Monday Economic Report - April 23, 2018

A Publication of the National Association of Manufacturers

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

Real GDP grew 2.9 percent at the annual rate in the fourth quarter, boosted by strength in consumer and business spending but weighed down by inventory spending and net exports. According to new data from the Bureau of Economic Analysis, manufacturing added 0.60 percentage points to top-line growth in the fourth quarter. Manufacturing value-added output rose to $2.300 trillion in the fourth quarter, a new all-time high. Adjusting for inflation, a new all-time high also occurred for real value-added output in manufacturing, which increased to $1.984 trillion in the fourth quarter and is in chained 2009 dollars (to adjust for inflation). Overall, manufacturing accounted for 11.6 percent of real GDP in the fourth quarter, up from 11.5 percent in the prior report.

More recently, manufacturing production edged up 0.1 percent in March, extending ever so slightly the robust gain of 1.5 percent in February. The data continue to show healthy growth for manufacturers, especially relative to one year ago. Indeed, manufacturing production has risen 3.0 percent over the past 12 months, up from 2.5 percent last month and the best year-over-year rate since June 2012. With that said, manufacturing capacity utilization inched down from 76.0 percent in February—a reading not seen since August 2015—to 75.9 percent in March. At the same time, total industrial production rose 0.5 percent in March. Over the past 12 months, industrial production has risen 4.3 percent, pulling back marginally from the 4.4 percent pace in February, which was the best since January 2011. In addition, capacity utilization ticked up to 78.0 percent in March, the strongest rate in three years.

The data also remained encouraging at the regional level, with healthy expansions in manufacturing activity recorded in the New York and Philadelphia Federal Reserve Bank districts in April. Manufacturing leaders continued to be positive about activity over the next six months, with signs of continued tightening in the labor market, both for hiring and regarding the length of the average workweek. At the same time, pricing pressures were highly elevated once again, at or near growth rates not seen since at least 2012. Businesses clearly expect raw material price growth to continue over the coming months, mirroring the pickup seen in other input cost data. Meanwhile, 52.9 percent of respondents in the Philadelphia Federal Reserve survey said that capital expenditures would be higher in 2018 than in 2017, with 19.1 percent expecting capital spending to be lower.

Turning to residential construction, housing starts increased 1.9 percent in March, up to an annualized 1,319,000. This was not far from January’s robust level (1,339,000), which was the fastest pace since August 2007. More importantly, it was only the second time since August 2007—before the start of the Great Recession—that new residential construction activity has exceeded 1.3 million units. With that said, the jump in activity in March stemmed largely from an increase in multifamily starts, which can often be highly volatile from month to month. March’s multifamily start rate registered the best reading since December 2016. In contrast, single-family housing starts pulled lower, with weather likely a factor. On the promising side, housing permits remained solid, up to 1,354,000 units in March and not far from January’s rate (1,377,000), which was the fastest permit rate since August 2007. This bodes well for future new residential construction activity, and along those lines, builders continue to remain optimistic about future sales, even with some easing in April’s survey findings.

Finally, retail spending improved in March, up 0.6 percent and rising for the first time since November. Strong motor vehicle and parts sales—up 2.0 percent in March—helped to buoy the headline number, especially contributing to the declines in the four prior months. Excluding automobiles, retail sales increased 0.2 percent in the latest data, inching up for the third consecutive month. The larger narrative remains encouraging, with consumers being a bright spot over the past year. Indeed, retail sales have risen 4.5 percent year-over-year in March, up from 4.1 percent in February. While this was lower than the robust rate of 5.9 percent in November, it continues to represent solid growth in consumer spending overall.

The Bureau of Economic Analysis will provide the first read on real GDP growth for the first quarter of 2018 on April 27, with a consensus estimate of around 2.5 percent. Beyond GDP data, there will be several reports on the health of the manufacturing sector, including preliminary durable goods orders and shipments figures and new survey data from IHS Markit and the Kansas City and Richmond Federal Reserve Banks. Other highlights this week include updates on consumer confidence, employment costs, existing and new home sales and the international trade in goods.

Economic Indicators

Last Week’s Indicators (Summaries Appear Below)

Monday, April 16
NAHB Housing Market Index
New York Fed Manufacturing Survey
Retail Sales

Tuesday, April 17
Housing Starts and Permits
Industrial Production

Wednesday, April 18
Beige Book

Thursday, April 19
Conference Board Leading Indicators
Gross Domestic Product by Industry
Philadelphia Fed Manufacturing Survey

Friday, April 20
State Employment Report

This Week’s Indicators

Monday, April 16
Chicago Fed National Activity Index Existing Home Sales IHS Markit Flash Manufacturing PMIs for the United States and Eurozone

Tuesday, April 17
Conference Board Consumer Confidence
New Home Sales
Richmond Fed Manufacturing Survey

Wednesday, April 18
None

Thursday, April 19
Durable Goods Orders and Shipments (Preliminary)
International Trade in Goods (Preliminary)
Kansas City Fed Manufacturing Survey

Friday, April 20
Employment Cost Index
Gross Domestic Product
University of Michigan Consumer Sentiment

Summaries for Last Week’s Economic Indicators

Conference Board Leading Indicators
The Conference Board’s Leading Economic Index (LEI) rose 0.3 percent in March, slowing from a gain of 0.7 percent in February but continuing to expand modestly. Overall, this report continued to reflect a U.S. economic outlook that is trending in the right direction, with the LEI up by a very healthy 4.3 percent over the past six months. This bodes well for solid economic growth moving forward. New orders for manufactured goods were among the bright spots in the latest data, providing about one-third of the increase in the headline figure in March. Building permits, consumer confidence, the interest rate spread and overall lending conditions also made notable positive contributions to the LEI in the latest data, but the average workweek for production workers and unemployment claims were drags. The stock market was neutral.

Meanwhile, the Coincident Economic Index (CEI), which assesses current conditions, increased 0.2 percent in March, pulling back somewhat from February’s 0.4 percent gain. Each component of the CEI—industrial production, nonfarm payrolls, personal income and manufacturing and trade sales—contributed positively to the index for the month. As noted below, manufacturing production inched up 0.1 percent in March, building on the solid 1.5 percent increase in February, with output in the sector up 3.0 percent over the past 12 months. That was the fastest year-over-year pace of growth for the sector since June 2012.

Gross Domestic Product by Industry
Real GDP grew 2.9 percent at the annual rate in the fourth quarter, boosted by strength in consumer and business spending but weighed down by inventory spending and net exports. According to new data from the Bureau of Economic Analysis, manufacturing added 0.60 percentage points to top-line growth in the fourth quarter, with 0.44 and 0.16 percentage points from durable and nondurable goods businesses, respectively. Real value-added output jumped 5.3 percent for manufacturers in the fourth quarter, buoyed by a 7.2 percent growth rate for durable goods firms. Real value-added output for nondurable goods bounced back from a hurricane-induced decline in the third quarter to a 3.1 percent increase in the fourth quarter.

Other top contributors in the fourth quarter to real GDP included professional and business services (0.67 percent), construction (0.35 percent), wholesale trade (0.26 percent), retail trade (0.21 percent), educational services, health care and social assistance (0.18 percent), mining (0.17 percent), transportation and warehousing (0.16 percent) and utilities (0.13 percent). In contrast, decreases occurred in finance, insurance, real estate, rental and leasing (-0.18 percent), agriculture, forestry, fishing and hunting (-0.01 percent) and information (-0.01 percent).

Overall, manufacturing gross output increased from $6.031 trillion in the third quarter to $6.228 trillion in the fourth quarter, a new all-time high. After struggling a few years ago on global headwinds, the manufacturing sector has improved notably since gross output bottomed out at $5.607 trillion in the first quarter of 2016. In addition, gross output from durable (up from $3.086 trillion to $3.164 trillion) and nondurable (up from $2.946 trillion to $3.064 trillion) goods also rose in the quarter, with the former reaching a new high and the latter notching the best reading since the third quarter of 2014.

Those findings closely mirrored the value-added data for manufacturing, which rose from $2.252 trillion in the third quarter to $2.300 trillion in the fourth quarter, also a new all-time high. Value-added output for durable goods increased from $1.224 trillion to $1.243 trillion, with nondurable goods value-added output rising from $1.028 trillion to $1.058 trillion. Both achieved new heights. The bottom line is that manufacturing accounted for 11.6 percent of real GDP in the fourth quarter, up from 11.5 percent in the prior report.

Adjusting for inflation, a new all-time high also occurred for real value-added output in manufacturing, up from $1.958 trillion in the third quarter to $1.984 trillion in the fourth quarter. Those figures are in chained 2009 dollars. It bottomed out at $1.694 trillion in the first quarter of 2009 before beginning to trend higher. In the fourth quarter, real value-added output increased for both durable (up from $1.143 trillion to $1.163 trillion—a new high) and nondurable (up from $0.827 trillion to $0.834 trillion) goods.

Housing Starts and Permits
The Census Bureau and the U.S. Department of Housing and Urban Development reported that housing starts increased 1.9 percent in March. New residential construction rose from an annualized 1,295,000 in February to 1,319,000 in March. This was not far from January’s robust level (1,339,000), which was the fastest pace since August 2007. More importantly, it was only the second time since August 2007—before the start of the Great Recession—that new residential construction activity has exceeded 1.3 million units.

With that said, the underlying data provided mixed results in the latest figures. The jump in activity in March stemmed largely from an increase in multifamily starts, up from 395,000 to 452,000, which can often be highly volatile from month to month. March’s multifamily start rate registered the best reading since December 2016, with year-over-year growth of a whopping 23.8 percent, up from 365,000 in March 2017.

However, single-family housing starts pulled lower, down 3.7 percent from 900,000 in February to 867,000 in March, the lowest rate since December. Weather likely played a factor, with declines in every region except for the Midwest. Even with some softening in March, single-family starts increased 5.2 percent from one year ago, up from 824,000 in March 2017.

Meanwhile, housing permits remained solid, up from 1,321,000 units in February to 1,354,000 units in March. Much like the starts data described above, the current level was not far from the January figure of 1,377,000, which was the fastest permit rate since August 2007. It was also the sixth straight month with permitting above 1.3 million units. Since permits are a good proxy of future activity, this is heartening. In March, multifamily permits soared from 432,000 to 514,000, whereas single-family activity slipped from 889,000 to 840,000. On a year-over-year basis, housing permits have risen 7.5 percent, up from 1,260,000 in March 2017, with single-family and multifamily activity up 1.7 percent and 18.4 percent, respectively.

Industrial Production
The Federal Reserve reported that manufacturing production edged up 0.1 percent in March, extending ever so slightly the robust gain of 1.5 percent in February. Overall, the data continue to show healthy growth for manufacturers, especially relative to one year ago. Indeed, manufacturing production has risen 3.0 percent over the past 12 months, up from 2.5 percent last month and the best year-over-year rate since June 2012. With that said, manufacturing capacity utilization inched down from 76.0 percent in February—a reading not seen since August 2015—to 75.9 percent in March. (Note that there was a new seasonal adjustment revision in March for the historic data series.)

In March, durable goods production increased 0.4 percent, whereas output among nondurable goods manufacturers fell 0.3 percent. The largest monthly increases occurred in motor vehicles and parts (up 2.7 percent), petroleum and coal products (up 1.8 percent), computer and electronic products (up 1.0 percent) and primary metals (up 0.5 percent), among other sectors. In contrast, production decreased for electrical equipment, appliances and components (down 1.9 percent), food, beverage and tobacco products (down 1.3 percent), textile and product mills (down 1.1 percent), miscellaneous durable goods (down 1.0 percent), printing and support (down 1.0 percent), plastics and rubber products (down 0.7 percent) and apparel and leather (down 0.6 percent).

Meanwhile, total industrial production rose 0.5 percent in March, following a 1.0 percent increase in February. In addition to manufacturing, mining and utilities production increased 1.0 percent and 3.0 percent, respectively, in March. Colder weather helped to contribute to better utilities output for the month. Over the past 12 months, industrial production has risen 4.3 percent, pulling back marginally from the 4.4 percent pace in February, which was the best since January 2011. Mining and utilities output has risen 10.8 percent and 5.3 percent year-over-year, respectively. In addition, capacity utilization ticked up from 77.7 percent in February to 78.0 percent in March, the strongest rate in three years.

NAHB Housing Market Index
The National Association of Home Builders (NAHB) and Wells Fargo reported that the Housing Market Index (HMI) eased marginally once again, down from 70 in March to 69 in April. Since reaching 74 in December, which was the best reading since July 1999, optimism among homebuilders has slipped slightly each month. Sales of single-family homes are expected to stay robust, even as that index edged down from 78 to 77, slipping a little but remaining not far from February’s highest level since June 2005 (80). Nonetheless, the headline measure continues to indicate that builders are upbeat overall about both current and future activity. With that said, NAHB Chief Economist Robert Dietz cautioned about “supply-side constraints, such as a lack of buildable lots and increasing construction material costs.”

To put the current numbers in perspective, the HMI stood at 58 and 68 in April 2016 and April 2017, respectively. Readings greater than 50 suggest that more homebuilders are positive than negative in their economic outlook. The HMI has exceeded 50 in every month since July 2014 and has surpassed 60—which would signify robust growth—for 20 consecutive months.

New York Fed Manufacturing Survey
Manufacturing activity in the New York Federal Reserve Bank’s district expanded modestly in April, but at a slower pace than in prior months. In the latest Empire State Manufacturing Survey, the composite index of general business conditions declined from 22.5 in March to 15.8 in April. Despite decelerating growth, new orders (down from 16.8 to 9.0), shipments (down from 27.0 to 17.5) and employment (down from 9.4 to 6.0) saw healthy gains, and the average employee workweek widened in April to the best reading since October 2007 (up from 5.9 to 16.9). Inventories also accelerated in this survey for the sixth straight month (up from 5.6 to 8.1).

As we have seen in recent months, pricing pressures remained highly elevated. Nonetheless, the prices paid index pulled back from 50.3 in March—the highest level in six years—to 47.4 in April. Nearly 49 percent of respondents said their input costs rose in April, with just 1.5 percent saying they decreased. The forward-looking inflationary measure also eased slightly, off from 55.9 in March—the fastest pace since May 2012—to 54.8 in April. Even with the lower figure, this suggests that manufacturers expect raw material price growth to continue over the coming months.

Manufacturers in the New York Federal Reserve’s district felt less upbeat in the latest survey about the next six months, even as they continue to predict decent growth in activity overall. The future-oriented composite index plummeted from 44.1 in March to 18.3 in April, the lowest level since February 2016. Expected growth in activity softened across the board, including for new orders (down from 43.0 to 18.5), shipments (down from 43.3 to 18.5), employment (down from 23.3 to 13.1), the average workweek (down from 14.7 to 3.7), capital expenditures (down from 29.4 to 25.2) and technology spending (down from 18.9 to 18.5).

Philadelphia Fed Manufacturing Survey
The Federal Reserve Bank of Philadelphia reported that manufacturing activity remained healthy in its district in April, with sentiment ticking slightly higher in the latest survey. The composite index of general business activity rose from 22.3 in March to 23.2 in April. With that said, the underlying data showed mixed results. On the positive side, the labor market remained robust, with employment (up from 25.6 to 27.1) and the average workweek (up from 12.8 to 21.6) accelerating in April. At the same time, new orders (down from 35.7 to 18.4) and shipments (down from 32.4 to 23.9) pulled back in their expansions, even as growth continued to be rather solid overall. In fact, more than 40 percent of survey respondents said new orders had increased in April, with 22.4 percent noting declines.

If there are any concerns in the data, it is in the pricing figures. The index for prices paid rose from 42.6 in March to 56.4 in April, the fastest pace since March 2011. Moreover, 68.3 percent of manufacturing firms in the region predict higher input costs over the next six months, with that index up from 62.8 to 66.8, a level not seen since February 2011. This appreciation in raw material costs mirrors the pickup in other pricing data as well. 

Meanwhile, manufacturers in the Philadelphia Federal Reserve district continued to be very upbeat in their outlook, even with some easing. The forward-looking composite index decreased from 47.9 to 40.7, with that measure exceeding 40—which would indicate very robust growth moving forward—for the ninth straight month. More than 55 percent of respondents see shipments rising in the months ahead, with 47.8 percent forecasting higher demand. In terms of investments in the company, 41.8 percent and 38.8 percent anticipate additional hiring and capital spending, respectively, for the next six months.

In a series of special questions, 52.9 percent of respondents said capital expenditures would be higher in 2018 than in 2017, with 19.1 percent expecting capital spending to be lower.

Retail Sales
Retail spending improved in March, up 0.6 percent and rising for the first time since November. Strong motor vehicle and parts sales—up 2.0 percent in March—helped to buoy the headline number, especially contributing to the declines in the four prior months. Excluding automobiles, retail sales increased 0.2 percent in the latest data, inching up for the third consecutive month. The larger narrative remains encouraging, with consumers being a bright spot over the past year. Indeed, retail sales have risen 4.5 percent year-over-year in March, up from 4.1 percent in February. While this was lower than the robust rate of 5.9 percent in November, it continues to represent solid growth in consumer spending overall.

Retail spending data provided mixed results in March but mostly increased. Beyond motor vehicles and parts, the largest gains included health and personal care stores (up 1.4 percent), nonstore retailers (up 0.8 percent), furniture and home furnishing stores (up 0.7 percent), electronics and appliance stores (up 0.5 percent), food services and drinking places (up 0.4 percent) and food and beverage stores (up 0.2 percent). Segments with reduced spending in March included sporting goods and hobby stores (down 1.8 percent), clothing and accessories stores (down 0.8 percent), building material and garden supply stores (down 0.6 percent), department stores (down 0.3 percent), gasoline stations (down 0.3 percent) and miscellaneous store retailers (down 0.3 percent).

Over the past 12 months, the fastest growth in retail sales included gasoline stations (up 9.7 percent), nonstore retailers (up 9.7 percent), building material and garden supply stores (up 5.3 percent), motor vehicle and parts dealers (up 4.5 percent), miscellaneous store retailers (up 4.2 percent) and furniture and home furnishing stores (up 3.9 percent). Higher prices boosted the jump in sales for gasoline stations.

State Employment Report
Texas created the most net new manufacturing jobs in March, according to the Bureau of Labor Statistics, adding 3,100 workers in the month. Florida (up 2,700), Wisconsin (up 2,100), California (up 1,900) and Washington (up 1,600) also topped the list of manufacturing employment gains in March. In addition, Texas also saw the greatest job gains in the sector over the past 12 months, with manufacturing employment in the state up 18,800 since March 2017. Other states with the fastest manufacturing job growth year-over-year included Illinois (up 18,200), Wisconsin (up 13,200), California (up 11,700), Ohio (up 11,600), Iowa (up 10,400) and Florida (up 10,000).

The national unemployment rate remained at 4.1 percent in March, staying at the lowest level since December 2000. Hawaii had the lowest unemployment rate in the country (2.1 percent), followed by New Hampshire (2.6 percent), North Dakota (2.6 percent), Maine (2.7 percent), Iowa (2.8 percent), Nebraska (2.8 percent), Vermont (2.8 percent) and Wisconsin (2.9 percent). In contrast, Alaska (7.3 percent), the District of Columbia (5.6 percent), New Mexico (5.6 percent) and West Virginia (5.4 percent) had the highest unemployment rates.

Questions or Comments?

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

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