Monday Economic Report - March 6, 2017

A Publication of the National Association of Manufacturers

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

Manufacturing activity continued to accelerate, rising to multiyear highs and buoyed by expectations that demand and output will benefit from possible pro-growth policies emanating from Washington. For instance, the Institute for Supply Management’s Manufacturing PMI rose from 56.0 in January to 57.7 in February, its fastest rate since August 2014. New orders and production both had healthy gains for the month, with sales growth at levels not seen since December 2013. In addition, exports also picked up slightly, which was refreshing given the struggles with increasing international sales over the past few years. While employment growth slowed a little, hiring remained positive for the fifth consecutive month. In addition, pricing pressures picked up, and inventories expanded for the first time since 2015.

Beyond the national numbers, the regional trends have also been encouraging, including the surveys from the Dallas and Richmond Federal Reserve Banks last week. In Texas, manufacturing activity in February expanded at a pace not seen since April 2006. The recent gains in business confidence can largely be attributed to better energy commodity prices and from a post-election boost in overall sentiment. At the same time, sample comments also suggest a number of anxieties, including a strong U.S. dollar, uncertainties about trade policy moving forward and continuing challenges in attracting qualified labor. Similar trends were seen in the mid-Atlantic region. In fact, in the Richmond Federal Reserve’s report, new orders grew at their fastest rate since April 2010, which should bode well for activity moving forward, particularly if it can be sustained. Both surveys found respondents very positive about the next six months.

With that said, there has often been a split in recent months between sentiment survey optimism and “real” data about the economy. Indeed, the sizable gains seen in confidence reports have not carried through to government-produced indicators, which have continued to remind us about the challenges in the sector over the past two years. Along those lines, new durable goods orders rose 1.8 percent in January, up for the first time in three months, but excluding transportation equipment sales, new orders fell 0.2 percent for the month. Large jumps in defense and nondefense aircraft and parts orders, which can be highly volatile from month to month, skewed the January data. Over the past 12 months, new durable goods orders declined 0.6 percent; however, this figure grew 2.4 percent year-over-year when excluding transportation equipment.

In addition, private manufacturing construction spending picked up slightly in January after falling to a two-year low in December. While manufacturing construction has largely trended higher over the past few years, activity has stalled more recently as the sector has grappled with sluggish growth and economic and political anxieties. Along those lines, construction activity in the manufacturing sector has pulled sharply lower since achieving the all-time high in September 2015. Over the past 12 months, manufacturing construction spending has fallen 6.8 percent.

Meanwhile, the latest revision to GDP data, which found the U.S. economy grew 1.9 percent in the fourth quarter, noted a significant drag from net exports. This appears to have continued into the new year. According to advance statistics, the goods trade deficit jumped from $64.36 billion in December to $69.22 billion in January in preliminary data. If that number holds, it would be the highest goods trade deficit since March 2015. The GDP release, however, did find that consumer spending was stronger than estimated originally, with Americans more willing to open their pocketbooks than this time last year. Yet, personal spending slowed in January after the strong gains in December. More positively, however, personal spending grew 4.7 percent year-over-year in January, its highest level since November 2014. That strong growth was consistent with a lower saving rate, which fell from 6.2 percent in January 2016 to 5.5 percent today. The pickup in spending mirrored better assessments on the economy, with the Conference Board’s consumer confidence measure rising to its highest level since July 2001.

The focus this week will be jobs. On Friday, we will get national employment numbers for February from the Bureau of Labor Statistics, with manufacturers hoping to build on the job gains in both December and January. Look for nonfarm payrolls to increase around 180,000 in February. Other economic highlights this week include the latest figures for consumer credit, factory orders and shipments, international trade and productivity.

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

Economic Indicators

Last Week’s Indicators (Summaries Appear Below)

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

Tuesday, February 28
Conference Board Consumer Confidences
Gross Domestic Product (Revision)
International Trade in Goods (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

This Week’s Indicators

Monday, March 6
Factory Orders and Shipments

Tuesday, March 7
Consumer Credit
International Trade Report

Wednesday, March 8
ADP National Employment Report
Productivity and Costs (Revision)

Thursday, March 9
None

Friday, March 10
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 July 2001. The Consumer Confidence Index increased from 111.6 in January to 114.8 in February. 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 130.0 to 133.4) and future (up from 99.3 to 102.4) conditions in February boosted the headline index. The acceleration in confidence in this report came from a lessoning in those respondents saying that business conditions were “bad,” down from 15.9 percent to 13.2 percent. Those suggesting conditions were “good” eased slightly, down from 29.0 to 28.7. Nonetheless, Americans were mostly upbeat in their outlook.

Along those lines, the percentage of respondents expecting their incomes to increase edged up from 18.1 percent to 18.3 percent, with those saying their incomes would fall in the months ahead dropping from 9.4 percent to 8.2 percent. This view extended to the labor market. In this release, those feeling jobs were “hard to get” declined from 21.1 percent to 20.3 percent. Yet, the data also expressed some lingering anxieties, with respondents saying jobs were “plentiful” also pulling back somewhat, down from 27.1 percent to 26.2 percent.

Construction Spending
The Census Bureau reported that private manufacturing construction spending picked up slightly in January after falling to a two-year low in December. The value of construction put in place in the sector rose from $69.06 billion in December to $69.47 billion in January. While manufacturing construction has largely trended higher over the past few years, activity has stalled more recently as the sector has grappled with sluggish growth and economic and political anxieties. Along those lines, construction activity in the manufacturing sector has pulled sharply lower since achieving the all-time high of $82.15 billion in September 2015. Over the past 12 months, manufacturing construction spending has fallen 6.8 percent.

Private nonresidential construction spending was unchanged in January, with year-over-year growth of 8.9 percent. Segments with the largest gains in January included power (up 1.4 percent), communication (up 0.9 percent), manufacturing (up 0.6 percent) and lodging (up 0.2 percent). In contrast, construction spending declined for religious (down 5.0 percent), amusement and recreation (down 3.3 percent), educational (down 2.0 percent), commercial (down 0.5 percent) and office (down 0.5 percent) projects, among others.

Since January 2016, there were notably strong gains in private nonresidential construction spending in the following sectors: office (up 33.9 percent), lodging (up 22.6 percent), amusement and recreation (up 17.8 percent), educational (up 15.7 percent), commercial (up 11.9 percent), health care (up 8.1 percent) and power (up 5.8 percent).

Meanwhile, private residential construction spending increased 0.5 percent in January, with 5.9 percent growth over the past 12 months. For the month, single-family construction and multifamily activity rose 1.1 percent and 2.2 percent, respectively. The year-over-year gain included a larger increase from the multifamily segment (up 9.0 percent) than for single-family activity (up 2.3 percent). In addition to those components, public construction spending fell 5.0 percent in January, with a 9.0 percent decline year-over-year.

Dallas Fed Manufacturing Survey
The Dallas Federal Reserve Bank reported that manufacturing activity expanded in February at its fastest rate since April 2006. The composite index of general business conditions increased from 22.1 in January to 24.5 in February, expanding for the fifth consecutive month after contracting for much of the past two years. The recent gains in business confidence can largely be attributed to better energy commodity prices and from a post-election boost in optimism, especially as it relates to expectations regarding pro-growth policies. At the same time, sample comments also suggest a number of anxieties, including a strong U.S. dollar, uncertainties about trade policy moving forward and continuing challenges in attracting qualified labor.

Digging into the underlying data points, key measures were mixed but remained mostly encouraging. Production (up from 11.9 to 16.7), capacity utilization (up from 9.1 to 14.7) and employment (up from 6.1 to 9.6) each accelerated in February from January’s pace. In addition, new orders (down from 15.7 to 11.6), shipments (down from 15.8 to 12.2), hours worked (down from 9.1 to 7.7) and capital expenditures (down from 16.3 to 14.4) continued to expand modestly despite some easing in the latest data. Demand grew for the fourth straight month, with 28.8 percent of respondents citing increased new orders and 17.2 percent noting declines.

Moving forward, manufacturing leaders were very positive about the next six months, but sentiment eased somewhat from the prior report. The forward-looking measure declined from 43.7—a level not seen since December 2004—to 37.0. Yet, firms remained optimistic, with more than half of respondents expecting higher orders, production and shipments in the coming months. Moreover, 46.5 percent and 35.8 percent anticipate higher employment and capital spending, respectively.

Durable Goods Orders and Shipments
The Census Bureau reported that new durable goods orders rose 1.8 percent in January, up for the first time in three months. New orders increased from $226.3 billion in December to $230.4 billion in January. However, volatility in the transportation equipment segment, which can often have large shifts from month to month, skewed the data. Defense and nondefense aircraft and parts orders jumped 59.9 percent and 69.9 percent, respectively, in January. Excluding transportation, new orders for durable goods fell 0.2 percent for the month, down from $154.3 billion to $153.9 billion. To be fair, December’s level, which had been the fastest pace since September 2014, appeared to be a bit of an outlier. Over the past 12 months, new durable goods orders declined 0.6 percent; however, this figure grew 2.4 percent year-over-year when excluding transportation equipment. As such, the broader durable goods market—outside of aircraft—continues to improve somewhat after struggling mightily over the past two years on global challenges.

Looking more closely at the various durable goods sectors, the data were mixed. Sales increased for fabricated metal products (up 1.9 percent), machinery (up 0.5 percent) and motor vehicles and parts (up 0.2 percent). At the same time, orders in January fell for electrical equipment and appliances (down 2.2 percent), computers and electronic products (down 1.6 percent), primary metals (down 1.6 percent) and other durable goods (down 0.3 percent). The bottom line is that new orders for core capital goods (or nondefense capital goods excluding aircraft) decreased 0.4 percent in January, falling for the first time since September. On a year-over-year basis, core capital goods have risen 0.5 percent—a number that was positive for the second straight month.

Meanwhile, durable goods shipments edged down 0.1 percent. Much like the new orders data described above, the long-term picture has stabilized and is moving in the right direction. Since January 2016, durable goods shipments have risen quite modestly, up 1.5 percent, with year-over-year growth of 2.8 percent when excluding transportation equipment. Nonetheless, shipments of core capital goods remained soft, down 0.9 percent year-over-year.

Gross Domestic Product (Revision)
The Bureau of Economic Analysis reported that the U.S. economy grew 1.9 percent at the annual rate in the fourth quarter, unchanged from an earlier estimate. This was slightly less than the consensus estimate of 2.2 percent and slower than the 3.5 percent increase in the third quarter. In this revision, weaker (but still positive) investment offset better consumer spending. Nonetheless, the underlying trends remained 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 2.2 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.

Looking more closely at the underlying data, consumer spending on goods increased 5.7 percent at the annual rate in the fourth quarter, building on the 3.5 percent gain during the third quarter. Strength in durable goods purchases, including motor vehicles, boosted this figure. Personal consumption expenditures added 2.05 percentage points to real GDP in the fourth quarter, with 0.81 percent coming from services and 1.23 percent stemming from goods spending.

Business spending also served to fuel real GDP growth, with gross private domestic investment adding 1.45 percentage points to the top line. It was the largest contribution to real GDP since the first quarter of 2015. That was down, however, from a 1.67 percent contribution in the prior estimate, and the underlying data were mixed. Residential fixed investment and inventory spending both improved in the fourth quarter from the third quarter, but nonresidential fixed investment, which was up 1.3 percent, was spottier. Spending on structures declined 4.5 percent, with softer-than-desired growth for equipment, up 1.9 percent. The good news was that nonresidential fixed investment in equipment was positive in the fourth quarter after four straight quarters of negative growth.

Finally, a number of global headwinds have challenged manufacturers over much of the past two years, 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 10.6 percent in this release, with goods exports down 6.6 percent.

International Trade in Goods (Preliminary)
The Census Bureau released advance statistics on the international trade in goods. Specifically, the goods trade deficit jumped from $64.36 billion in December to $69.22 billion in January in preliminary data. If that number holds, it would be the highest goods trade deficit since March 2015. Growth in the trade deficit resulted from an increase in goods imports (up from $190.94 billion to $195.38 billion) that corresponded with a slight decline in goods exports (down from $126.58 billion to $126.16 billion). Final data will be released March 7. Note that the U.S. trade deficit is also assisted by a surplus in service-sector activity, which was $21.44 billion in December, a one-year high.

In January, the underlying goods trade data were mixed in the advance report. Exports increased for industrial supplies (up $1.53 billion) and automotive vehicles (up $1.14 billion), but declines for capital goods (down $2.07 billion) and other goods (down $1.73 billion) offset those gains. Meanwhile, the largest increase in goods imports came from consumer goods (up $2.38 billion), with automotive vehicles (up $895 million), industrial supplies (up $707 million) and capital goods (up $519 million) also higher.

ISM Manufacturing PMI
The Institute for Supply Management’s Manufacturing PMI expanded at its fastest rate since August 2014. The composite index rose from 56.0 in January to 57.7 in February, marking the sixth straight monthly expansion in the headline number. Indeed, manufacturing sentiment has soared in recent months, buoyed by expectations that demand and output will benefit from possible pro-growth policies emanating from Washington. Indeed, all of the sample comments echoed this optimism, citing a very positive outlook, solid demand and strong growth. Along those lines, new orders (up from 60.4 to 65.1) and production (up from 61.4 to 62.9) both indicated healthy gains for the month, with sales growth at levels not seen since December 2013. In addition, exports also picked up slightly (up from 54.5 to 55.0), which was refreshing given the struggles with increasing international sales over the past few years.

Beyond those measures, employment growth slowed a little in February (down from 56.1 to 54.2) but remained modest. The good news was that hiring remained positive for the fifth consecutive month. Given the more cautious approach to hiring over much of 2016, the employment numbers continued to be encouraging, even with the lower index reading.

One of the other highlights of this report was inventories (up from 48.5 to 51.5), which shifted away from contraction for the first time since June 2015. For some time, we have been saying that production would need to accelerate to meet additional demand given the reduction in stockpiles over the past two years. The fact that manufacturers are increasing their inventories in this survey mirrors the pickup in activity seen in other measures, giving us optimism moving forward.

Personal Income and Spending
The Bureau of Economic Analysis reported that personal spending slowed in January after the strong gains in December. Personal consumption expenditures rose 0.2 percent in January, off from the more robust pace of 0.5 percent in December. In this latest report, weaker durable goods sales (down 0.3 percent), including motor vehicles, held back spending, whereas nondurable goods spending increased (up 1.0 percent). In general, Americans have been more willing to open their pocketbooks in recent months relative to a more cautious approach at this time last year. Along those lines, personal spending grew 4.7 percent year-over-year in January, its highest level since November 2014.

With the easing in spending, the saving rate edged higher, up from 5.4 percent in December to 5.5 percent in January. To illustrate the increased willingness to spend relative to one year ago, the saving rate was 6.2 percent in January 2016.

Meanwhile, personal income grew at its fastest rate in three months, up 0.4 percent in January. On a year-over-year basis, personal incomes have continued to increase at a decent clip, up 4.0 percent since January 2016. At the same time, total manufacturing wages and salaries increased from $844.5 billion in December to $845.1 billion in January. This continues a steady trend upward for manufacturing compensation, with wages and salaries in the sector averaging $806.7 billion and $829.3 billion in 2015 and 2016, respectively.

In other news, the personal consumption expenditure (PCE) deflator increased 0.4 percent in January, the fastest monthly gain in nearly four years. The pickup in inflation was primarily due to higher energy costs, up 4.2 percent. Nonetheless, core inflation, which excludes food and energy costs, rose 0.3 percent in January. The PCE deflator increased 1.9 percent year-over-year in January, up from 1.6 percent in December and at its highest level since October 2012. Yet, even with accelerated pressures, core price growth remains mostly under control for now, with core inflation up 1.7 percent over the past 12 months.

Richmond Fed Manufacturing Survey
The Richmond Federal Reserve Bank reported that manufacturing activity in its district expanded at its fastest rate in 11 months. The composite index of general business activity increased from 12 in January to 17 in February, marking the fourth straight monthly expansion in the mid-Atlantic region. Indeed, new orders (up from 15 to 24), shipments (up from 13 to 16), capacity utilization (up from 8 to 15), employment (up from 8 to 10) and the average workweek (up from 5 to 16) each accelerated in the latest survey. New orders grew at the briskest pace since April 2010, 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. A number of key indicators regarding the economic outlook in the region for the sector remained strong, including more than half of respondents expecting increased sales and shipments in the coming months. Indices grew for new orders (up from 44 to 53), shipments (up from 50 to 53), capacity utilization (up from 34 to 46) and the average workweek (up from 10 to 11). To illustrate the level of positivity in the data, the expected new orders index was at its highest point in the survey’s 23-year history. At the same time, expectations for hiring (down from 27 to 23) and capital expenditures (down from 28 to 27) remained robust despite a slight easing in this survey.

Meanwhile, inflationary pressures have accelerated over the past few months but remain largely under control. Manufacturers in the district reported that prices paid for raw materials have increased from 1.00 percent in November at the annual rate to 2.09 percent in February. Raw material prices are expected to grow 1.85 percent at the annual rate six months from now, up from 1.17 percent in November.

Questions or Comments?

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

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