Monday Economic Report - January 23, 2017

A Publication of the National Association of Manufacturers

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

The Federal Reserve reported that manufacturing production rebounded in December after pulling lower in November, with output in the sector up 0.2 percent in the latest release. Manufacturers have struggled to increase demand over the past couple years, with a strong dollar and global headwinds dampening overall activity, but recent data have started to reflect a turnaround in sentiment. In that regard, manufacturing production grew 0.2 percent year-over-year in December, its first positive reading since June but still indicating essentially stagnant growth over the past 12 months. Similarly, manufacturing capacity utilization edged up from 74.7 percent to 74.8 percent, which, despite some progress, remained below the 75.2 percent utilization rate observed one year ago. At the same time, total industrial production jumped 0.8 percent in December, boosted by a spike in utilities output. It marks the largest monthly gain since March 2014.

The better manufacturing data have also extended into the new year, with continued expansions seen in the New York and Philadelphia Federal Reserve Bank districts. In the case of the Philadelphia Fed survey, new orders and the headline composite index both grew at their fastest monthly pace in January since November 2014. Similarly, those leaders completing the Empire State Manufacturing Survey were very optimistic about activity in the next six months, with the forward-looking composite index at a five-year high. In a special question on the Philadelphia Fed Manufacturing Business Outlook Survey, 62.5 percent of respondents anticipate higher production in the first quarter of 2017 relative to levels seen in the fourth quarter of 2016. With that said, one-quarter of respondents predicted declining production, which remained sizable. It also suggests there is still room for improvement in the broader sector despite recent progress.

Meanwhile, the housing market data provided mixed levels of comfort in December but remained mostly encouraging. New housing starts rose 11.3 percent in December, largely on a rebound in the multifamily segment. New residential construction activity rose from an annualized 1,102,000 in November to 1,226,000 in December. These data have been highly volatile, especially in the second half of 2016 and mostly from multifamily activity. While multifamily starts have risen 9.1 percent over the past 12 months, housing starts for multifamily units fell from an average of 395,333 in 2015 to 384,500 in 2016. On the other hand, single-family starting activity eased from 828,000 units in November to 795,000 in December. Yet, despite a slower December, the single-family segment has trended higher over the longer term, up 3.9 percent from 765,000 in December 2015.

New residential construction activity exceeded 1.2 million in December for the third time in 2016—a psychological threshold that we have struggled to maintain each time. Still, the longer-term trend has also been positive—similar to what we see for single-family starts—with housing starts up 5.7 percent year-over-year and the 2015 and 2016 averages being 1,108,167 and 1,167,833 units, respectively. That more-upbeat assessment can also be seen in the housing permits figures, despite a slight pullback in the latest release. Permitting for new residential units declined from 1,212,000 units at the annual rate in November to 1,210,000 in December. It was the fourth straight month with permitting data exceeding 1.2 million, which was reassuring, particularly since permits serve as a proxy for future activity. For their part, homebuilders also continued to be confident about increased single-family sales over the next six months, albeit with some easing in the Housing Market Index in January.

Finally, the latest Federal Reserve Beige Book noted stronger expansions in the U.S. economy, including tightening labor markets and intensifying pricing pressures. Along those lines, consumer prices rose 0.3 percent in December, up for the fifth straight month. The increase in the latest release stemmed largely from higher energy costs, up 1.5 percent, with gasoline prices up 3.0 percent. Overall, the consumer price index increased 2.1 percent year-over-year in October, up from 0.9 percent in July and the highest level since May 2014. Excluding food and energy costs, consumer prices have increased 2.2 percent over the past 12 months, which was the average for 2016. Even though core consumer price inflation has exceeded the Federal Reserve’s stated goal of 2 percent for 14 consecutive months, overall price pressures remain modest and under control for now.

This week, we will get a number of economic indicators on the health of the U.S. economy and regarding manufacturers. The largest focus will come on Friday with the release of fourth quarter GDP data, which are expected to show 2.2 percent growth. For 2016 as a whole, the U.S. economy will likely have grown by 1.6 percent. (For more detail on manufacturing’s contribution to real GDP in the third quarter, see below.) In addition, the Census Bureau will provide new figures on durable goods orders and shipments for December, and new surveys on U.S. and European manufacturing activity will be released by Markit this week and about regional performance from the Kansas City and Richmond Federal Reserve Banks. Other highlights to watch are the most recent updates on consumer confidence, employment costs, existing and new home sales, leading indicators and state employment.

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

Economic Indicators

Last Week’s Indicators (Summaries Appear Below)

Monday, January 16
MARTIN LUTHER KING JR. HOLIDAY

Tuesday, January 17
New York Fed Manufacturing Survey

Wednesday, January 18
Consumer Price Index
Industrial Production
NAHB Housing Market Index

Thursday, January 19
Housing Starts and Permits
Industry GDP
Philadelphia Fed Manufacturing Survey

Friday, January 20
INAUGURATION DAY

This Week’s Indicators

Monday, January 23
None

Tuesday, January 24
Existing Home Sales
Markit Flash PMIs for the United States, Eurozone
Richmond Federal Reserve Manufacturing Survey
State Employment Report

Wednesday, January 25
None

Thursday, January 26
Chicago Federal Reserve National Activity Index
Conference Board Leading Indicators
Kansas City Federal Reserve Manufacturing Survey
New Home Sales

Friday, January 27
Durable Goods Orders and Shipments
Employment Cost Index
Gross Domestic Product (Fourth Quarter 2016)
University of Michigan Consumer Sentiment (Revision)

Summaries for Last Week’s Economic Indicators

Consumer Price Index
The Bureau of Labor Statistics reported that consumer prices rose 0.3 percent in December, up for the fifth straight month. The increase in the latest release stemmed largely from higher energy costs, up 1.5 percent, with gasoline prices up 3.0 percent. Indeed, the average price of regular conventional gasoline was $2.25 per gallon on December 26, up from $2.08 on November 28, according to the Energy Information Administration. Over the past 12 months, energy prices have risen 5.4 percent. At the same time, food prices remained unchanged for the sixth consecutive month, with a decline of 0.2 percent since December 2015. Overall, the Consumer Price Index increased 2.1 percent year-over-year in October, up from 0.9 percent in July, reaching its highest level since May 2014.

Core consumer prices inched up 0.2 percent in December, mirroring the pace seen in November. Medical care, new and used vehicles, transportation services and shelter all had higher prices, but apparel and household furnishings had lower costs. Excluding food and energy costs, consumer prices have increased 2.2 percent over the past 12 months, which was the average for 2016. Even though core consumer price inflation has exceeded the Federal Reserve’s stated goal of 2 percent for 14 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 reported that new housing starts rose 11.3 percent in December, largely on a rebound in the multifamily segment. New residential construction activity rose from an annualized 1,102,000 in November to 1,226,000 in December. These data have been highly volatile, especially in the second half of 2016, with starts ranging from 1,052,000 in September to 1,340,000 in October, its fastest monthly pace since July 2007. Much of that volatility stemmed from multifamily activity, which increased from 274,000 in November to 431,000 in December. To further express recent variability, multifamily starts have risen 9.1 percent over the past 12 months, and yet, housing starts for multifamily units fell from an average of 395,333 in 2015 to 384,500 in 2016.

On the other hand, single-family starting activity eased from 828,000 units in November to 795,000 in December. Yet, despite a slower December, the single-family segment has trended higher over the longer term, up 3.9 percent from 765,000 in December 2015. Indeed, single-family housing starts have increased from an average of 712,833 in 2015 to 783,333 in 2016 — an encouraging trend. Likewise, new residential construction activity exceeded 1.2 million in December for the third time in 2016 — a psychological threshold that we have struggled to maintain each time. Still, the longer-term trend has also been positive — similar to what we see for single-family starts — with housing starts up 5.7 percent year-over-year and the 2015 and 2016 averages being 1,108,167 and 1,167,833 units, respectively.

That more-upbeat assessment can also be seen in the housing permits figures, despite a slight pullback in the latest release. Permitting for new residential units declined from 1,212,000 units at the annual rate in November to 1,210,000 in December. It marked the fourth straight month with permitting data exceeding 1.2 million, which was reassuring, particularly since permits serve as a proxy for future activity. Single-family permitting increased for the fifth consecutive month, up from 780,000 to 817,000, its highest level since October 2007. On the other hand, multifamily activity dropped from 432,000 to 393,000. Over the course of the past 12 months, housing permits have increased 7.5 percent, with single-family activity up 10.7 percent but permits for multifamily down 15.1 percent year-over-year.

Industrial Production
The Federal Reserve reported that manufacturing production rebounded in December after pulling lower in November, with output in the sector up 0.2 percent in the latest release. Manufacturers have struggled to increase demand over the past couple years, with a strong dollar and global headwinds dampening overall activity, but recent data have started to reflect a turnaround in sentiment. In that regard, manufacturing production grew 0.2 percent year-over-year in December, its first positive reading since June but still indicating essentially stagnant growth over the past 12 months. Similarly, manufacturing capacity utilization edged up from 74.7 percent to 74.8 percent, which, despite some progress, remained below the 75.2 percent utilization rate observed one year ago.

Looking more closely at the December manufacturing data, durable goods production increased by 0.5 percent, but output among nondurable goods firms dipped by 0.3 percent. The largest monthly gains were seen in the motor vehicles and parts (up 1.8 percent), primary metals (up 1.4 percent), computer and electronic products (up 0.9 percent), machinery (up 0.9 percent), fabricated metal products (up 0.7 percent), food, beverage and tobacco products (up 0.7 percent) and nonmetallic mineral products (up 0.7 percent). On the other hand, a number of sectors saw declining production in December, including textile and product mills (down 3.0 percent), electrical equipment and appliances (down 1.1 percent), chemicals (down 1.0 percent), aerospace and other transportation equipment (down 0.8 percent) and printing and support (down 0.8 percent).

Meanwhile, total industrial production jumped 0.8 percent in December, bouncing back from a decline of 0.7 percent in November and representing the largest monthly gain since March 2014. Output from utilities soared, up 6.6 percent, following decreases in the three prior months. That helped to push utilities production up 6.2 percent year-over-year. At the same time, mining production was flat, with a decline of 2.8 percent over the past 12 months. Overall, total industrial production rose 0.5 percent year-over-year, its first positive reading since August 2015. Capacity utilization also increased, up from 74.9 percent to 75.5 percent, which was not far from the 75.4 percent rate seen in December 2015.

Industry GDP
Real GDP grew 3.5 percent in the third quarter, its fastest pace in two years. The Bureau of Economic Analysis provided more detail about growth by industry. In short, real value-added output in the manufacturing sector increased by 2.5 percent in the third quarter, its strongest rate since the first quarter of 2015. Real value-added output from durable goods firms rose 5.1 percent but fell by 0.4 percent for nondurable goods businesses. As a result, manufacturers contributed 0.30 percentage points to headline growth in the third quarter, up from 0.09 percent in the second quarter, but still rather subpar.

The largest contributors to real GDP in the third quarter were finance, insurance, real estate, rental and leasing (0.64 percent), wholesale trade (0.48 percent), professional and business services (0.47 percent) and information (0.40 percent). In contrast, there were notable drags to growth from mining (-0.05 percent), the only sector with a negative contribution in the third quarter.

Overall, manufacturing gross output increased from $5.739 trillion in the second quarter to $5.792 trillion in the third quarter. Gross output from durable (up from $2.943 trillion to $2.972 trillion) and nondurable (up from $2.796 trillion to $2.820 trillion) goods both expanded in the quarter. In general, the data have drifted lower since reaching an all-time high of $6.113 trillion in the third quarter of 2014, highlighting the challenges for manufacturers in the global economy since then. But, they have stabilized since bottoming out at $5.689 in the first quarter of 2016.

Those findings closely mirrored the value-added data for manufacturing, which rose from $2.172 trillion in the second quarter to $2.181 trillion in the third quarter. Value-added output for durable goods increased from $1.178 trillion to $1.188 trillion; however, nondurable goods value-added data slipped from $0.994 trillion to $0.993 trillion. Value-added data in manufacturing peaked at $2.188 trillion in the third quarter of 2015, with the current data not far from that level.

The bottom line is that manufacturing accounted for 11.7 percent of real GDP in the third quarter, down from 11.8 percent in the second quarter and 12.1 percent one year earlier.

NAHB Housing Market Index
The National Association of Home Builders (NAHB) and Wells Fargo reported that the Housing Market Index edged down somewhat in January but remained elevated. It dropped from 69 in December, its highest level of confidence since July 2005, to 67 in January. Index values greater than 50 indicate strong builder confidence, with numbers greater than 60 suggesting strong expectations for activity. Respondents were optimistic about policy changes in the new year, according to the press, helping to buoy the headline index. 

Along those lines, builders made healthy assessments about single-family home sales over the next six months. The index for expected sales declined from 78 in December to 76 in January but remained strong. NAHB Chief Economist Robert Dietz forecasts 10 percent growth in single-family construction in 2017.

New York Federal Reserve Manufacturing Survey
The Empire State Manufacturing Survey reported that manufacturing activity expanded for the third straight month in January, albeit with a little easing in the latest survey. The composite index of general business conditions decreased from 7.6 in December, its fastest pace in eight months, to 6.5 in January. As such, business leaders in the New York Federal Reserve Bank’s district began 2017 with a stronger assessment about the economy than they did at the beginning of 2016, which was marked by contracting levels of activity and a more apprehensive outlook. The turnaround is quite encouraging. With that said, growth in new orders (down from 10.4 to 3.1) and shipments (down from 8.6 to 7.3) slowed a bit in January.

At the same time, employment continued to lag behind, with indices for the number of employees (down from -12.2 to -1.7) and the average workweek (up from -7.0 to -4.2) still in contraction territory. Note that hiring declined at a slower rate in January, so hopefully, employment starts to shift to expansion in the coming months, particularly if demand continues to rebound.

Along those lines, manufacturers in the New York region were very upbeat about the next six months. The forward-looking composite index held steady at 49.7 in January, its highest level since January 2012. In fact, more than half of those completing the survey anticipate stronger growth for new orders and shipments in the months ahead, with 37.0 percent and 32.8 percent expecting increased hiring and capital spending, respectively.

Philadelphia Federal Reserve Manufacturing Survey
The Federal Reserve Bank of Philadelphia reported that manufacturing activity expanded at its fastest pace in 26 months, continuing to accelerate as we begin 2017. The composite index of general business activity rose from 19.7 in December to 23.6 in January, its highest level since November 2014. In addition, sentiment has now expanded for six consecutive months, improving from broad-based weaknesses in late 2015 and early 2016. Growth in new orders (up from 14.9 to 26.0) also rose strongly, with 41.4 percent of respondents noting increased sales for the month, up from 31.6 percent in the prior release. At the same time, shipments (down from 21.7 to 20.5) and hiring (up from 3.6 to 12.8) were also encouraging, albeit with a slight easing in the former.

In special questions, 61.0 percent of those completing the survey described increased demand for their manufactured products over the past several months, with 20.3 percent noting declines. They were also upbeat about production in the first quarter of 2017, with 62.5 percent suggesting that output would increase relative to levels seen in the fourth quarter of 2016. With that said, one-quarter predicted declining production, which remained sizable. For those predicting increased production, the additional output will be obtained through productivity gains (27.3 percent), increased work hours for existing staff (18.2 percent) and/or additional hiring (13.6 percent).

Beyond those responses, the data continued to be consistent with a very optimistic outlook in the Philadelphia Fed district. The forward-looking index rose from 48.7 to 56.6, the most since August 2014. More than 60 percent of those completing the survey predict higher levels of new orders and shipments over the next six months, with 43.1 percent expanding hiring and 26.7 planning for higher capital expenditures.

Questions or Comments?

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

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