Monday Economic Report - February 27, 2017

A Publication of the National Association of Manufacturers

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

Last week, President Donald Trump met with manufacturing CEOs at the White House to discuss policies that will make the sector more competitive globally. A number of NAM members were present at this meeting, including our Board Chair David Farr, chairman and CEO of Emerson. The focus on pro-growth policies by the new administration—even with lingering uncertainties—has helped to lift both consumer and business confidence to multiyear records. In addition, the Dow Jones Industrial Average has risen 4.9 percent since Inauguration Day (or 13.5 percent since Election Day), up to yet another all-time high. (Treasury Secretary Steven Mnuchin asserted on Thursday that rising stock prices might be a good “report card” on the prospects for growth in the U.S. economy.)

For now, manufacturers are cautiously optimistic in their economic outlook. Along those lines, the Kansas City Federal Reserve Bank reported that manufacturing activity expanded in February at its fastest rate since June 2011. As such, manufacturing conditions have continued to improve after notable challenges over the past two years from global headwinds and reduced commodity prices, especially for crude oil. Moreover, the forward-looking composite index edged up from 27 to 29, its highest reading in the survey’s 16-year history. This mirrored progress in other regional and national surveys. For instance, the Markit Flash U.S. Manufacturing PMI remained elevated in February despite dipping from its highest level since March 2015 in the latest data, with decent growth in new orders, output and employment. Moreover, improvements in manufacturing were not limited to the United States, with encouraging news emanating from Europe as well. The Markit Flash Eurozone Manufacturing PMI rose to its fastest rate since April 2011.

Meanwhile, there was also encouraging news about the housing market last week. Existing home sales increased 3.3 percent in January, rising to its highest annual level since February 2007. National Association of Realtors Chief Economist Lawrence Yun attributed the robust growth in 2016 to “strong hiring and improved consumer confidence at the end of last year,” but he also noted reduced stockpiles of homes for sale and rising prices. Likewise, new single-family home sales increased 3.7 percent in January, with year-over-year growth of 5.5 percent. Still, the current pace of 555,000 new homes sold at the annual rate was not far from the 559,083 average rate in 2016, and unlike existing homes trends, inventories of new homes for sale have widened in recent months.

For its part, the Federal Reserve seems poised to raise short-term interest rates again in the coming months, according to the minutes of its January 31–February 1 meeting. The Federal Open Market Committee (FOMC) noted recent progress in the U.S. economy, including a strengthened labor market, household spending and overall sentiment. Specific to the outlook for rate hikes, the minutes state:

“…many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations or if the risks of overshooting the Committee’s maximum-employment and inflation objectives increased.”

With that said, FOMC participants also referred to a desire for a “gradual pace of rate increases over time,” which would suggest some moderation as it seeks to normalize rates. Currently, financial markets anticipate two to three short-term rate increases in 2017, with the next 25-basis-point increase occurring at the March 14–15 meeting.

This week, we will get additional clues about the current state of the manufacturing sector with a number of new releases, including surveys from the Dallas and Richmond Federal Reserve Banks and the Institute for Supply Management. We are hopeful each will show continued expansions in activity in February, building on strong gains in January. Beyond sentiment reports, however, we will also be looking for signs of progress in “real” data, with preliminary January figures released for durable goods and the international trade of goods out on Monday and Tuesday, respectively. Beyond those figures, there will be a revision released for fourth-quarter GDP, perhaps improving on the 1.9 percent growth rate seen in advanced data. In that release, net exports were the largest drag on growth in the fourth quarter. Other highlights this week include new data on construction spending, consumer confidence and personal income and spending.

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 22-question survey will help us gauge how manufacturing sentiment has changed since December. The survey includes special questions on monetary policy, the benefits of trade, the outcome of the election, regulatory relief and hiring and capital spending plans. To complete the survey, click here. Responses are due by Tuesday, February 28, at 5:00 p.m. EST. As always, all responses are anonymous.

In addition, on Thursday, March 9, PTC and HIROTEC will present a webinar on rolling out the Industrial Internet of Things in a series of six-week sprints and building the business case for each expansion on the quantifiable results from previous phases. Click here to register.

Economic Indicators

Last Week’s Indicators (Summaries Appear Below)

Monday, February 20
PRESIDENTS DAY HOLIDAY

Tuesday, February 21
Markit Flash PMIs for the United States, Eurozone

Wednesday, February 22
Existing Home Sales

Thursday, February 23
Chicago Federal Reserve National Activity Index
Conference Board Leading Indicators
Kansas City Federal Reserve Manufacturing Survey
New Home Sales

Friday, February 24
Durable Goods Orders and Shipments
Employment Cost Index
Gross Domestic Product (Fourth Quarter 2016)
University of Michigan Consumer Sentiment (Revision)

This Week’s Indicators

Monday, February 27
Dallas Fed Manufacturing Survey
Durable Goods Orders and Shipments

Tuesday, February 28
Conference Board Consumer Confidence
Gross Domestic Product (Revision)
International Trade in Goods Report (Preliminary)
Richmond Fed Manufacturing Survey

Wednesday, March 1
Construction Spending
ISM Manufacturing PMI
Personal Income and Spending

Thursday, March 2
None

Friday, March 3
None

Summaries for Last Week’s Economic Indicators

Chicago Fed National Activity Index
The Chicago Federal Reserve Bank reported that the U.S. economy slowed slightly in January after rebounding in December. The National Activity Index decreased from 0.18 in December to -0.05 in January, returning to negative territory for the fifth time in the past six months. Index readings below zero suggest the economy is growing below its historical trend, with positive readings indicating the opposite. As such, this report continues to reflect overall economic conditions that are subpar relative to the trend. Meanwhile, the three-month moving average changed little, down from -0.03 to -0.04 in this release.

For its part, production-related indicators subtracted 0.07 from the headline number in January, with industrial production down 0.3 percent for the month. On the positive side, manufacturing production expanded for the fourth consecutive month, with output in the sector up 0.2 percent. There was also a small negative contribution from personal consumption and housing, but employment-related indicators were a slight positive in this report.

Existing Home Sales
The National Association of Realtors (NAR) reported that existing home sales increased 3.3 percent in January, rising to its highest annual level since February 2007. There were 5.69 million existing homes sold in January, up from 5.51 million in December. NAR Chief Economist Lawrence Yun attributed the robust growth in 2016 to “strong hiring and improved consumer confidence at the end of last year,” but he noted ongoing challenges from “inventory levels that are far from adequate and deteriorating affordability conditions.” On a year-over-year basis, sales of existing homes have increased 3.8 percent, led by strength in every region of the country except the Midwest.

In January, both single-family (up from 4.91 million to 5.04 million) and condo/co-op (up from 600,000 to 650,000) sales were higher. Inventories remain low, as noted above, with 3.6 months of supply on the market, the same as in the previous report. That is down from an average of 4.4 months of supply for 2016 as a whole. Not surprisingly, reduced supply has led to higher prices. The median price for an existing home sold in January was $228,900, up 7.1 percent over the past 12 months. 

Kansas City Manufacturing Survey
The Kansas City Federal Reserve Bank reported that manufacturing activity expanded in February at its fastest rate since June 2011. The composite index of general business conditions rose from 9 in January to 14 in February, expanding for the third straight month. As such, manufacturing conditions have continued to improve after notable challenges over the past two years from global headwinds and reduced commodity prices, especially for crude oil. Outside of the headline number, the underlying indices also suggested relatively healthy gains in new orders (up from 20 to 26), production (down from 20 to 11), shipments (down from 20 to 16), employment (up from 6 to 17) and the average workweek (up from 9 to 15), even with some easing in a few of these measures. Exports were also stronger in the month (up from -5 to 9), with positive growth for the first time in 15 months.

At the same time, manufacturers continue to be quite upbeat about the next six months, mirroring sentiment seen in other recent regional reports. The forward-looking composite index edged up from 27 to 29, its highest reading in the survey’s 16-year history. To illustrate the figure, 59 percent of respondents expect production to be higher moving forward, with 18 percent seeing declines in output. More than half also anticipate increased sales and shipments, with 43 percent predicting more hiring and 39 percent planning more capital spending. The exports data were also encouraging, particularly given that they have been a major drag for the Kansas City region over the past few years, with that index up from 4 to 13, a level not seen since June 2013.

Markit Flash Manufacturing PMIs for the United States and Eurozone
The Markit Flash Eurozone Manufacturing PMI rose from 55.2 in January to 55.5 in February, its fastest rate since April 2011. As such, the continent’s economy continues to move in the right direction, with activity accelerating at a modest rate. The headline PMI has trended higher since bottoming out at 51.2 one year ago. The underlying data were mostly higher in February. New orders (up from 56.0 to 56.1), output (up from 56.1 to 57.2) and exports (up from 55.2 to 55.5) each accelerated somewhat in the latest survey. Hiring growth also continued to be promising despite pulling back a little from its quickest pace in nearly six years (down from 55.0 to 54.6). Likewise, respondents remained upbeat about future output (down from 66.9 to 66.3) even though that measure eased from its highest point since January 2014 in this release.

There was stronger manufacturing performance in Germany (up from 56.4 to 57.0) in February, with activity expanding at levels not seen since May 2011, nearly mirroring the headline Eurozone number. At the same time, manufacturing in France edged slightly lower (down from 53.6 to 52.3), but the bottom line was that activity in the country has now expanded for five straight months, which is encouraging.

Meanwhile, the Markit Flash U.S. Manufacturing PMI declined from 55.0 in January—its highest level since March 2015—to 54.3 in February. Nonetheless, the survey continued to indicate improvements in the U.S. manufacturing sector, with growth picking up from levels seen in the autumn months. In February, expansions for a number of activities in the sector decelerated a bit, even as they reflected decent growth overall, including new orders (down from 57.3 to 56.2), output (down from 56.7 to 55.7) and employment (down from 53.3 to 53.2). Looking ahead 12 months, manufacturers continued to be optimistic about future output (down from 69.4 to 67.8) even with some easing. On the other hand, exports slowed to a near crawl for the month (down from 51.1 to 50.4), but remained slightly positive for the fifth consecutive month. Overall, this report provides some reassurance for manufacturers, many of whom have been rather cautious in their economic outlook for much of the past two years.

New Home Sales
The Census Bureau and the U.S. Department of Housing and Urban Development reported that new single-family home sales increased 3.7 percent in January, rebounding from a 7.0 percent decline in December. There were 555,000 new homes sold in January at the annual rate, up from 535,000 in December. The current pace was not far from the 559,083 average rate in 2016. Nonetheless, new home sales have risen 5.5 percent year-over-year, up from 526,000 in January 2016. In the latest release, there were faster sales rates in every region of the country except for the West; however, it also reflected a favorable long-term trend.

Despite the stronger sales data, inventories of new homes for sale have widened in recent months. There were 5.7 months of supply in January, unchanged in this report but up from 5.2 months in November. The median sales price was $312,900 in January, up 7.5 percent year-over-year.

University of Michigan Consumer Sentiment (Revision)
The University of Michigan and Thomson Reuters reported that consumer confidence pulled back in February from January’s levels, which had represented the survey’s best reading in 13 years. The Index of Consumer Sentiment declined from 98.5 in January to 96.3 in February. This was slightly better than the 95.7 reading in preliminary figures. Richard Curtin, the Surveys of Consumers chief economist, noted that confidence has been sharply divided along partisan lines since the election. Even with such wide disparities, the current data were consistent with consumer spending growth of 2.7 percent in 2017, but perhaps with wide “spending differences across subgroups.”

Looking specifically at the February data, the drop in the headline number stemmed largely from a weakened perception about future economic conditions (down from 90.3 to 86.5), even as the longer-term trend remained positive. At the same time, respondents’ views of the current environment (up from 111.3 to 111.5) edged up slightly and remained highly elevated.

Questions or Comments?

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

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