Monday Economic Report - May 1, 2017

A Publication of the National Association of Manufacturers

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

The U.S. economy grew 0.7 percent at the annual rate in the first quarter, starting 2017 off on a soft start as expected. Weaker consumer and inventory spending in the first quarter could explain the lower figures, with government spending also serving as a drag on the headline number. We traditionally have a sluggish first quarter followed by a strong rebound in the second quarter, and in that context, this report is less discouraging than it might seem at face value. My current forecast is for 2.8 percent growth in real GDP in the second quarter, with the economy expanding 2.1 percent for 2017 as a whole. Of course, these estimates might drift higher with passage of more pro-growth policies, especially in terms of the outlook later this year and into 2018.

In terms of manufacturing activity, a number of economic indicators suggest some cooling in the expansion rate in recent data even as they continue to reflect progress. For instance, growth in new durable goods orders eased in March but expanded for the third straight month, reaching a five-month high. Overall, new durable goods demand has continued to trend in the right direction after stalling for much of the past few years, with year-over-year growth of 4.5 percent. At the same time, sentiment surveys from the Dallas, Kansas City and Richmond Federal Reserve Banks each reported slower growth in April from prior months, including for many of the key measures of activity. Yet, respondents in each of these reports positively reflect on the gains made since last autumn, with leaders in the sector mostly optimistic in their six-month outlook and in their expectations for hiring and capital spending.

In a similar way, consumer confidence has pulled back from multiyear highs but remained elevated. In April, the two consumer surveys were mixed. The survey from the Conference Board in April decelerated from the March reading, which was the highest level since December 2000. The longer-term trend remained favorable, with 30.2 percent of respondents saying conditions were “good” and 13.8 percent indicating conditions were “bad.” Meanwhile, sentiment in the report from the University of Michigan and Thomson Reuters inched up in April but continued to be weaker than in January, which had been the survey’s best reading in 13 years. Richard Curtin, the Surveys of Consumers chief economist, said that confidence has remained sharply divided along partisan lines since the election. With that said, the underlying data are consistent with 2.5 percent growth in consumer spending in 2017.

We will be looking for additional signs of growth in manufacturing this week, with the Institute for Supply Management’s survey expected to report the eighth straight monthly expansion in April. Demand and production should continue to increase rather strongly, though a slight pullback from March’s reading is possible, mirroring other sentiment surveys. We anticipate additional hiring for the month, with new jobs numbers out on Friday. Manufacturers have added 67,000 workers over the past four months, and we expect at least 10,000 more in April.

The Federal Open Market Committee will convene May 2–3, although it is not likely to raise short-term interest rates at this meeting. The Federal Reserve’s next hike is predicted to be during its June 13–14 meeting. Other highlights this week include new figures for construction spending, factory orders and shipments, international trade, labor productivity and personal income and spending.

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

Economic Indicators

Last Week’s Indicators (Summaries Appear Below)

Monday, April 24
Chicago Fed National Activity Index
Dallas Fed Manufacturing Survey

Tuesday, April 25
Conference Board Consumer Confidence
Richmond Fed Manufacturing Survey

Wednesday, April 26
None

Thursday, April 27
Durable Goods Orders and Shipments
International Trade in Goods
Kansas City Fed Manufacturing Survey

Friday, April 28
Employment Cost Index
Gross Domestic Product
University of Michigan Consumer Sentiment (Revised)

This Week’s Indicators

Monday, May 1
Construction Spending
ISM Manufacturing PMI
Personal Income and Spending

Tuesday, May 2
None

Wednesday, May 3
ADP National Employment Report
FOMC Monetary Policy Statement

Thursday, May 4
Factory Orders and Shipments
International Trade Report
Productivity and Costs

Friday, May 5
BLS National Employment Report

Summaries for Last Week’s Economic Indicators

Chicago Fed National Activity Index
The Chicago Federal Reserve Bank reported that growth in the U.S. economy slowed in March. The National Activity Index (NAI) decreased from 0.27 in February to 0.08 in March. Despite the decline in the headline number, the NAI has now been positive in three of the past four 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 that overall economic conditions have begun to move in the right direction after more than two years of subpar performance. This was consistent with the three-year moving average, which edged down from 0.15 to 0.11 in this release but was positive for the fifth consecutive month.

For its part, production-related indicators added 0.04 to the NAI in March, unchanged from February. Industrial production rose 0.5 percent for the month, mainly from a jump in utilities output, whereas manufacturing production declined 0.4 percent, ending six straight months of gains. Employment and business sales both made small positive contributions to the index. Meanwhile, personal consumption and housing provided a slight negative contribution, primarily because the residential market remains below its historical average, even with progress of late.

Conference Board Consumer Confidence
The Conference Board reported that consumer confidence remained quite elevated in April despite easing a bit from its March reading, which was its highest level since December 2000. The Consumer Confidence Index decreased from 124.9 in March to 120.3 in April. Even with the reduced headline number, the data continue to reflect a mostly positive assessment of the economy relative to perceptions just a few months ago. For instance, the index stood at 100.8 in October. In this release, perceptions of the current (down from 143.9 to 140.6) and future (down from 112.3 to 106.7) conditions both declined in April, but the longer-term trend remained favorable. In addition, 30.2 percent of respondents said conditions were “good,” while 13.8 indicated conditions were “bad,” with both data points weakening in this release.

The labor market data showed similar results. In this release, 30.8 percent of respondents felt jobs were “plentiful,” while 19.1 percent said jobs were “hard to get.” Both data points improved in recent months overall but softened in April. Likewise, the percentage of respondents expecting their incomes to increase dropped from 22.5 percent to 19.3 percent. This was higher, however, than the 17.4 percent who said the same thing six months ago. The percentage feeling their incomes would fall in the months ahead remained the same at 7.5 percent, continuing to improve from 10.2 percent six months ago.

Dallas Fed Manufacturing Survey
The Dallas Federal Reserve Bank reported that manufacturing activity expanded in April for the seventh straight month, mostly sustaining the pace in March. The composite index of general business conditions edged down from 16.9 in March to 16.8 in April. While the headline number eased ever so slightly, the composite index has averaged 18.4 over the past six reports, which would indicate significant progress from contracting conditions as recently as September. The recent gains in business confidence can be attributed largely to better energy commodity prices and from a post-election boost in optimism, especially as it relates to expectations regarding pro-growth policies. Nonetheless, the sample comments suggest that the improvements have not been as broad-based as we might prefer, with some firms seeing large gains in activity while others continue to struggle—at least for now.

Digging into the underlying data points, key measures were mixed. New orders (up from 9.5 to 11.5), shipments (up from 6.5 to 9.5) and employment (up from 8.4 to 8.5) each moved higher. At the same time, there were modest decelerations in the expansions for production (down from 18.6 to 15.4), capacity utilization (down from 13.2 to 11.5), hours worked (down from 8.7 to 5.9) and capital expenditures (down from 12.7 to 6.7). Even with some easing, one-third of respondents said that production had increased in April relative to March, with 17.3 percent citing declines and one-half reporting no change.

Moving forward, manufacturing leaders remained very positive about the next six months albeit with some softening from the prior report. The forward-looking measure has declined from 43.7 in January (a 12-year high) to 27.1 in April. Yet, firms remained optimistic, with roughly half of respondents expecting higher orders, production and shipments in the coming months. Moreover, 38.9 percent and 31.0 percent anticipate higher employment and capital spending, respectively. Pricing pressures also eased (down from 42.5 to 28.4), with that index pulling back from its quickest pace since August 2014.

Durable Goods Orders and Shipments
The Census Bureau reported that growth in new durable goods orders eased in March but expanded for the third straight month. New orders rose 0.7 percent in March, increasing from $237.1 billion to $238.7 billion, a five-month high. However, significant escalations in defense and nondefense aircraft and parts orders, which can often be quite volatile from month to month, could explain much of the gain in March. Excluding transportation, new durable goods orders declined 0.2 percent for the month, edging down from $155.7 billion to $155.4 billion. Overall, new durable goods demand has continued to trend in the right direction after stalling for much of the past few years. New durable goods orders have increased 4.5 percent since March 2016’s $228.5 billion pace.

Looking more closely at the various durable goods sectors, the data were mixed. Sales increased for defense aircraft and parts (up 26.1 percent), nondefense aircraft and parts (up 7.0 percent), primary metals (up 0.8 percent) and electrical equipment and appliances (up 0.4 percent). At the same time, orders declined in March for fabricated metal products (down 0.8 percent), motor vehicles and parts (down 0.8 percent), other durable goods (down 0.4 percent) and computers and electronic products (down 0.2 percent). The bottom line is that new orders for core capital goods (or nondefense capital goods excluding aircraft) rose 0.2 percent in March, increasing for the sixth consecutive month. On a year-over-year basis, core capital goods have risen 3.0 percent, up from $63.1 billion in March 2016 to $65.0 billion in this release.

Meanwhile, durable goods shipments edged up 0.2 percent. Much like the new orders data described above, the long-term picture has stabilized and is trending higher. Since March 2016, durable goods shipments have risen modestly, up 3.7 percent, with year-over-year growth of 4.5 percent when excluding transportation equipment shipments. In addition, shipments of core capital goods have also improved over the past 12 months, up 2.5 percent and only the second positive year-over-year reading since July 2015, building on the progress in the February report.

Employment Cost Index
The Bureau of Labor Statistics reported that manufacturing compensation rose 0.5 percent in the first quarter, the same pace as the fourth quarter. On a year-over-year basis, compensation in the sector grew 2.2 percent. Manufacturing wages and salaries increased 0.6 percent in the first quarter, with benefits up 0.5 percent. Private-sector manufacturing workers earned 2.5 percent more over the past 12 months in wages and salaries, with benefit costs up 1.5 percent year-over-year. The Bureau of Labor Statistics does not break out various benefit costs, including health insurance, in its quarterly releases.

Overall, the employment cost index for private-sector workers increased 0.8 percent in the first quarter. Private-sector wages and salaries and benefits rose 0.9 percent and 0.5 percent in this report, respectively. Over the past 12 months, total compensation for private-sector workers increased 2.3 percent, with wages and salaries and benefits up 2.6 percent and 1.9 percent, respectively.

Gross Domestic Product
The Bureau of Economic Analysis reported that the U.S. economy grew 0.7 percent at the annual rate in the first quarter, starting 2017 off on a soft start as expected. This follows real GDP growth of 2.1 percent in the fourth quarter. Weaker consumer and inventory spending in the first quarter could explain the lower figures, with government spending also serving as a drag on the headline number.

To be fair, this is just the first estimate, so there is a chance that future revisions might show better growth, particularly if incoming data for March are better than expected. In addition, we traditionally have a sluggish first quarter followed by a strong rebound in the second quarter. My current forecast is for 2.8 percent growth in real GDP in the second quarter, with the economy expanding 2.1 percent for 2017 as a whole. Of course, these estimates might drift higher with passage of more pro-growth policies, especially in terms of the outlook later this year and into 2018.

Digging further into the data, consumer spending slowed to a near crawl in the first quarter, up just 0.3 percent at the annual rate, down from 3.5 percent growth in the fourth quarter. Durable goods spending declined 2.5 percent in this report, pulled lower by a 4.5 percent decrease in motor vehicles and parts. Spending on nondurable goods and services was also soft, up 1.5 percent and 0.4 percent, respectively. Overall, personal consumption expenditures added 0.23 percentage points to the top-line GDP growth figure.

At the same time, the business investment picture was mixed. On the bright side, nonresidential fixed investment jumped 9.4 percent, its strongest pace since the fourth quarter of 2013 and boosted by large gains in spending on structures, up 22.1 percent. In addition, residential spending accelerated for the second straight release, up 13.7 percent in the first quarter. In sum, residential and nonresidential fixed investment contributed 1.62 percentage points to headline GDP. However, reduced spending on inventories partially offset this increase, subtracting 0.93 percent. The silver lining is that better spending on inventories in the second quarter should help to propel a rebound in growth.

Meanwhile, the large drag on fourth quarter growth was net exports, with economic headwinds abroad and the strong U.S. dollar challenging manufacturers. That stabilized somewhat in the first quarter, with goods exports rising 8.3 percent and goods imports up 4.5 percent. As a result, net exports added 0.07 percent to real GDP. While that contribution was rather paltry, it was significantly better than the 1.82 percentage point subtraction from net exports to the headline number in the fourth quarter.

Finally, government spending subtracted 0.30 percentage points from real GDP, ending two quarters of positive contributions, with reduced spending at all levels. Federal government spending fell 1.9 percent, led by a 4.0 percent decrease in defense, and state and local government spending declined 1.6 percent.

International Trade in Goods (Preliminary)
The Census Bureau released advance statistics on the international trade in goods. Specifically, the goods trade deficit widened from $63.93 billion in February to $64.81 billion in March in preliminary data. The higher figure stemmed from a reduction in goods exports (down from $127.73 billion to $125.50 billion) that was enough to offset fewer goods imports (down from $191.66 billion to $190.31 billion). Final data will be released May 4. Note that a surplus in service-sector activity, which was $21.42 billion in February, also assisted the U.S. trade deficit.

In March, goods exports declined mainly due to reductions in industrial supplies (down $1.93 billion), automotive vehicles (down $977 million) and consumer goods (down $670 million). Exports for capital goods (up $768 million), other goods (up $462 million) and foods, feeds and beverages (up $114 million) all increased. Meanwhile, goods imports decreased for capital goods (down $967 million), industrial supplies (down $738 million), foods, feeds and beverages (down $559 million) and consumer goods (down $429 million), with increases for automotive vehicles (up $1.15 billion) and other goods (up $191 million).

Kansas City Fed Manufacturing Survey
The Kansas City Federal Reserve Bank reported that manufacturing activity pulled back in April from March’s levels, which were the highest since March 2011. The composite index of general business conditions declined from 20 in March to 7 in April, even as it expanded for the fifth straight month. In general, manufacturers report improvements in activity, as noted in the selected comments; yet, they also mentioned the “slow first quarter” and some lingering global headwinds. In some ways, we might have expected some easing in sentiment from the euphoric measures in the prior release. Indeed, many of the underlying data points decelerated sharply in April from those highs, including new orders (down from 32 to 8), production (down from 37 to 12), shipments (down from 35 to 11) and employment (down from 13 to 9). Two other figures were mixed. Exports picked up very slightly for the month (up from 2 to 4), whereas the average workweek narrowed for the first time since November (down from 13 to -4).

Meanwhile, manufacturers continued to be optimistic about the next six months even with a reduction in sentiment in April, mirroring the headline number. The forward-looking composite index dropped from 32—its highest reading in the survey’s history—to 17. Yet, nearly half of respondents expect production and shipments to be higher moving forward, with 43 percent and 40 percent seeing more sales and hiring, respectively. One-quarter of respondents anticipate additional capital spending. On the downside, business leaders in the district also see pricing pressures remaining quite elevated relative to just a few months ago (down from 59 to 45), despite some softening from the quickest pace in just more than four years in the prior report.

Richmond Fed Manufacturing Survey
The Richmond Federal Reserve Bank reported that manufacturing activity in its district continued to expand strongly, even as it pulled back slightly from the fastest rate since April 2010. The composite index of general business activity declined from 22 in March to 20 in April. That was the sixth straight monthly expansion in the mid-Atlantic region. The underlying data were mixed, but still quite encouraging. New orders (unchanged at 26), shipments (up from 17 to 25) and capacity utilization (up from 21 to 22) all grew at healthy rates, with the latter two accelerating their paces for the month. Growth in demand remained at its briskest pace in seven years, which was also positive. Nonetheless, some measures eased, mirroring the headline number, including the backlog of orders (down from 14 to 4), employment (down from 20 to 5) and the average workweek (down from 21 to 8).

Moving forward, manufacturing respondents expressed strong optimism about the next six months, even with some easing from the prior survey in some indices. The key variable all suggested healthy gains in the months ahead for new orders (down from 48 to 46), shipments (down from 44 to 42), capacity utilization (up from 38 to 43), employment (unchanged at 25), the average workweek (down from 15 to 13) and capital expenditures (up from 17 to 26). The April reading for new orders was just shy of March’s number, which was the highest in the survey’s 23-year history. The same can be said about capital expenditures, which was the second highest in the survey’s history following February’s 46 reading.

Meanwhile, inflationary pressures picked up somewhat in April. Manufacturers in the district reported that prices paid for raw materials have increased from 1.69 percent at the annual rate in March to 1.96 percent in April. Note that this pace was 1.07 percent in April 2016. Raw material prices are expected to grow 1.81 percent at the annual rate six months from now, up from 1.60 percent in March and 1.36 percent one year ago.

University of Michigan Consumer Sentiment (Revised)
The University of Michigan and Thomson Reuters reported that consumer confidence edged marginally higher in April. The Index of Consumer Sentiment inched up from 96.9 in March to 97.0 in April. This was lower than the preliminary estimate of 98.0, suggesting a weakening of sentiment in the past two weeks. Overall, consumer confidence has pulled back in the past three months after reaching 98.5 in January, the survey’s best reading in 13 years. Richard Curtin, the Surveys of Consumers chief economist, said that confidence has remained sharply divided along partisan lines since the election. With that said, the underlying data are consistent with 2.5 percent growth in consumer spending in 2017.

Looking specifically at the April data, respondents were slightly more upbeat in their economic outlook (up from 86.5 to 87.0), but their assessments of current conditions declined in this survey (down from 113.2 to 112.7). The latter measure was revised downward relative to the preliminary estimate, as it was originally targeted at 115.2.

Questions or Comments?

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

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