and from a post-election boost in optimism, especially as it relates to expectations regarding pro-growth policies.

Key measures were mixed but remained mostly encouraging. Production (up from 16.7 to 18.6) and hours worked (up from 7.7 to 8.7) both accelerated in March, with the output index at its highest point since July 2014. At the same time, a number of figures eased in this release while remaining positive overall, including new orders (down from 11.6 to 9.5), capacity utilization (down from 14.7 to 13.2), shipments (down from 12.2 to 6.5), employment (down from 9.6 to 8.4) and capital expenditures (down from 14.4 to 12.7). The bottom line, however, was that demand grew for the fifth consecutive month, with 27.5 percent of respondents citing increased new orders and 18.0 percent noting declines.

Moving forward, manufacturing leaders remained very positive about the next six months albeit with some easing from the prior report. The forward-looking measure declined from 43.7 in January (a 12-year high) to 37.0 in February to 36.3 in March. Yet, firms remained optimistic, with more than half of respondents expecting higher orders, production and shipments in the coming months. Moreover, 36.1 percent and 29.9 percent anticipate higher employment and capital spending, respectively. One potential challenge, however, is the pickup in pricing pressures for raw materials (up from 36.4 to 42.5), its quickest pace since August 2014.

Gross Domestic Product (Second Revision)
The Bureau of Economic Analysis reported that the U.S. economy grew 2.1 percent at the annual rate in the fourth quarter, up from earlier estimates of 1.9 percent. The upward revision stemmed from better data on private inventories and spending on nondurable goods and services. This was somewhat offset, however, by a larger decline than previously reported from net exports and slightly weaker contributions from nonresidential fixed investments.

Nonetheless, the underlying trends were mostly the same. Modest growth in consumer and government spending buoyed real GDP growth, but net exports served as a drag on the headline number. Overall, the U.S. economy expanded 1.6 percent in 2016, down from its 2.1 percent post-recessionary average. Moving forward, I would expect 2.6 percent growth in real GDP in 2017—a figure that will likely be assisted by pro-growth policies emanating from Washington.

Consumer and business spending were bright spots, and if those were the only two elements of GDP, fourth-quarter growth would have been roughly 3.9 percent. Personal consumption expenditures rose by an annualized 3.5 percent in the fourth quarter, with a 6.0 percent gain in goods spending. Nonresidential fixed investment rose 0.9 percent, with equipment spending positive for the first time since the third quarter of 2015. Similarly, residential spending increased 9.6 percent, reversing two quarters of declines. The change in private inventories alone added 1.01 percentage points to real GDP in the quarter, providing a positive contribution for the second straight release.

Finally, several global headwinds have challenged manufacturers over much of the past two years, including a rapid appreciation in the U.S. dollar as well as economic softness to many key markets. Along those lines, the contribution to GDP from net exports slipped back into negative territory in the fourth quarter for the first time in 2016, subtracting 1.81 percentage points to the headline number. Goods imports jumped 10.9 percent in this release, with goods exports off 6.7 percent.

International Trade in Goods (Preliminary)
The Census Bureau released advance statistics on the international trade in goods. Specifically, the goods trade deficit declined from $68.84 billion in January, its highest level since March 2015, to $64.79 billion in February in preliminary data. February’s pace remained above the $41.71 billion average for all of 2016. The reduction in the goods trade deficit in February was largely the result of a drop in goods imports (down from $195.78 billion to $191.60 billion), with goods exports (down from $126.94 billion to $126.81 billion) changing little. Final data will be released April 4. Note that the U.S. trade deficit is also assisted by a surplus in service-sector activity, which was $21.19 billion in January. 

In February, the largest shifts included goods imports, as noted, especially for consumer goods (down $3.03 billion) and automotive vehicles (down $2.64 billion). Increased imports for industrial supplies (up $1.26 billion), foods, feeds and beverages (up $276 million) and capital goods (up $217 million) were enough to somewhat offset those declines. In contrast, goods exports were mostly mixed. Higher export levels for other goods (up $769 million) and consumer goods (up $594 million) were more than counterbalanced by decreases for foods, feeds and beverages (down $747 million), capital goods (down $599 million) and automotive vehicles (down $146 million).

NAM Manufacturers’ Outlook Survey
In the latest NAM Manufacturers’ Outlook Survey, 93.3 percent of manufacturers are either somewhat or very positive about their own company’s outlook, up from 56.6 percent one year ago and 77.8 percent in December. That represents a new all-time high in the survey’s 20-year history. As a result, the NAM Manufacturers’ Outlook Index also soared to a new high, up from 53.3 in December to 63.7 in this report. It was the second straight quarter where the outlook exceeded its historical average, which would equate to 50 in the index, and there were strong gains in confidence for all firm sizes.

Respondents are predicting sales growth of 4.9 percent on average over the next 12 months, its fastest pace since the second quarter of 2011 and a healthy rebound from the more paltry 0.4 percent gain forecasted at this time last year. The production data were similar, with 4.8 percent growth in the coming year, up from 3.0 percent in the prior survey. Firms are less cautious about hiring and capital spending than they have been in prior quarters. Business leaders in the sector are predicting 2.3 percent and 2.1 percent growth in full-time employment and capital investments, respectively, in this survey. Both figures were negative in the first quarter of 2016, so we have seen a nice turnaround since then.

Rising health insurance costs were once again cited as a major concern, noted by 65.1 percent of manufacturers completing the survey as their top business challenge. They see these costs increasing 7.2 percent over the next year. Respondents also listed attracting and retaining a quality workforce as a top worry, with 63.5 percent noting it as a primary challenge. Meanwhile, an unfavorable business climate fell to third place on this list, cited by 58.2 percent, but down from 71.2 percent in December. To the extent that it has dropped on the list, it is likely because manufacturers are hopeful that the new administration will continue to provide regulatory relief and make progress on regulatory and tax reform.

Personal Spending and Income
The Bureau of Economic Analysis reported that personal spending slowed in February, even as it expanded for the 25th straight month. Personal consumption expenditures rose 0.1 percent in February, down from gains of 0.6 percent and 0.2 percent in December and January, respectively. Reduced spending on goods helped to explain much of this easing, with slight declines for both durable and nondurable goods. Despite the somewhat weaker figures in February, Americans have been more willing to open their pocketbooks in recent months relative to a more cautious approach seen at this time last year. Along those lines, personal spending grew 4.8 percent year-over-year in this release, down from 5.0 percent in January but up from 3.4 percent in February 2016. With the easing in spending, the saving rate edged higher, up from 5.4 percent in January to 5.6 percent in February.

Meanwhile, personal income grew 0.4 percent in February, just shy of the 0.5 percent rate in January, which was its fastest rate since July. On a year-over-year basis, personal incomes have continued to increase at a decent clip, up 4.6 percent since February 2016, a level not seen since May 2015. In a similar manner, total manufacturing wages and salaries increased from $847.4 billion in January to $861.3 billion in February. This continues a steady upward trend for manufacturing compensation, with wages and salaries in the sector averaging $806.7 billion and $829.4 billion in 2015 and 2016, respectively.

In other news, the personal consumption expenditure (PCE) deflator edged up 0.1 percent in February, down from its fastest monthly gain in nearly four years in January (0.4 percent). The deceleration in this report came mostly from reduced energy costs, down 1.3 percent. Excluding food and energy, core inflation also slowed from a 0.3 percent gain in January to being up 0.2 percent in February. Nonetheless, the PCE deflator rose 2.1 percent in February, up from 1.9 percent in January and at its highest level since March 2012. Yet, even with accelerated pressures, core price growth remains mostly under control for now, with core inflation up 1.8 percent over the past 12 months.

Richmond Fed Manufacturing Survey
The Richmond Federal Reserve Bank reported that manufacturing activity in its district expanded at the fastest rate since April 2010. The composite index of general business activity increased from 17 in February to 22 in March. That was the fifth straight monthly expansion in the mid-Atlantic region. Indeed, new orders (up from 24 to 26), shipments (up from 16 to 17), capacity utilization (up from 15 to 21), employment (up from 10 to 20) and the average workweek (up from 16 to 21) each accelerated in the latest survey. Growth in demand also grew at its briskest pace in nearly seven years, which should bode well for activity moving forward, particularly if it can be sustained.

Indeed, manufacturing respondents were very optimistic about the next six months, even with some easing from the prior survey. A number of key indicators regarding the economic outlook in the region for the sector remained strong, including new orders (down from 53 to 48), shipments (down from 53 to 44), capacity utilization (down from 46 to 38), employment (up from 23 to 25), the average workweek (up from 11 to 15) and capital expenditures (down from 27 to 17). The March reading for expected new orders represented a slight pullback from February’s index figure, which was the highest point in the survey’s 23-year history.

Meanwhile, inflationary pressures decelerated somewhat in March after moving higher in February (and over the course of the past few months). Manufacturers in the district said that prices paid for raw materials have decreased from 2.09 percent at the annual rate in February to 1.69 percent in March. Note that this pace was 0.73 percent in March 2016. Raw material prices are expected to grow 1.60 percent at the annual rate six months from now, down from 1.85 percent in February but up from 1.02 percent one year ago.

University of Michigan Consumer Sentiment (Revised)
The University of Michigan and Thomson Reuters reported that consumer confidence accelerated slightly in March after pulling back a bit in February. The Index of Consumer Sentiment rose from 96.3 in February to 96.9 in March. This was, however, lower than the preliminary estimate of 97.6 released two weeks prior. Still, it remained not far from the 98.5 reading in January, which was the survey’s best number in 13 years. Indeed, over the past four months, the headline number has averaged 97.5, with Americans more confident than earlier in 2016. For instance, the Index of Consumer Sentiment measured 87.2 as recently as October. With that said, Richard Curtin, the Surveys of Consumers chief economist, said that confidence has remained sharply divided along partisan lines since the election.

Looking specifically at the March data, the public was more upbeat in their assessment of current conditions, up from 111.5 to 113.2, whereas the measure for future economic conditions was unchanged at 86.5. Overall, the data are consistent with 2.7 percent growth in consumer spending in 2017, according to the release.

Questions or Comments?

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

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