Monday Economic Report - April 2, 2018

A Publication of the National Association of Manufacturers

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

According to the latest revision from the Bureau of Economic Analysis, the U.S. economy grew 2.9 percent at the annual rate in the fourth quarter of 2017, up from the previous estimate of 2.5 percent and better than the consensus estimate of around 2.7 percent. The upward revision mainly reflected improvements in service-sector and inventory spending, even as the latter continued to be a significant drag on top-line growth. Overall, the modest growth in real GDP in the fourth quarter reflected strength in consumer, business and government spending, with net exports and inventories providing headwinds. For the year, the U.S. economy expanded 2.3 percent in 2017, but the forecast for 2018 is for growth of 3 percent. The recently enacted tax cuts should provide a sizable boost to growth, especially in terms of increased investments, and improvements in the global economy will continue to buoy activity.

With that said, manufacturing activity softened somewhat in the Dallas and Richmond Federal Reserve Bank districts, even as they continued to reflect strong growth and a promising outlook for the next six months. The headline index in Texas was the best since December 2005, so some pullback might have been expected given the elevated reading in the prior survey. Both regional reports cited accelerating pricing pressures for raw materials, with input costs rising at multiyear highs in the March data. Along those lines, respondents to the Richmond Federal Reserve’s survey noted faster wage growth, with ongoing challenges with the availability of workers reflecting the current tightness of the labor market. With that said, the personal consumption expenditure deflator suggests that inflationary pressures remain quite modest, up 0.2 percent in February or 1.8 percent over the past 12 months.

On the consumer front, Americans remain very upbeat about the economy. The University of Michigan and Thomson Reuters reported that consumer sentiment rose strongly in March, up to the highest level since January 2004. Moreover, respondents felt more positive about current economic conditions, with that measure soaring to a new all-time high.

In the competing release from the Conference Board, the Consumer Confidence index pulled back slightly in March after reaching an 18-month high in February, but Americans continued to be upbeat in their outlook, especially about the job market. The percentage of respondents feeling jobs were “plentiful” increased from 39.1 percent to 39.9 percent, with those saying jobs were “hard to get” inching down from 15.1 percent to 14.9 percent. At the same time, the percentage of respondents saying business conditions were “good” increased from 36.5 percent to 37.9 percent, with those suggesting that conditions were “bad” also rising, up from 11.3 percent to 13.4 percent.

The better assessment about the economy has lifted consumer spending. Personal spending has risen 4.6 percent year-over-year, with consumers continuing to be one of the bright spots in the economy. In addition, personal income increased 0.4 percent for the third straight month in February. Over the past 12 months, personal incomes have risen 3.7 percent in February. Even with some easing in the year-over-year rate over the past few months, income growth remains quite healthy. For manufacturers, total wages and salaries rose to $869.9 billion in February. That translated into a solid 4.6 percent increase in manufacturing wages and salaries year-over-year, up from $831.8 billion in February 2017.

This week, there will be more evidence of healthy growth in the manufacturing sector. The NAM will release the latest results of its Manufacturers’ Outlook Survey. In December, 94.6 percent of respondents felt positive about their own company’s outlook—a new all-time high in the survey’s 20-year history—with strong growth in sales, employment and capital spending. Much of that optimism was spurred by positive assessments about the impact of tax reform, which passed after the release of the previous survey, and it will be interesting to see how this impacts activity moving forward. At the same time, the Institute for Supply Management’s Manufacturing Purchasing Managers’ Index has also reflected robust growth in demand, output and hiring, and it is expected that the March data will continue that trend.

Other highlights this week include new data on construction, employment, factory orders and international trade. In February, nonfarm payrolls and manufacturing employment increased 313,000 and 31,000, respectively. The unemployment rate was unchanged at 4.1 percent and remained at the lowest level since December 2000. Given the strength of the February jobs data, the jobs figures will be watched closely, especially in light of the Federal Reserve’s recent decision to raise short-term rates (and with the prospect of at least two more rate hikes this year). I would expect continued healthy growth in employment for the sector over the coming months, with the unemployment rate falling to 3.8 percent by year’s end.

Economic Indicators

Last Week’s Indicators (Summaries Appear Below)

Monday, March 26
Chicago Fed National Activity Index
Dallas Fed Manufacturing Survey

Tuesday, March 27
Conference Board Consumer Confidence
Richmond Fed Manufacturing Survey

Wednesday, March 28
Gross Domestic Product (Second Revision)
International Trade in Goods (Preliminary)

Thursday, March 29
Personal Income and Spending
University of Michigan Consumer Sentiment

Friday, March 30
None

This Week’s Indicators

Monday, April 2
Construction Spending
ISM Manufacturing Purchasing Managers’ Index

Tuesday, April 3
None

Wednesday, April 4
ADP National Employment Report
Factory Orders and Shipments

Thursday, April 5
International Trade Report

Friday, April 6
BLS National Employment Report

Summaries for Last Week’s Economic Indicators

Chicago Fed National Activity Index
The Chicago Federal Reserve Bank reported that the U.S. economy continued to expand strongly in February. The National Activity Index (NAI) soared from 0.02 in January to 0.88 in February, just shy of October’s sky-high reading of 0.90, which was the highest since November 2005. The three-month moving average—which helps to smooth out month-to-month volatility in the data—also increased, up from 0.16 to 0.37. Overall, the NAI continues to be encouraging, as positive readings indicate growth above the historical trend.

Manufacturing accounted for the bulk of the large gain in February’s data. Manufacturing production jumped 1.2 percent in February, rebounding from a decline of 0.2 percent in January, with 2.5 percent growth over the past 12 months. That was the fastest year-over-year pace of growth for the sector since July 2014. As a result, production-related indicators added 0.50 to the NAI in February, a notable shift after subtracting 0.15 from January’s headline index. The other big contributor was the labor market, with employment-related indicators adding 0.31 to the measure, up from 0.24 in the prior month. Nonfarm payrolls and manufacturing employment rose 313,000 and 31,000, respectively. The unemployment rate remained the same at 4.1 percent and stayed at the lowest level since December 2000.

Conference Board Consumer Confidence
The Conference Board reported that consumer sentiment pulled back slightly in March after reaching an 18-month high in February. The Consumer Confidence Index eased from 130.0 in February to 127.7 in March. Conference Board Director of Economic Indicators Lynn Franco said, “Consumers’ assessment of current conditions declined slightly, with business conditions the primary reason for the moderation. Consumers’ short-term expectations also declined, including their outlook for the stock market, but overall expectations remain quite favorable. Despite the modest retreat in confidence, index levels remain historically high and suggest further strong growth in the months ahead.” As noted in that explanation, Americans felt slightly less upbeat in their assessments of both current (down from 161.2 to 159.9) and future (down from 109.2 to 106.2) economic conditions.

With that said, their views of the job market continued to strengthen in March. The percentage of respondents feeling jobs were “plentiful” increased from 39.1 percent to 39.9 percent, with those saying jobs were “hard to get” inching down from 15.1 percent to 14.9 percent. At the same time, the percentage of respondents saying business conditions were “good” increased from 36.5 percent to 37.9 percent, with those suggesting conditions were “bad” also rising, up from 11.3 percent to 13.4 percent.

As noted above, stock market volatility was also apparent. In the latest survey, 22.0 percent felt their incomes would rise in the coming months, down from 23.5 percent in the prior survey. On the positive side, the percentage expecting their incomes to fall declined from 8.6 percent to 7.2 percent.

Dallas Fed Manufacturing Survey
The Dallas Federal Reserve Bank reported that manufacturing activity continued to expand in March but eased from the robust gains in February. The composite index of general business conditions declined from 37.2 in February—the fastest rate since December 2005—to 21.4 in March. That would still indicate healthy expansions for the sector, and some pullback might have been expected given the elevated reading in the prior survey. Indeed, the underlying data slowed across the board, including new orders (down from 25.3 to 8.3), production (down from 27.9 to 12.7), shipments (down from 32.1 to 9.3), capacity utilization (down from 19.6 to 9.6), hours worked (down from 16.3 to 9.4) and capital expenditures (down from 23.7 to 17.7).

As we have seen in other recent releases, manufacturers in Texas cited accelerating pricing pressures in March. The index for raw material prices rose to the highest point since May 2011 (up from 39.8 to 41.4). In addition, input prices are expected to remain highly elevated over the next six months, even with that measure off from 43.0 to 50.5. Along those lines, 53.3 percent of respondents see input costs rising over the coming months, with just 2.8 percent predicting reduced raw material prices.

Manufacturers in the Dallas Federal Reserve’s district continued to be very positive in their overall outlook for the next six months, even with some softening in optimism from the prior release. The forward-looking measure has fallen from 44.5 in January—the best pace since December 2004—to 40.6 in February, to 32.0 in March. Yet, that figure continues to suggest encouraging sentiment about activity over the coming months. More than half of manufacturing respondents anticipate new orders, production and shipments increasing over the next six months, with at least 40 percent planning to hire more workers and spend more on capital investments.

Gross Domestic Product (Second Revision)
According to the latest revision from the Bureau of Economic Analysis, the U.S. economy grew 2.9 percent at the annual rate in the fourth quarter of 2017, up from the previous estimate of 2.5 percent and better than the consensus estimate of around 2.7 percent. The upward revision mainly reflected improvements in service-sector and inventory spending, even as the latter continued to be a significant drag on top-line growth. Overall, the modest growth in real GDP in the fourth quarter reflected strength in consumer, business and government spending, with net exports and inventories providing headwinds. For the year, the U.S. economy expanded 2.3 percent in 2017, but the forecast for 2018 is for growth of 3 percent. The recently enacted tax cuts should provide a sizable boost to growth, especially in terms of increased investments, and improvements in the global economy will continue to buoy activity.

Some highlights in the latest data:

  • Personal consumption expenditures rose 4.0 percent at the annual rate in the fourth quarter, with goods spending jumping 7.8 percent, the best quarterly gain since the second quarter of 2016. In total, consumer spending added 2.75 percentage points to headline real GDP growth—almost all of the reported increase.
  • Nonresidential and residential fixed investment increased 6.8 percent and 12.8 percent in the fourth quarter. The housing segment rebounded from two negative quarters, whereas business investment remained robust, especially for structures and equipment. In fact, capital spending on equipment was the strongest in more than three years. Fixed investment added 1.31 percentage points to real GDP growth.
  • Inventory investment subtracted 0.53 percentage points from real GDP growth, but that was certainly better than in prior estimates. For instance, in the previous release, inventories subtracted 0.70 percentage points.
  • Net exports provided the largest drag on growth in the fourth quarter, subtracting 1.16 percentage points from the top-line number. Yet, the data continue to show solid increases in trade volumes, which are consistent with healthy growth in the global economy. Goods exports and imports rose 11.6 percent and 17.3 percent, respectively.

International Trade in Goods (Preliminary)
The Census Bureau released advance statistics on international trade in goods. Specifically, the goods trade deficit ticked marginally higher, up from $75.26 billion in January to $75.35 billion in February in preliminary data. The jump in the monthly trade deficit stemmed from an increase in goods imports (up from $208.93 billion to $211.90 billion) that was slightly larger than the increase in goods exports (up from $133.67 billion to $136.55 billion). Final data will be released on April 5. Note that a surplus in service-sector activity, which was $19.89 billion in January, helped to improve the overall U.S. trade deficit. 

In February, goods exports mostly increased, including industrial supplies (up $1.89 billion), automotive vehicles (up $923 million) and capital goods (up $581 million). Consumer goods exports were the lone major category with declines, down $752 million. Meanwhile, goods imports rose for capital goods (up $1.69 billion), foods, feeds and beverages (up $749 million) and industrial supplies (up $663 million), among others.

Personal Income and Spending
The Bureau of Economic Analysis reported that personal income increased 0.4 percent for the third straight month in February. Over the past 12 months, personal incomes have risen 3.7 percent in February, down from 4.3 percent in December and 3.8 percent in January. Even with some easing in the year-over-year rate over the past few months, income growth remains quite healthy. For manufacturers, total wages and salaries rose from $852.5 billion in January to $869.9 billion in February. That translated into a solid 4.6 percent increase in manufacturing wages and salaries year-over-year, up from $831.8 billion in February 2017.

At the same time, personal spending has been a little softer in the first few months of this year, up 0.2 percent in both January and February after rising 0.7 percent and 0.5 percent in November and December, respectively. Despite the slower figure, the data continue to be consistent with strong gains in personal consumption. Over the past 12 months, personal spending has risen 4.6 percent, edging up from a 4.5 percent gain in the prior report. In February, durable goods spending rose 0.2 percent, but purchases of nondurable goods fell 0.2 percent. On a year-over-year basis, goods spending for durable and nondurable goods increased at very healthy rates, up 4.3 percent and 4.5 percent, respectively, since February 2017.

The saving rate rose from 2.5 percent in December—the lowest rate since September 2005—to 3.2 percent in January and 3.4 percent in February. Despite the uptick in the saving rate, it has trended largely lower since peaking at 4.1 percent one year ago.

In other news, the personal consumption expenditure (PCE) deflator increased 0.2 percent in February, pulling back from a 0.4 percent increase in January. The deceleration in price growth stemmed from slight declines in food and energy costs, both of which fell 0.1 percent in February. Core inflation—which excludes food and energy—also rose 0.2 percent in February.

While other indicators of inflation have shown accelerated price growth recently, the PCE deflator—which is the preferred measure for the Federal Reserve—continues to reflect more modest cost pressures, at least for now. After seeing pricing pressures strongly accelerate earlier in 2017—with the PCE deflator peaking at 2.2 percent year-over-year in February 2017—inflation has pulled back since then. Over the past 12 months, the PCE deflator has risen 1.8 percent, edging up from 1.7 percent in the previous report. In addition, core PCE inflation rose 1.6 percent year-over-year in February, up from 1.5 percent in January and well below the Federal Reserve’s goal of 2 percent.

Richmond Fed Manufacturing Survey
The Richmond Federal Reserve Bank reported that manufacturing activity in its district softened in March, with the composite index for general business assessment easing from 28 in February to 15 in March. While manufacturers continue to report healthy expansions overall, the underlying data decreased across the board in the latest survey, including new orders (down from 27 to 17), shipments (down from 31 to 15), capacity utilization (down from 32 to 13), employment (down from 25 to 11), the average workweek (down from 28 to 12) and capital expenditures (down from 28 to 16). Respondents continued to cite elevated levels for wage increases (down from 23 to 22), with ongoing challenges with the availability of workers (up from -17 to -6). The latter measure remained negative for the third straight month (and 18 of the past 20 months), even with some improvement in March, highlighting the tightness of the labor market.

Moving forward, manufacturing respondents in the Richmond Federal Reserve’s district felt very optimistic in their outlook for the next six months. Forward-looking measures for new orders (up from 40 to 46), shipments (up from 45 to 55—the highest since February 2002), capacity utilization (up from 34 to 40), employment (up from 22 to 31) and capital expenditures (up from 36 to 39) remained quite robust in March.

Meanwhile, manufacturers in the district continue to note accelerating pricing pressures, mirroring data in other reports. Respondents said prices paid for raw materials increased 2.39 percent at the annual rate in March, an 11-month high, up from 1.89 percent in February. Moreover, raw material prices are expected to grow 2.59 percent at the annual rate six months from now, slowing slightly from 2.69 percent in the prior survey, which was the highest expected growth rate for inflation since May 2013.

University of Michigan Consumer Sentiment
The University of Michigan and Thomson Reuters reported that consumer confidence rose strongly in March. The Index of Consumer Sentiment jumped from 99.7 in February to 101.4 in March, the highest level since January 2004. The press release notes that those individuals with higher incomes felt less upbeat in the most recent survey—likely from volatility in equity markets and the impact that has on personal finances—but that was not enough to drag down the headline index.

Indeed, Americans felt more positive about current economic conditions (up from 114.9 to 121.2), with that measure soaring to a new all-time high. At the same time, the index for future conditions pulled back slightly (down from 90.0 to 88.8).

Questions or Comments?

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

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