Monday Economic Report - January 30, 2017

A Publication of the National Association of Manufacturers

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

The Bureau of Economic Analysis reported that the U.S. economy grew 1.9 percent at the annual rate in the fourth quarter in preliminary data. This was slightly less than the consensus estimate of 2.2 percent, and it was slower than the 3.5 percent increase in the third quarter. Real GDP growth was buoyed by modest growth in consumer and government spending and by a continuing rebound in business investment, 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 2.2 percent post-recessionary average, and the year was mostly marked by an all-too-cautious approach to spending on the part of consumers and business leaders. Yet, by year’s end, that began to change with many Americans and firms more willing to open their pocketbooks. 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, including comprehensive tax reform, regulatory balance and investment in infrastructure.

For their part, manufacturers continued to be mostly upbeat about current and future activity. Surveys from the Kansas City and Richmond Federal Reserve Banks both reflected modest expansions in January. New orders, shipments and employment each reflected recent progress in both districts, even as exports remained weak in the Kansas City region as manufacturing leaders struggle with global headwinds and the strong U.S. dollar. Similarly, the Markit Flash U.S. Manufacturing PMI rose to its highest level since March 2015. Looking ahead 12 months, manufacturers in the Markit release were optimistic about future output, with that forward-looking index at a nine-month high. Overall, these reports provide some encouragement for manufacturers, many of whom have been rather cautious in their economic outlook for much of the past two years.

The Census Bureau reported that new durable goods orders declined 0.4 percent in December. New orders decreased from $228.0 billion in November to $227.0 billion in December. However, the data have been skewed by volatility in the transportation equipment segment. Defense aircraft and parts orders plummeted 63.9 percent in December after soaring by 99.1 percent in November. Excluding transportation, new orders for durable goods increased 0.5 percent, rising from $152.6 billion to $153.4 billion, its fastest pace since October 2014. In general, the data reflect better performance after the sector has struggled mightily recently. On a year-over-year basis, new durable goods orders have risen 1.6 percent, with 3.5 percent growth since December 2015 when excluding transportation equipment.

Improvements in manufacturing activity have not been limited to the United States. The Markit Flash Eurozone Manufacturing PMI increased to a level not seen 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 earlier last year in February. Nonetheless, the underlying data were mixed—albeit still at decent paces—in the latest survey. New orders and output both eased slightly in January, with the index for exports unchanged. On the positive side, hiring expanded at its fastest rate since March 2011, helping to buoy the headline number. There was stronger manufacturing performance in Germany in January, with activity at a three-year high.

Beyond those data points, there were other signs that the U.S. economy was strengthening. For instance, the Conference Board’s Leading Economic Index (LEI) increased 0.5 percent in December, its strongest showing since July. Manufacturing provided a small contribution to headline growth, which signified progress after serving as a drag on the LEI for four straight months prior to that. Meanwhile, the Index of Consumer Sentiment from the University of Michigan and Thomson Reuters increased to its best reading in 13 years, with Americans expressing more optimism about future economic conditions since the election. In contrast to those reports, existing and new home sales were lower in December, with both likely impacted negatively by the recent run-up in mortgage rates.

This week, there will be two big economic stories that will dominate the news. First, the Federal Open Market Committee will meet for the first time after raising short-term rates at its December meeting. We do not anticipate the Federal Reserve to change policies at this meeting, but the current expectation is for two to three interest rate hikes in 2017. Job growth will be an important part of the discussion at the meeting, and we will get new employment figures on Friday, likely along the lines of the gains in December.

The Institute for Supply Management will release its Manufacturing Purchasing Managers’ Index for January, which should build on the rebound in the past four months. The Dallas Federal Reserve Bank’s monthly survey will also be released, which we hope will build on better data in recent reports. Other highlights this week include new figures for construction spending; consumer confidence; employment costs; factory orders and shipments; international trade in goods; personal income and spending; and productivity and costs.

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

Economic Indicators

Last Week’s Indicators (Summaries Appear Below)

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)

This Week’s Indicators

Monday, January 30
Dallas Fed Manufacturing Survey
Personal Income and Spending

Tuesday, January 31
Conference Board Consumer Confidence
Employment Cost Index
International Trade in Goods Report (Preliminary)

Wednesday, February 1
ADP National Employment Report
Construction Spending
Federal Reserve Monetary Policy Statement
ISM Manufacturing Purchasing Managers’ Index

Thursday, February 2
Productivity and Costs

Friday, February 3
BLS National Employment Report
Factory Orders and Shipments

Summaries for Last Week’s Economic Indicators

The Conference Board’s 
Leading Economic Index (LEI) increased 0.5 percent in December, its strongest showing since July. Over the past six months, the LEI rose 1.4 percent, accelerating from prior months where growth was more sluggish. Manufacturing provided a small contribution to headline growth, with new orders adding 0.1 percentage points to the top line. Overall, that represented progress after four straight months with manufacturing activity serving as a drag on the leading indicators measure. Consumer confidence, the S&P 500, the interest rate spread and overall lending conditions also contributed to growth in the headline number. At the same time, there was a negative contribution from average weekly unemployment claims in this month’s LEI report.

Meanwhile, the Coincident Economic Index (CEI), which assesses current conditions, rose 0.3 percent in December. This was also a five-month high. All four components of the CEI—industrial production, nonfarm payrolls, personal income and manufacturing and trade sales—were positive contributors to the index for the month.

Durable Goods Orders and Shipments
The Census Bureau reported that new durable goods orders declined 0.4 percent in December. New orders decreased from $228.0 billion in November to $227.0 billion in December. However, the data have been skewed by volatility in the transportation equipment segment. Defense aircraft and parts orders plummeted 63.9 percent in December after soaring by 99.1 percent in November. Excluding transportation, new orders for durable goods increased 0.5 percent, rising from $152.6 billion to $153.4 billion, its fastest pace since October 2014. In general, the data reflect better performance after the sector has struggled mightily over the past two years on global challenges. On a year-over-year basis, new durable goods orders have risen 1.6 percent, with 3.5 percent growth since December 2015 when excluding transportation equipment.

Looking more closely at the various durable goods sectors, the data were mixed but mostly positive. There were increased sales reported for computers and electronic products (up 2.4 percent), motor vehicles and parts (up 2.0 percent), other durable goods (up 1.0 percent), electrical equipment and appliances (up 0.6 percent) and machinery (up 0.4 percent). At the same time, there were reduced orders in December for primary metals (down 0.9 percent) and fabricated metal products (down 0.8 percent). The bottom line is that new orders for core capital goods (or nondefense capital goods excluding aircraft) rose 0.8 percent in December, expanding for the third straight month. This is encouraging and a sign that one should not read too much into the headline number.

Meanwhile, durable goods shipments rose 1.4 percent, increasing for the second consecutive month. Excluding transportation, shipments grew 0.8 percent, as the top-line figure was boosted by a strong gain in nondurable aircraft and parts shipments. Much like the new orders data described above, the long-term picture has stabilized and is moving in the right direction. Since December 2015, durable goods shipments have risen modestly, up 3.1 percent, with year-over-year growth of 2.2 percent when excluding transportation equipment.

Existing Home Sales
The National Association of Realtors (NAR) reported that existing home sales declined 2.8 percent in December, falling for the first time since August. There were 5.49 million existing homes sold in December, down from 5.65 million in November. Nonetheless, sales of existing homes reached 5.45 million in 2016, its best reading in 10 years and up from 5.25 million in 2015. NAR Chief Economist Lawrence Yun attributed the strong growth in 2016 to “solid job creation” and “exceptionally low mortgage rates,” but noted that “higher mortgage rates and home prices combined with record low inventory levels stunted sales in much of the country in December.”

In December, both single-family (down from 4.97 million to 4.88 million) and condo/co-op (down from 680,000 to 610,000) sales were lower. Inventories remain low, with 3.6 months of supply on the market in December, down from 4.7 months in July. The median price for an existing home sold in December was $232,200, up 4.0 percent year-over-year.

Gross Domestic Product (Fourth Quarter 2016)
The Bureau of Economic Analysis reported that the U.S. economy grew 1.9 percent at the annual rate in the fourth quarter in preliminary data. This was slightly less than the consensus estimate of 2.2 percent, and it was slower than the 3.5 percent increase in the third quarter. Real GDP growth was buoyed by modest growth in consumer and government spending and by a continuing rebound in business investment, 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 2.2 percent post-recessionary average, and the year was mostly marked by an all-too-cautious approach to spending on the part of consumers and business leaders. Yet, by year’s end, that began to change with many Americans and firms more willing to open their pocketbooks. 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.

Looking more closely at the underlying data, consumer spending on goods increased 5.2 percent at the annual rate in the fourth quarter, building on the 3.5 percent gain in the third quarter. This figure was boosted by strength in durable goods purchases including motor vehicles. Personal consumption expenditures added 1.70 percentage points to real GDP in the fourth quarter, with 0.58 percent coming from services and 1.11 percent stemming from goods spending.

Healthier business spending also served to boost real GDP growth, with gross private domestic investment adding 1.67 percentage points to the top line. It was the largest contribution to real GDP since the second quarter of 2014. Residential and nonresidential fixed investment rose 10.2 percent and 2.4 percent in the fourth quarter, respectively, with both notching notable improvements from the third quarter. Indeed, residential spending rebounded from a sharp decline in the prior report, and equipment spending rose for the first time in five quarters. Inventories were also up significantly for the second straight quarter, accounting for a full percentage point of the 1.67 percent contribution in this category. Yet, it was not all good news, as nonresidential fixed investment in structures fell 5.0 percent in the fourth quarter.

Finally, manufacturers have been challenged over much of the past two years by a number of global headwinds, including a rapid appreciation in the U.S. dollar and 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 1.70 percentage points to the headline number. (Put another way, if it had not been for net exports, real GDP growth in the fourth quarter would have been 3.6 percent, not 1.9 percent.) Goods imports jumped 10.9 percent in this release, with goods exports off 6.9 percent.

Kansas City Fed Manufacturing Survey
The Kansas City Federal Reserve Bank reported that manufacturing activity expanded for the second straight month in January (or for the fourth time in the past five months). The composite index of general business conditions was unchanged at 9 in January, continuing to represent progress after pullbacks in activity during the first half of 2016. To begin the new year, respondents were more upbeat about demand and output, echoed in some of the sample comments. This can be seen in a number of indices, including new orders (up from 5 to 20), production (up from 18 to 20) and shipments (up from 8 to 20). That was the fastest monthly pace of growth since March 2011. With that said, exports have not expanded since November 2015 (down from -4 to -5), as manufacturers in the district have continued to struggle with global headwinds and a strong U.S. dollar.

The labor market data were mixed, but encouragingly, still positive. Hiring expanded for the second consecutive month (down from 8 to 6). At the same time, the average employee workweek mirrored the pickup in other activity measures (up from 3 to 9), with that index at its highest point since May 2014.

Meanwhile, manufacturers continue to be very upbeat about the next six months. The forward-looking composite index jumped from 17 to 27. It has now been positive in each month since April. More than half of respondents expect higher new orders in the months ahead, with at least 60 percent anticipating more shipments and output. The index for production was at levels not seen since June 2004 (up from 29 to 50). At the same time, 40 percent of respondents predict more hiring, and just more than one-quarter see additional capital spending moving forward. Still, exports were expected to expand just slightly in the first half of 2017 (up from 3 to 4).

Markit Flash PMIs for the United States and Eurozone
The Markit Flash U.S. Manufacturing PMI grew from 54.3 in December to 55.1 in January, its highest level since March 2015. This mirrored faster pace of expansions for new orders (up from 55.6 to 57.3), output (up from 55.1 to 56.7) and exports (up from 50.3 to 51.1). Demand growth was the strongest since September 2014. On the other hand, employment decelerated a bit in January but remained mostly encouraging (down from 54.1 to 53.3). Looking ahead 12 months, manufacturers were optimistic about future output (up from 64.3 to 69.4), with that forward-looking index at a nine-month high. Overall, this report provides some encouragement for manufacturers, many of whom have been rather cautious in their economic outlook for much of the past two years.

Meanwhile, it was a similar story to begin the new year in Europe. The Markit Flash Eurozone Manufacturing PMI increased from 54.9 in December to 55.1 in January, a level not seen 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 earlier last year at 51.2 in February. Nonetheless, the underlying data were mixed—albeit still at decent paces—in the latest survey. New orders (down from 55.9 to 55.7) and output (down from 56.1 to 55.9) both eased slightly in January, with the index for exports unchanged at 54.8. On the positive side, hiring expanded at its fastest rate since March 2011 (up from 53.5 to 55.2), helping to buoy the headline number. In addition, respondents were upbeat about future output (up from 63.7 to 66.5), with that measure at its highest point since January 2014.

There was stronger manufacturing performance in Germany in January (up from 55.6 to 56.5), with activity at a three-year high. At the same time, manufacturing in France edged slightly lower (down 53.5 to 53.4), but the bottom line was that activity in the country remained relatively strong, near its fastest pace in more than five years. As such, this remains an impressive accomplishment given that the French data were in contraction territory as recently as September.

New Home Sales
The Census Bureau and the U.S. Department of Housing and Urban Development reported that new single-family home sales fell 10.4 percent, down from 598,000 in November to 536,000 in December. It was its slowest pace of activity in 11 months, led lower by significant drops in sales in the Midwest (down from 83,000 to 49,000) and South (down from 326,000 to 285,000). In contrast, sales rebounded strongly in the Northeast for the month (up from 31,000 to 46,000). As a result of the notably weaker figures at year’s end, new home sales fell 0.4 percent over the past 12 months, down from 538,000 in December 2015.

Inventories of new homes for sale widened in this release, up from 5.0 months of supply in November to 5.8 months in December. The median sales price was $322,500 in December, up 7.9 percent year-over-year.

Richmond Fed Manufacturing Survey
The Richmond Federal Reserve Bank reported that manufacturing activity in its district continued to expand modestly in January. The composite index of general business activity increased from 8 in December to 12 in January. That was the fastest pace of growth since March, representing the third straight monthly expansion in the mid-Atlantic region. Indeed, new orders (up from 11 to 15) and shipments (up from 12 to 13) both accelerated somewhat in the latest survey, with employment (up from -1 to 8) returning to positive growth in January after slipping a little in December. At the same time, capacity utilization (down from 10 to 8) and the average workweek (down from 11 to 5) slowed a bit in the latest report but still experienced decent growth.

Beyond the current economic environment, manufacturing respondents were very optimistic about the next six months. A number of key indicators regarding the economic outlook in the region for the sector remained strong, even with some easing in a few. This included new orders (down from 47 to 44), shipments (up from 45 to 50), capacity utilization (down from 37 to 34), hiring (up from 22 to 27) and capital expenditures (up from 21 to 28). To illustrate the level of positivity in the data, the expected shipments index was at its highest point since June 2002. With that said, the average workweek was seen expanding more modestly moving forward (down from 13 to 10).

Meanwhile, inflationary pressures have accelerated over the past two months but remain largely under control. Manufacturers in the district said that prices paid for raw materials have increased from 1.00 in November at the annual rate to 1.52 percent in January. Raw material prices are expected to grow 1.75 percent at the annual rate six months from now, up from 1.17 percent and 1.58 percent in the November and December reports, respectively.

State Employment Report
Pennsylvania created the most net new manufacturing jobs in December, according to the Bureau of Labor Statistics, adding 5,400 workers for the month. Tennessee (up 3,300), Wisconsin (up 3,000) and Indiana (up 2,700) also topped the list of manufacturing employment gains in the past month. In addition, Florida saw the greatest job gains over the past 12 months, with manufacturing employment in the state up 7,000 since December 2015. Other states with the fastest manufacturing job growth year-over-year included Tennessee (up 5,300), Utah (up 4,700), North Carolina (up 4,500) and New Jersey (up 4,300).

The national unemployment rate edged up from 4.6 percent in November to 4.7 percent in December. New Hampshire had the lowest unemployment rate in the country at 2.6 percent. A number of states were not far behind, including Massachusetts (2.8 percent), South Dakota (2.8 percent), Hawaii (2.9 percent), Colorado (3.0 percent), North Dakota (3.0 percent), Utah (3.1 percent), Vermont (3.1 percent) and Nebraska (3.4 percent). In contrast, Alaska (6.7 percent), New Mexico (6.6 percent), Alabama (6.2 percent), Louisiana (6.1 percent), West Virginia (5.9 percent) and the District of Columbia (5.8 percent) had the highest unemployment rates.

University of Michigan Consumer Sentiment (Revision)
The University of Michigan and Thomson Reuters reported that consumer confidence edged slightly higher in January. The Index of Consumer Sentiment increased from 98.2 in December to 98.5 in January, its best reading in 13 years. It was also an improvement from the 98.1 reading in preliminary data two weeks ago. Overall, the better perception of the economic outlook mirrored rising post-election optimism in the competing survey from the Conference Board, which rose to its highest level since August 2001 in December.

The January data reflected a slightly better assessment of future conditions (up from 89.5 to 90.3), but current economic conditions dipped a bit (down from 111.9 to 111.3), albeit still at elevated levels. The overall data were consistent with real personal spending growth of 2.7 percent in 2017, according to the University of Michigan. The press release also noted, “Consumers have become more convinced that the stronger economy would finally prompt the Fed to increase interest rates at a quicker pace, which caused one in five consumers to favor borrowing in advance of anticipated increases in mortgage rates, the highest level in more than 20 years.”

Questions or Comments?

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

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