Monday Economic Report - December 4, 2017

A Publication of the National Association of Manufacturers

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

Economic reports released last week continued to reflect health in the manufacturing sector. For instance, the Institute for Supply Management (ISM) reported that manufacturing activity expanded robustly in November, even as it pulled back for the second straight month from September’s reading, which was the fastest pace since May 2004. The ISM Manufacturing Purchasing Managers’ Index decreased from 58.7 in October to 58.2 in November. Even with some easing in the headline number, the underlying data remained promising, with respondents citing strong growth in demand and an optimistic outlook for next year. Indeed, production accelerated at its fastest pace since March 2011. New orders, employment and exports also signified hardy increases in November, with the labor market reflecting overall tight conditions.

Regional surveys also indicate healthy growth in activity for the sector, including the latest surveys from the Dallas and Richmond Federal Reserve Banks. The composite index of general business assessment from the latter found that manufacturing activity expanded at its fastest rate in November since the introduction of the Richmond Federal Reserve survey in late 1993, with the Dallas Federal Reserve’s headline index pulling back from its 11-and-a-half-year high in October but remaining quite elevated. Both releases found strong gains in new orders, shipments, capacity utilization and employment, with Texas manufacturers once again noting difficulties in attracting qualified labor, and in some special questions, two-thirds of respondents echoed the struggles in finding workers. Moving forward, respondents to both surveys continue to be very upbeat in their outlook for the next six months.

In addition, the Bureau of Economic Analysis reported that the U.S. economy grew by an annualized 3.3 percent in the third quarter, up slightly from its earlier estimate of 3.0 percent growth and extending the 3.1 percent gain in the second quarter. The revision came from slightly better data on business and state and local government spending than earlier thought. My current forecast is for 3.5 percent real GDP growth in the fourth quarter, with 2.3 percent growth in the U.S. economy for 2017 as a whole. This is a slight improvement from the 2.1 percent average growth rate since the Great Recession, but I am also estimating 2.8 percent growth for 2018. I continue to believe there is upward potential in the forecast, especially for next year and beyond, if pro-growth policies are enacted, including comprehensive tax reform.

Meanwhile, we learned that consumer confidence grew to its highest point since December 2000, with Americans more upbeat in their economic outlook and about job prospects. Of course, optimistic consumers are more likely to open their pocketbooks, helping to boost manufacturing activity and the overall economy. Indeed, the most recent data on retail sales and personal spending suggested that Americans were buying more, with solid year-over-year growth in both reports. New personal consumption expenditures data for October will be released on Thursday, with November retail sales figures out on December 14.

Even before those data come out, there have been several releases reporting healthy increases in holiday spending over the long Thanksgiving weekend. The National Retail Federation (NRF) reported that more than 174 million Americans shopped over the holiday weekend, spending $335.47 on average per person. Millennials spent even more, averaging $419.52 per person. More importantly for the sector, retailers benefited from technology. More than 64 million Americans shopped both in store and online, with another 58 million spending their dollars online only. Unfortunately, the NRF changed its methodology, making historical comparisons not possible.

Other sources, however, indicate that holiday spending accelerated strongly from previous years. For instance, Adobe Analytics reported that Americans spent $50 billion from November 1 to November 27 online, up 16.8 percent over the previous year, with total spending for the holidays expected to exceed $100 billion. Cyber Monday sales alone accounted for $6.59 billion, a new all-time high.

This week, new data on the labor market, which has tightened significantly over the past year, will be released. The unemployment rate fell to 4.1 percent in October, its lowest level since December 2000. Manufacturers added 24,000 workers in October, with net hiring in the sector averaging 13,800 year to date per month so far in 2017, and the November data should continue that trend. Other highlights this week include new figures for consumer credit, consumer confidence, factory orders and shipments, international trade and labor productivity.

Economic Indicators

Last Week’s Indicators (Summaries Appear Below)

Monday, November 27
Dallas Fed Manufacturing Survey
New Home Sales

Tuesday, November 28
Conference Board Consumer Confidence
International Trade in Goods (Preliminary)
Richmond Fed Manufacturing Survey

Wednesday, November 29
Gross Domestic Product (Revision)

Thursday, November 30
Personal Income and Spending

Friday, December 1
Construction Spending
ISM Manufacturing Purchasing Managers’ Index

This Week’s Indicators

Monday, December 4
Factory Orders and Shipments

Tuesday, December 5
International Trade Report

Wednesday, December 6
ADP National Employment Report
Productivity and Costs (Revision)

Thursday, December 7
Consumer Credit

Friday, December 8
BLS National Employment Report
University of Michigan Consumer Sentiment

Summaries for Last Week’s Economic Indicators

Conference Board Consumer Confidence
The Conference Board reported that consumer sentiment grew to its highest level in nearly 17 years in November. The Consumer Confidence Index rose from 126.2 in October to 129.5 in November, notching its best reading since December 2000 for the second month in a row. Americans felt more upbeat in their assessments of both current (up from 152.0 to 153.9) and future (up from 109.0 to 113.3) economic conditions. Along those lines, the percentage of respondents saying that business conditions were “good” increased from 34.4 percent to 34.9 percent, with those suggesting that conditions were “bad” inching down from 13.5 percent to 12.7 percent.

Overall, pocketbook issues remained important, with the public more upbeat about labor market conditions. The percentage of respondents feeling that jobs were “plentiful” increased from 36.7 percent to 37.1 percent, with those saying that jobs were “hard to get” decreasing from 17.1 percent to 16.9 percent. At the same time, 7.6 percent felt that their incomes would fall in the coming months, up slightly from 7.5 percent in the prior survey but down from 9.5 percent in July. Just more than 20 percent anticipate higher incomes in the coming months.

Construction Spending
The Census Bureau reported that private manufacturing construction spending rose 1.3 percent in October, ending four straight months of declines from June through September. The value of construction put in place in the sector increased from $60.44 billion in September to $61.20 billion in October, its best reading since July. The September reading was its lowest since September 2014, with recent hurricanes, among other challenges, negatively impacting that figure. Construction spending in the sector has averaged $66.30 billion year to date in 2017, down from the average of $74.61 billion in 2016 as a whole. While manufacturing construction has trended largely higher over the past few years, activity has moved lower since achieving the all-time high of $82.13 billion in May 2015. Nonetheless, a turnaround in construction activity is continued to be expected in the coming months, especially in light of the improved outlook of late.

Overall, private nonresidential construction spending increased 0.9 percent in October, rising to a three-month high, but activity declined 1.3 percent over the past 12 months. In October, the data provided mixed results. Dollars spent on construction projects increased for transportation (up 7.2 percent), office (up 4.4 percent), educational (up 2.5 percent), lodging (up 2.3 percent) and health care (up 1.2 percent), in addition to the manufacturing data discussed above. In contrast, reduced construction spending for religious (down 3.7 percent), amusement and recreation (down 2.0 percent), commercial (down 1.9 percent), power (down 0.3 percent) and communication (down 0.1 percent) projects partially offset those gains.

Meanwhile, private residential construction spending rose 0.4 percent in October, with a healthy 7.4 percent year-over-year gain. For the month, single-family construction increased 0.3 percent, with the multifamily segment down 1.6 percent. Since October 2016, single-family construction spending rose 8.9 percent, but multifamily activity declined 2.0 percent. In addition to those components, public construction spending grew 3.9 percent in October, with a gain of 1.8 percent over the past 12 months.

Dallas Fed Manufacturing Survey
The Dallas Federal Reserve Bank reported that manufacturing activity remained healthy in November despite slowing from an 11-and-a-half-year high in October. The composite index of general business activity declined from 27.6 in October—its best reading since March 2006—to 19.4 in November. As such, manufacturers in the Texas district continued to report solid gains in activity even with some easing in many of this month’s indicators. This included some softening—but still strong—expansions for new orders (down from 24.8 to 20.0), production (down from 25.6 to 15.1), capacity utilization (down from 22.5 to 17.3), shipments (down from 20.9 to 16.7) and hours worked (down from 13.7 to 11.5). Hiring was modest (down from 16.7 to 6.3), growing for the 11th straight month. At the same time, capital expenditures were a bright spot in this survey (up from 13.3 to 15.8), accelerating at its fastest pace since January.

Moving forward, manufacturing leaders remain very positive about the next six months, with the forward-looking measure increasing from 38.5 in October to 39.0 in November—also its highest point since January. Roughly half of respondents feel that new orders, production, shipments and capacity utilization will rise in the coming months, and 40.5 percent and 41.5 percent anticipate more hiring and capital spending, respectively. Meanwhile, respondents predict pricing pressures for raw materials to pick up the pace robustly (up from 36.5 to 48.4), with that index at its quickest clip since March 2012.

In addition, sample comments once again noted difficulties in attracting qualified labor, and in some special questions, two-thirds of respondents echoed the struggles in finding workers.

Gross Domestic Product (Revision)
The Bureau of Economic Analysis reported that the U.S. economy grew by an annualized 3.3 percent in the third quarter, up slightly from its earlier estimate of 3.0 percent growth and extending the 3.1 percent gain in the second quarter. The revision came from slightly better data on business and state and local government spending than earlier thought.

My current forecast is for 3.5 percent real GDP growth in the fourth quarter, with 2.3 percent growth in the U.S. economy for 2017 as a whole. This is a slight improvement from the 2.1 percent average growth rate since the Great Recession, but I am also estimating 2.8 percent growth for 2018. In addition, I continue to believe there is upward potential in the forecast, especially for next year and beyond, if pro-growth policies are enacted, including comprehensive tax reform.

Looking at the underlying data, personal consumption expenditures slowed a little from 3.3 percent annual growth in the second quarter to 2.3 percent in the third quarter. However, durable goods spending was a bright spot in both of the past two reports, up 7.6 percent and 8.1 percent in the second and third quarters, respectively. This included the best numbers for motor vehicles and parts in one year. Overall, personal spending contributed 1.60 percentage points to the top-line growth figure of 3.3 percent in the third quarter, including 0.89 percentage points from goods spending. That was off from a contribution of 2.24 percentage points in the second quarter, but a fair share of that easing came from pullbacks related to recent hurricanes.

Weather also likely played a factor in decelerating nonresidential fixed investment spending, which softened from an annualized 6.7 percent growth rate in the second quarter to 4.7 percent in the third quarter. However, that improved from the earlier estimate of 3.9 percent growth. Spending on structures declined 6.8 percent at the annual rate—the source of much of the easing in nonresidential investments for the quarter. In contrast, investments in equipment remained robust, up 10.4 percent, extending the 8.8 percent growth figure in the prior release.

One of the larger positives among business spending was inventories, with business spending to restock shelves contributing 0.80 percentage points to real GDP in the third quarter. That was revised up from the prior estimate of 0.73 percentage points and was the strongest contribution for inventory spending so far this year. Beyond those figures, residential investment continued to be weak, subtracting 0.20 percentage points from headline growth, on challenges in the housing market. In total, gross private domestic investment, which includes residential and nonresidential investment and private inventory spending, added 1.20 percentage points to the topline in the third quarter, improving from its 0.64 percentage point contribution in the second quarter.

Meanwhile, the international economy has also made notable progress year to date, with global trade making its best contribution to real GDP growth since the end of 2013. With that said, goods exports grew just 1.6 percent in the third quarter, down from 2.2 percent in the second quarter. Goods imports, however, fell 0.6 percent in this release, the first decline since the first quarter of 2016. The export of services rose 3.2 percent in the latest data. Therefore, net exports of goods and services added 0.43 percentage points to real GDP growth.

International Trade in Goods (Preliminary)
The Census Bureau released advance statistics on international trade in goods. Specifically, the goods trade deficit rose from $64.11 billion in September to $68.30 billion in October in preliminary data. The jump in the monthly trade deficit stemmed from both a decline in goods exports (down from $130.33 billion to $129.08 billion) and an increase in goods imports (up from $194.45 billion to $197.38 billion). Final data will be released on December 5. If that number holds, the goods imports figure would be the highest since March 2015. Note that a surplus in service-sector activity, which was $21.89 billion in September, helped to improve the overall U.S. trade deficit.

In October, goods exports mostly decreased, including capital goods (down $1.35 billion), foods, feeds and beverages (down $1.35 billion), consumer goods (down $285 million) and automotive vehicles (down $275 million). At the same time, exports increased for both industrial supplies (up $1.95 billion) and other goods (up $54 million). Meanwhile, the increase in goods imports came largely from stronger activity in industrial supplies (up $1.49 billion), other goods (up $1.12 billion) and consumer goods (up $666 million), with reduced imports for capital goods (down $342 million) and foods, feeds and beverages (down $16 million).

ISM Manufacturing Purchasing Managers' Index
The Institute for Supply Management (ISM) reported that manufacturing activity expanded robustly in November, even as it pulled back for the second straight month from September’s reading, which was the fastest pace since May 2004. The ISM Manufacturing Purchasing Managers’ Index decreased from 58.7 in October to 58.2 in November. Even with some easing in the headline number, the underlying data remained promising, with respondents citing strong growth in demand and an optimistic outlook for next year.

Indeed, production accelerated at its fastest pace since March 2011 (up from 61.0 to 63.9). New orders (up from 63.4 to 64.0), employment (down from 59.8 to 59.7) and exports (down from 56.5 to 56.0) also signified hardy increases in November, even with some easing in the latter two indices. The labor market for manufacturers continued to be tight, with the hiring index averaging 59.9 over the past four months, up from a more modest 52.5 one year ago. In addition, improvements in the global economy have been helpful for manufacturers, with exports expanding for 21 straight months.

Meanwhile, prices for raw materials remained elevated (down from 68.5 to 65.5) despite the input cost index decelerating from September’s rate, which was the highest in more than six years. While we have seen decelerating pricing pressures in general since the spring months, this more recent pickup reflects a rebound in some commodity costs. In other news, inventories contracted for the second straight month (down from 48.0 to 47.0), with stockpiles declining after modest gains in both August and September.

New Home Sales
The Census Bureau and the Department of Housing and Urban Development reported that new home sales rose to a 10-year high in October. New single-family residential sales jumped from an annualized 645,000 units in September to 685,000 units in October, an increase of 6.2 percent and the best reading since October 2007. Sales of new single-family homes grew in every region of the country, with the largest gains in the Midwest and Northeast. With the steep increase in the past two months, new home sales have risen 18.7 percent since the 577,000 pace in October 2016.

With strong sales growth, inventories of new homes for sale tightened considerably for the month. In October, the number of months of supply on the market fell from 5.2 to 4.9, the lowest rate since July 2016. The average sales price was $400,200 in October, up 13.6 percent from $352,200 one year ago.

Personal Income and Spending
The Bureau of Economic Analysis reported that personal spending rose modestly in October, up 0.3 percent. As such, the latest increase in personal consumption expenditures (PCEs) extended the robust 0.9 percent gain in September, which was the fastest monthly pace since August 2009. In October, the goods spending data provided mixed results, with nondurable goods purchases up 0.2 percent but with durable goods outlays edging down 0.1 percent. With that said, the longer-term picture remains favorable, as Americans have continued to spend at relatively healthy rates overall. Indeed, personal spending has increased 4.2 percent over the past 12 months, off slightly from 4.3 percent year-over-year in the previous release. In addition, goods spending for durable and nondurable goods increased 3.8 percent and 4.2 percent year-over-year, respectively.

Likewise, the saving rate has fallen from 4.1 percent in October 2016 to 3.2 percent in the current data, highlighting the degree to which Americans have become more willing to spend. At the same time, the saving rate did increase from 3.0 percent in September, largely on stronger income growth.

Along those lines, personal incomes rose 0.4 percent in October, continuing the solid pace in September. Over the past 12 months, personal incomes have risen 3.4 percent, up from 2.9 percent year-over-year in September. In addition, manufacturing wages and salaries edged higher for the month, up from $836.1 billion in September to $840.6 billion in October. That translated into a 2.6 percent increase in manufacturing wages and salaries over the past 12 months, up from $819.0 billion in October 2016.

In other news, the PCE deflator inched up 0.1 percent in October, pulling back from the 0.4 percent increase in September. A fair share of the jump in pricing pressures in the prior figures stemmed from recent hurricanes, especially in energy costs. In October, energy prices decreased 1.1 percent, declining after sizable jumps in both August and September. Core inflation, which excludes food and energy, rose 0.2 percent in October.

Overall, pricing pressures remain quite modest. After seeing pricing pressures accelerate strongly earlier this year—with the PCE deflator peaking at 2.2 percent year-over-year in February—inflation has pulled back since then. Since October 2016, the PCE deflator has increased 1.6 percent, down slightly from 1.7 percent in September. Core PCE inflation rose 1.4 percent year-over-year in October, the same pace as in September but down from 1.9 percent in January.

Richmond Fed Manufacturing Survey
The Richmond Federal Reserve Bank reported that manufacturing activity in its district expanded at its fastest monthly rate in November since the introduction of the survey in late 1993. The composite index of the general business assessment improved from 12 in October—its lowest point since January—to 30 in November, a new all-time high. The jump in confidence in the latest report included strong gains for new orders (up from 17 to 35), shipments (up from 9 to 33), capacity utilization (up from 7 to 19), employment (up from 10 to 18) and the average workweek (up from 8 to 17). As such, this release has shown healthy economic conditions for the sector in the district, with demand and output trending in the right direction. To illustrate this, the headline index has averaged 15.3 year to date in 2017, well above the average of 1.1 during the same 11-month time period in 2016.

In addition, manufacturing respondents in the Richmond Federal Reserve region felt very optimistic in their outlook for the next six months, even with easing in some of the key data points in this survey. Forward-looking measures for new orders (down from 45 to 38), shipments (down from 50 to 40), capacity utilization (down from 40 to 31) and employment (down from 25 to 24) remained quite robust despite some softening in responses. At the same time, capital expenditures (up from 27 to 32) and wages (up from 33 to 39) accelerated in November, illustrating manufacturers’ willingness to make new investments in their businesses and highlighting an expectation for a tight labor market.

Meanwhile, manufacturers in the district have seen input prices pick up recently but still anticipate modest inflationary pressures overall moving forward. Those completing the survey said that prices paid for raw materials increased slightly from 1.77 percent at the annual rate in October to 2.04 percent in November, its highest rate since April. Nonetheless, raw material prices are expected to grow 1.78 percent at the annual rate six months from now, down from 1.95 percent in the October survey.

Questions or Comments?

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

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