Monday Economic Report - January 29, 2018

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 said that the U.S. economy grew by an annualized 2.6 percent in the fourth quarter, according to preliminary data. This was somewhat lower than the consensus estimate of around 3 percent, and it represented an easing from the 3.1 percent and 3.2 percent gains seen in the second and third quarters, respectively. Overall, the latest report found solid growth in consumer, business and government spending, but headline growth was pulled lower by both net exports and inventory spending. To illustrate the impact of those various components, real GDP growth would have been 4.35 percent absent the drag from net exports and inventories, which subtracted 1.8 percentage points from the top-line growth figure. Personally, I would not be surprised to see the growth rate revised up in the coming weeks.

In 2017, real GDP increased by 2.3 percent, up from 1.5 percent in 2016. Since the end of the Great Recession, the U.S. economy has expanded by 2.2 percent on average. Moving forward, the NAM anticipates 3.0 percent growth in 2018—or something close to that. The consensus right now is for growth of around 2.7 percent. I continue to believe that there is upward potential in that outlook for next year, especially as firms increase their investments. Passage of comprehensive tax reform and other pro-growth measures should help to stimulate economic activity, which I hope will allow us to reach 3.0 percent annual growth for the first time since 2005.

On the manufacturing front, the news continues to be encouraging. For instance, the IHS Markit Flash U.S. Manufacturing PMI rose to 55.5 in January, its best reading since March 2015. New orders, output and exports all accelerated in January, with demand and production each at 12-month highs. At the same time, employment slowed somewhat in the latest survey, easing from December’s hiring rate, which was the fastest since October 2014. In addition, manufacturing activity in the Kansas City and Richmond Federal Reserve Bank districts started the new year on a strong note, with continued expansions in demand, shipments and employment, among other indicators. Most importantly, manufacturers remained very optimistic about the next six months, even as they continued to predict a pickup in raw material prices.

In a similar way, European manufacturers cited healthy growth in activity in January, even as IHS Markit Flash Eurozone Manufacturing PMI pulled back slightly from its fastest pace since the survey was introduced in June 1997. Preliminary data for France and Germany also decelerated a little in January but remained not far from multiyear highs. Overall, new orders, output, exports and employment continued to signal strong expansions, and manufacturers in the Eurozone were very upbeat in the outlook for the first half of 2018, with the index for future output rising to its highest point since the measure was introduced in mid-2012.

Meanwhile, the Census Bureau said that new durable goods orders rose 2.9 percent in December, extending the 1.7 percent gain seen in November. The increase in both months stemmed largely from strong defense and nondefense aircraft and parts sales, keeping in mind that both sectors can be highly volatile from month to month. Excluding transportation equipment, new durable goods orders were up 0.6 percent in December, increasing for the sixth straight month. New durable goods orders have generally trended in the right direction over the course of the past 12 months. In fact, new durable goods orders have soared 11.5 percent since December 2016. With transportation equipment excluded, the year-over-year rate was a rather robust 8.2 percent.

This week will be a busy one, beginning with Janet Yellen chairing her last Federal Open Market Committee meeting on January 31 and February 1. Jay Powell, who was confirmed this week, will take over on February 4. Although the Federal Reserve is likely to raise short-term rates three times in 2018, no action is expected this week. It is widely anticipated the Federal Reserve will hike the federal funds rate during its March meeting.

On February 1, the Institute for Supply Management will report on manufacturing sentiment for January; it will likely find continued optimism about new orders, output and hiring. On average in 2017, manufacturers added 16,333 net new jobs each month. I anticipate that our first read on January employment will build on that momentum in what has been an ever-tightening labor market. Other highlights this week will include a new survey from the Dallas Federal Reserve Bank and updates on construction spending, consumer confidence, employment costs, factory orders and shipments and productivity and costs.

Economic Indicators

Last Week’s Indicators (Summaries Appear Below)

Monday, January 22
Chicago Fed National Activity Index

Tuesday, January 23
Richmond Fed Manufacturing Survey
State Employment Report

Wednesday, January 24
Existing Home Sales
IHS Markit Flash Manufacturing PMIs for the United States and Eurozone

Thursday, January 25
Conference Board Leading Indicators
International Trade in Goods (Preliminary)
Kansas City Fed Manufacturing Survey
New Home Sales

Friday, January 26
Durable Goods Orders and Shipments
Gross Domestic Product

This Week’s Indicators

Monday, January 29
Dallas Fed Manufacturing Survey

Tuesday, January 30
Conference Board Consumer Confidence

Wednesday, January 31
ADP National Employment Report
Employment Cost Index

Thursday, February 1
Construction Spending
FOMC Monetary Policy Statement
ISM Manufacturing Purchasing Managers’ Index
Productivity and Costs

Friday, February 2
BLS National Employment Report
Factory Orders and Shipments
University of Michigan Consumer Sentiment (Revision)
 

Summaries for Last Week’s Economic Indicators

Chicago Fed National Activity Index
The Chicago Federal Reserve Bank said that the U.S. economy accelerated once again in December, growing ahead of its historic trend for the fourth straight month. The National Activity Index (NAI) increased from 0.11 in November to 0.27 in December, and its three-month moving average remained highly elevated, edging down from 0.43 to 0.42 in this report. The three-month average was buoyed by the 0.87 reading in October, which was its highest level since November 2005. More importantly, the headline index was boosted by industrial production, which jumped 0.9 percent in December after inching down by 0.1 percent in November. For its part, manufacturing production rose for the fourth consecutive month, up 0.1 percent in December, with 2.4 percent year-over-year growth.

Employment-related indicators added just 0.1 to the NAI in December, slowing from a 0.12 contribution in November and reflecting an easing in nonfarm payroll growth from 252,000 to 148,000. On the other hand, manufacturing continued to be a bright spot in the labor market, with the sector adding 25,000 workers in December and averaging 16,333 workers per month in 2017. In addition, the unemployment rate was unchanged at 4.1 percent, remaining at its lowest level since December 2000.

Conference Board Leading Indicators
The Conference Board’s Leading Economic Index (LEI) increased 0.6 percent in December, extending the strong 1.3 percent and 0.5 percent gains observed in October and November, respectively. Over the past six months, the LEI has risen by a healthy 3.1 percent, which bodes well for solid economic growth moving forward. New orders for manufactured goods were among the bright spots in the latest data, providing about half of the increase in the headline figure in December. Consumer confidence, the interest rate spread, overall lending conditions and stock prices also made notable positive contributions to the LEI in the latest data. The average workweek of production workers was the only drag on the index, subtracting 0.07 points.

Meanwhile, the Coincident Economic Index (CEI), which assesses current conditions, increased 0.3 percent in December, rising for the fourth straight month. Each of the components of the CEI—industrial production, nonfarm payrolls, personal income and manufacturing and trade sales—contributed positively to the index for the month. As noted above, manufacturing production edged up by 0.1 percent in December, with modest—and improved—growth in 2017 as a whole.

Durable Goods Orders and Shipments
The Census Bureau said that new durable goods orders rose 2.9 percent in December, extending the 1.7 percent gain seen in November. The increase in both months stemmed largely from strong defense and nondefense aircraft and parts sales, jumping 55.3 percent and 15.9 percent in December, respectively. It is important to note that aircraft orders can be highly volatile from month to month. Excluding transportation equipment, new durable goods orders were up 0.6 percent in December, increasing for the sixth straight month.

New durable goods orders have generally trended in the right direction over the course of the past 12 months. In fact, new durable goods orders have soared 11.5 percent since December 2016. With transportation equipment excluded, the year-over-year rate was a rather robust 8.2 percent. One of the more important measures in this release is new orders for core capital goods (or nondefense capital goods excluding aircraft), which can often be seen as a proxy for capital spending in the U.S. economy. In November, new orders for core capital goods edged down 0.3 percent, but like the headline number above, the year-over-year pace was a very healthy 8.4 percent.

Looking more closely at the various durable goods sectors in December, the data were mixed but mostly higher. There were increased sales for primary metals (up 1.4 percent), fabricated metal products (down 0.9 percent), other durable goods (up 0.9 percent), machinery (up 0.6 percent) and motor vehicles and parts (up 0.4 percent). In contrast, orders were lower for electrical equipment and appliances (down 0.9 percent) and computers and electronic products (down 0.2 percent).

Meanwhile, durable goods shipments increased 0.6 percent in December, but with transportation equipment excluded, shipments rose by 1.1 percent. Much like the new orders data described above, shipments have trended strongly higher over the past year. Since December 2016, durable goods shipments have risen at solid rates, up 5.8 percent, with year-over-year growth of 7.1 percent when transportation equipment shipments were excluded. In addition, shipments of core capital goods have also improved significantly over the past 12 months, up 8.4 percent year-over-year.

Existing Home Sales
The National Association of Realtors (NAR) said that existing home sales dropped 3.6 percent in December, ending the year on a disappointing note. Sales of existing homes decreased from 5.78 million units at the annual rate in November to 5.57 million in December, with declines in every region of the country. Single-family home sales were off by 2.6 percent in December, down from 5.09 million to 4.96 million units, with sales of condominium and co-op units off more sharply, down 11.6 percent from 690,000 to 610,000 units. On a more positive note, existing home sales were up 1.1 percent over the past 12 months, up from 5.51 million units in December 2016, with single-family and condo/co-op sales up 1.0 percent and 1.7 percent year-over-year, respectively. The average sales rate for 2017 was 5.51 million units, which was the best year since 2006 (6.48 million).

While acknowledging the strong year overall, Lawrence Yun, NAR’s chief economist, noted, “New listings struggled to keep up with what was sold very quickly, and buying became less affordable in a large swath of the country. These two factors ultimately muted what should have been a stronger sales pace.” Regarding the inventory of existing homes, there were 3.2 months of supply in December, down significantly from 4.2 months in September, illustrating the decline in new listings. This has helped to raise list prices. The median existing home sales price was $246,800 in December, up 5.8 percent from one year ago.

Gross Domestic Product
The Bureau of Economic Analysis said that the U.S. economy grew by an annualized 2.6 percent in the fourth quarter, according to preliminary data. This was somewhat lower than the consensus estimate of around 3 percent, and it represented an easing from the 3.1 percent and 3.2 percent gains seen in the second and third quarters, respectively. Overall, the latest report found solid growth in consumer, business and government spending, but headline growth was pulled lower by both net exports and inventory spending. To illustrate the impact of those various components, real GDP growth would have been 4.35 percent absent the drag from net exports and inventories, which subtracted 1.8 percentage points from the top-line growth figure. Personally, I would not be surprised to see the growth rate revised up in the coming weeks.

In 2017, real GDP increased by 2.3 percent, up from 1.5 percent in 2016. Since the end of the Great Recession, the U.S. economy has expanded by 2.2 percent on average. Moving forward, the NAM anticipates 3.0 percent growth in 2018—or something close to that. The consensus right now is for growth of around 2.7 percent. I continue to believe that there is upward potential in that outlook for next year, especially as firms increase their investments. Passage of comprehensive tax reform and other pro-growth measures should help to stimulate economic activity, which I hope will allow us to reach 3.0 percent annual growth for the first time since 2005.

Looking more closely at the underlying data in this report, consumer spending was the biggest bright spot. Personal consumption expenditures rose by an annualized 3.8 percent in the fourth quarter, up from 2.2 percent in the third quarter but the best reading since the second quarter of 2016. Durable and nondurable goods spending jumped 14.2 percent and 5.2 percent, respectively, for the quarter. Service-sector spending increased by 1.8 percent. In total, personal spending contributed 2.58 percentage points to real GDP growth—suggesting that the other components of headline growth essentially offset one another. The good news here is that Americans opened their pocketbooks widely at the end of the year, boosting retail sales and, as seen here, the overall economy.

Business and government spending rates were also encouraging. Nonresidential fixed investment rose by 6.8 percent in the fourth quarter. The robust growth of 11.4 percent in equipment spending led that sector and represented the fastest pace in more than three years. Structures spending rebounded from a weather-related decline of 7.0 percent in the third quarter to a gain of 1.4 percent in the fourth quarter. Similarly, residential investment ended two quarters of sharp declines to jump by 11.6 percent in the fourth quarter. As a result, fixed investment in the economy rose 7.9 percent at the annual rate in the fourth quarter, adding 1.27 percentage points to real GDP.

Likewise in this report, federal spending and state and local government spending increased 3.5 percent and 2.6 percent, respectively, with government expenditures adding another 0.50 percentage points to top-line growth.

In contrast to those readings, businesses spent less on inventories in the fourth quarter, subtracting 0.67 percentage points from real GDP. The silver lining, though, is that the reduction in stockpiles could necessitate additional production in the coming months—especially given the uptick in demand. That should be a positive for the first quarter of 2018.

Finally, there was mixed news on the international front, with net exports serving as the largest drag on real GDP growth in the fourth quarter, subtracting 1.13 percentage points from the headline number. On the positive side, goods exports were up a whopping 12.6 percent at the annual rate in the fourth quarter, its strongest growth rate in four years. Yet, those gains were more than offset by a 16.8 percent jump in goods imports in the quarter, its largest growth rate since the second quarter of 2010.

IHS Markit Flash Manufacturing PMIs for the United States and Eurozone
The IHS Markit Flash U.S. Manufacturing PMI rose from 55.1 in December to 55.5 in January, its best reading since March 2015. New orders (up from 55.9 to 56.7), output (up from 55.7 to 56.2) and exports (up from 50.6 to 52.9) all accelerated in January, with demand and production each at 12-month highs. At the same time, employment (down from 55.7 to 55.0) slowed somewhat in the latest survey, easing from December’s hiring rate, which was the fastest since October 2014. Similarly, the index for future output (down from 71.1 to 66.9) decelerated in January but remained highly elevated. Overall, respondents continue to be very optimistic about production over the next six months.

Meanwhile, manufacturing activity in Europe began the new year on a positive note, even as the headline index pulled back from its fastest pace since the survey was introduced in June 1997. The IHS Markit Flash Eurozone Manufacturing PMI declined from 60.6 in December to 59.6 in January. The underlying data remained encouraging despite some softer growth for new orders (down from 61.5 to 59.6), output (down from 62.2 to 61.1), exports (down from 60.6 to 58.2) and employment (down from 58.2 to 57.7). Encouragingly, manufacturers in the Eurozone are very upbeat in the outlook for the first half of 2018, with the index for future output (up from 67.6 to 67.9) rising to its highest point since the measure was introduced in mid-2012. In addition to data on Europe as a whole, IHS Markit also released figures for France (down from 58.8 to 58.1) and Germany (down from 63.3 to 61.2), both of which also decelerated somewhat in January but remained not far from multiyear highs.

Final data on each of these surveys will be released on February 1.

International Trade in Goods (Preliminary)
The Census Bureau released advance statistics on international trade in goods. Specifically, the goods trade deficit rose from $69.99 billion in November to $71.58 billion in December in preliminary data. The jump in the monthly trade deficit stemmed from a growth in goods exports (up from $134.03 billion to $137.64 billion) that was outpaced by even stronger growth in goods imports (up from $204.02 billion to $209.22 billion). Final data will be released on February 6. Note that a surplus in service-sector activity, which was $20.40 billion in November, helped to improve the overall U.S. trade deficit.

In December, goods exports were mostly higher, including capital goods (up $1.23 billion), industrial supplies (up $1.05 billion), other goods (up $533 million), consumer goods (up $455 million) and foods, feeds and beverages (up $418 million). Automotive vehicles exports were off by $80 million in December. Meanwhile, there were increased goods imports across the board, led by consumer goods (up $3.16 billion) and automotive vehicles (up $1.01 billion).

Kansas City Fed Manufacturing Survey
The Kansas City Federal Reserve Bank said that manufacturing activity started the new year on a strong note, with sentiment picking up in January. The composite index of general business conditions increased from 13 in December to 16 in January. (Note that these figures reflect a new seasonal adjustment update for all past data points.) Growth in new orders (up from 11 to 14), production (unchanged at 16), shipments (up from 10 to 14), employment (up from 16 to 18) and exports (up from 4 to 6) continued to be encouraging, with solid expansions for most of those key indicators. At the same time, the average employee workweek (down from 10 to 2) slowed a little but remained positive.

Meanwhile, manufacturers were optimistic about the next six months, with roughly half of respondents expecting increased new orders, production, shipments and employment in the coming months. In addition, 24 percent and 44 percent of those completing the survey said they anticipate higher levels of export sales and capital spending. The forward-looking composite index rose from 23 to 29. On the downside, 61 percent of business leaders predicted a pickup in raw material costs over the next six months, consistent with the acceleration in input prices seen in other measures.

New Home Sales
The Census Bureau and the Department of Housing and Urban Development reported that new home sales fell sharply in December, down 9.3 percent. New single-family residential sales declined from 689,000 units at the annual rate in November, its fastest pace since October 2007, to 625,000 in December. Activity has seesawed from month to month in the second half of the year, but the longer-term trend has been positive. In 2017, new home sales averaged 611,833 units, up 9.1 percent from the 560,917 rate seen in 2016. On a year-over-year basis, new single-family home sales jumped 14.1 percent from 548,000 units in December 2016, with gains over the past 12 months in every region except for the Midwest.

With weaker sales growth in the latest data, inventories of new homes for sale widened for the month. In December, the number of months of supply on the market rose from 4.9 months in November to 5.7 months, matching the rate seen in October. Despite some recent volatility, the average supply on the market in 2017 was 5.4 months, up slightly from 5.2 months in 2016. The median sales price was $335,400 in December, up 2.6 percent from $327,000 one year ago.

Richmond Fed Manufacturing Survey
The Richmond Federal Reserve Bank said that manufacturing activity in its district continued to expand in January, even as growth eased for the second straight month. The composite index for the general business assessment declined from 20 in December to 14 in January, pulling back once again from November’s all-time high in the survey’s 34-year history (30). The bottom line is that manufacturers in the region see relatively strong expansions in activity as 2018 begins, continuing the trend of decent growth experienced for much of 2017. New orders (unchanged at 16) expanded at the same pace on net in January as seen in December, but other key measures decelerated somewhat. This included shipments (down from 24 to 15), capacity utilization (down from 16 to 13), employment (down from 20 to 10) and average workweek (down from 8 to 2). Wages (up from 22 to 24) picked up, expanding rather strongly for the month—another sign of continued tightening in the labor market.

In addition, manufacturing respondents in the Richmond Fed’s region were very optimistic in their outlook for the next six months. Forward-looking measures for new orders (down from 44 to 36), shipments (up from 44 to 45), capacity utilization (down from 35 to 30), employment (down from 26 to 21) and capital expenditures (down from 35 to 30) remained quite robust despite some softening in many of these responses.

Meanwhile, manufacturers in the district said they anticipate pricing pressures will accelerate at modest rates in the months ahead. Those completing the survey said that prices paid for raw materials increased by 1.79 percent at the annual rate in January, the same pace as in December. Nonetheless, raw material prices are expected to grow by 2.33 percent at the annual rate six months from now, up from 2.10 percent in the prior survey. That is the highest expected growth rate for inflation in 11 months.

State Employment Report
Indiana created the most net new manufacturing jobs in December, according to the Bureau of Labor Statistics, adding 4,700 workers in the month. Ohio (up 3,500), Iowa (up 3,300), California (up 3,000), Oregon (up 2,400), Washington (up 2,400) and Arizona (up 2,300) also topped the list of manufacturing employment gains in December. In addition, Texas saw the greatest job gains in the sector in 2017, with manufacturing employment in the state up 36,300 since December 2016. Other states with the fastest manufacturing job growth year-over-year included Florida (up 16,200), Iowa (up 11,700), Wisconsin (up 11,500), Ohio (up 10,200) and South Carolina (up 9,300).

The national unemployment rate remained at 4.1 percent in December, continuing to be at its lowest level since December 2000. Hawaii (2.0 percent) had the lowest unemployment rate in the country. Several states were not far behind, including New Hampshire (2.6 percent), North Dakota (2.6 percent), Nebraska (2.7 percent), Iowa (2.8 percent), Vermont (2.8 percent) and Idaho (2.9 percent). In contrast, Alaska (7.3 percent), the District of Columbia (6.0 percent) and New Mexico (6.0 percent) had the highest unemployment rates.

Questions or Comments?

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

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