Monday Economic Report - March 19, 2018

A Publication of the National Association of Manufacturers

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

The Federal Reserve reported that manufacturing production rebounded in February, up 1.2 percent, after edging down 0.2 percent in January. That was the fastest monthly pace of growth since October, and overall, the data continue to show healthy growth for manufacturers, with strength last year carrying over into this year. Indeed, manufacturing production has risen 2.5 percent over the past 12 months, up from 1.6 percent last month and the best year-over-year rate since July 2014. Similarly, manufacturing capacity utilization jumped from 76.0 percent in January to 76.9 percent in February, a reading not seen since April 2008. At the same time, total industrial production jumped 1.1 percent in February, or 4.4 percent year-over-year, the highest rate since March 2011. The data were supported by strength in the New York and Philadelphia Federal Reserve Bank districts in their March manufacturing surveys, with respondents quite positive about current activity and in their economic outlook.

The labor market has tightened significantly as a result of strength in the manufacturing sector and larger macroeconomy. For instance, there were 427,000 manufacturing job openings in January, up strongly from 374,000 in December. That was the best number since September’s reading (445,000), which was the strongest since January 2001. The manufacturing sector hired 360,000 workers in January, just shy of the 364,000 employees hired in August, which was the strongest rate since November 2007. Net hiring (or hires minus separations) registered 8,000 in January but has averaged a rather healthy 14,500 over the past 12 months. Meanwhile, job openings for nonfarm payroll businesses soared to 6,312,000 in January, a new all-time high.

Positive economic news—especially in the jobs market—has helped to lift consumer confidence. The Index of Consumer Sentiment from the University of Michigan and Thomson Reuters jumped to 102.0 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 122.8), with that measure soaring to a new all-time high.

Despite robust consumer assessments about the economy, retail spending declined 0.1 percent in February for the third straight month, starting the new year off on a disappointing note. Motor vehicle and parts sales fell 0.9 percent in February, decreasing for the fourth consecutive month and one of the larger drags in the latest report. Along those lines, retail spending excluding automobiles increased 0.2 percent in February. Nonetheless, the larger narrative remains encouraging, with consumers being a bright spot over the past year. Indeed, retail sales have risen 4.0 percent year-over-year in February, suggesting a decent pace overall even if it represented a deceleration from the more robust rate of 5.9 percent in November. Excluding motor vehicles and parts, the pace was somewhat stronger, with retail sales up 4.4 percent over the past 12 months.

Turning to the housing market, new housing starts declined 7.0 percent from an annualized 1,329,000 units in January—the fastest pace since August 2007—to 1,236,000 units in February. Yet, there were some positives to note in the latest report. First, for the fifth straight month, housing starts exceeded 1.2 million units at the annual rate, which suggests that we might finally have breached and sustained that threshold of activity, which is promising. Second, single-family housing starts rose to 902,000 units in February. It was only the second time since September 2007 that single-family construction activity has risen above 900,000 units, following the rate of 946,000 units in November. The softness in the February housing starts data came from the multifamily segment, which is highly volatile from month to month.

Housing permits also weakened, down from an annualized 1,377,000 units in January—also the best reading since August 2007—to 1,298,000 units in February. Much like the starts figures, this was the fifth consecutive month with permitting above 1.2 million units, and the trend continues to be a mostly heartening one. On a year-over-year basis, housing permits have risen 6.5 percent, up from 1,219,000 in February 2017. With that in mind, the permits data—while somewhat reduced in February—continue to signal strength in the housing market in the coming months, as this measure is a good proxy for future construction activity. In that way, it mirrored solid assessments from homebuilders, who remain very upbeat about single-family sales in their outlook.

Finally, the beforementioned regional Federal Reserve Bank surveys both reported that input costs were elevated, with measures for raw material prices at their highest level in at least five years. Along those lines, consumer and producer prices both increased 0.2 percent in February. Reduced energy costs in February helped to ease pricing pressures after solid gains in January. Overall, however, prices have picked up somewhat, even if some modest acceleration should be expected given the low levels of inflation over much of the past two years. The consumer price index has risen 2.3 percent over the past 12 months, the fastest year-over-year pace since March 2017, and producer prices for final demand goods and services have increased 2.9 percent year-over-year. Core inflation, which excludes food and energy costs, was 1.9 percent year-over-year for consumers and 2.7 percent for producers.

The Federal Open Market Committee (FOMC) meets on March 20 and 21; it is expected to raise short-term interest rates for the first time this year. The Federal Reserve will be reacting to stronger economic growth and an ever-tighter labor market in its move toward normalizing monetary policy, with the FOMC anticipated to increase the federal funds rate at least three (and maybe four) times in 2018. It is also continuing to reduce the size of the Federal Reserve’s balance sheet, a process that has been ongoing since last fall.

The Census Bureau will release preliminary numbers for durable goods orders and shipments for February this week, which were softer than desired in January but have been quite robust over the past 12 months. In addition, new surveys from IHS Markit and the Kansas City Federal Reserve Bank will provide new clues about manufacturing activity. Other highlights this week include new data on existing and new home sales, leading indicators and state employment.

Economic Indicators

Last Week’s Indicators (Summaries Appear Below)

Monday, March 12
State Employment Report

Tuesday, March 13
Consumer Price Index
NFIB Small Business Survey

Wednesday, March 14
Producer Price Index
Retail Sales

Thursday, March 15
NAHB Housing Market Index
New York Fed Manufacturing Survey
Philadelphia Fed Manufacturing Survey

Friday, March 16
Housing Starts and Permits
Industrial Production
Job Openings and Labor Turnover Survey
University of Michigan Consumer Sentiment

This Week’s Indicators

Monday, March 19
None

Tuesday, March 20
None

Wednesday, March 21
Existing Home Sales
FOMC Monetary Policy

Thursday, March 22
Conference Board Leading Indicators
IHS Markit Flash Manufacturing PMIs for the United States and Eurozone
Kansas City Fed Manufacturing Survey

Friday, March 23
Durable Goods Orders and Shipments
New Home Sales
State Employment Report (February)

Summaries for Last Week’s Economic Indicators

Consumer Price Index
The Bureau of Labor Statistics reported that consumer prices increased 0.2 percent in February, slowing from a robust 0.5 percent gain in January. Food and energy costs decelerated in the latest data, with the latter being one of the bigger drivers of higher consumer prices in the prior release. Energy costs inched up 0.1 percent in February, slowing after a rise of 3.0 percent in January, with gasoline prices off 0.9 percent. This is largely consistent with data from the Energy Information Administration, which pegged the average price for regular conventional gasoline at $2.516 per gallon on January 29 but fell to $2.442 a gallon on February 26. At the same time, food prices were flat in February. Since February 2017, food and energy costs have increased 1.4 percent and 7.7 percent, respectively.

Excluding food and energy, core consumer inflation rose 0.2 percent in February, down slightly from 0.3 percent growth in January. Higher costs for apparel, shelter and transportation services helped to push core consumer prices higher in the latest data, with lower costs for medical care commodities and new and used vehicles.

The consumer price index has risen 2.3 percent over the past 12 months, the fastest year-over-year pace since March 2017. Despite the acceleration in consumer costs, overall pricing pressures remain mostly modest. While consumer inflation represents an increase from 1.6 percent year-over-year in June 2017, it remains well below the 2.8 percent pace seen one year ago. Moreover, core consumer prices, which exclude food and energy costs, have risen 1.9 percent over the past 12 months. This would indicate that inflation remains under control for now, even if core consumer prices have accelerated in recent months.

Housing Starts and Permits
The Census Bureau and the Department of Housing and Urban Development reported that housing starts pulled back in February after notching the fastest pace since August 2007 in January. New residential construction declined 7.0 percent from an annualized 1,329,000 units in January to 1,236,000 units in February. Despite the deceleration in activity, there were some positives to note in the latest report. First, for the fifth straight month, housing starts exceeded 1.2 million units at the annual rate, which suggests that we might finally have breached and sustained that threshold of activity, which is promising. Second, single-family housing starts rose from 877,000 units in January to 902,000 units in February. It was only the second time since September 2007 that single-family construction activity has risen above 900,000 units, following the rate of 946,000 units in November.

The softness in the February housing starts data came from the multifamily segment, which is highly volatile from month to month. Multifamily starts fell sharply from 452,000 units at the annual rate in January to 334,000 units in February, a five-month low.

Meanwhile, housing permits also weakened, down from an annualized 1,377,000 units in January—also the best reading since August 2007—to 1,298,000 units in February. Much like the starts figures, this was the fifth consecutive month with permitting above 1.2 million units, and the trend continues to be a mostly heartening one. With that said, both single-family (down from 877,000 to 872,000) and multifamily (down from 500,000 to 426,000) residential permits decreased in February. On a year-over-year basis, housing permits have risen 6.5 percent, up from 1,219,000 in February 2017, with single-family and multifamily activity up 4.6 percent and 10.6 percent, respectively.

With that in mind, the permits data—while somewhat reduced in February—continue to signal strength in the housing market in the coming months, as this measure is a good proxy for future construction activity. In that way, it mirrored solid assessments from homebuilders, who remain very upbeat about single-family sales in their outlook.

Industrial Production
The Federal Reserve reported that manufacturing production rebounded in February, up 1.2 percent, after edging down 0.2 percent in January. That was the fastest monthly pace of growth since October, and overall, the data continue to show healthy growth for manufacturers, with strength last year carrying over into this year. Indeed, manufacturing production has risen 2.5 percent over the past 12 months, up from 1.6 percent last month and the best year-over-year rate since July 2014. Similarly, manufacturing capacity utilization jumped from 76.0 percent in January to 76.9 percent in February, a reading not seen since April 2008.

In February, durable and nondurable goods production rose 1.8 percent and 0.7 percent, respectively. The largest monthly increases included motor vehicles and parts (up 3.9 percent), nonmetallic mineral products (up 3.9 percent), wood products (up 2.6 percent), miscellaneous durable goods (up 2.5 percent), furniture and related products (up 1.9 percent), machinery (up 1.6 percent), computer and electronic products (up 1.5 percent), plastics and rubber products (up 1.4 percent), aerospace and miscellaneous transportation equipment (up 1.3 percent) and apparel and leather (up 1.0 percent), among others. Only two manufacturing sectors—out of 19—saw declining production in February: petroleum and coal products (down 2.8 percent) and electrical equipment, appliances and components (down 0.8 percent).

Meanwhile, total industrial production jumped 1.1 percent in February, recovering from the 0.3 percent decline in January. In addition to manufacturing, mining production soared 4.3 percent in February, but utilities output fell 4.7 percent, likely due to warmer temperatures. Over the past 12 months, industrial production has risen 4.4 percent, the highest rate since March 2011. Mining and utilities output increased 9.7 percent and 10.5 percent year-over-year, respectively. In addition, capacity utilization rose from 77.4 percent to 78.1 percent, the strongest rate since January 2015.

Job Openings and Labor Turnover Survey
The Bureau of Labor Statistics reported there were 427,000 manufacturing job openings in January, up strongly from 374,000 in December. That was the best number since September’s reading (445,000), which was the strongest since January 2001. In fact, the job postings rate in January was only the fifth time since the indicator started in December 2000 that openings have exceeded 400,000. In the latest figures, both durable (up from 239,000 to 284,000) and nondurable (up from 135,000 to 143,000) goods manufacturers posted more jobs in January, and the pace of job openings has continued to trend higher overall. Monthly job openings in the sector averaged 365,458 in 2017, up from 326,750 in 2016. Moving forward, we would anticipate renewed strength for job openings in the coming months.

Meanwhile, net hiring among manufacturers has also been relatively solid, according to the latest Job Openings and Labor Turnover Survey report. The manufacturing sector hired 360,000 workers in January, up from 348,000 workers in December. This was just shy of the 364,000 employees hired in August, which was the strongest rate since November 2007. Hiring among durable goods firms (up from 201,000 to 217,000) accelerated in January, but eased slightly for nondurable goods businesses (down from 147,000 to 143,000). At the same time, total separations—including layoffs, quits and retirements—rose from 337,000 to 352,000, a level not seen since May 2007. As a result, net hiring (or hires minus separations) was 8,000 in January but has averaged a rather healthy 14,500 over the past 12 months.

Turning to the larger economy, job openings for nonfarm payroll businesses soared from 5,667,000 in December to 6,312,000 in January, a new all-time high. In the latest data, job openings increased in every major sector except for leisure and hospitality, which was just marginally lower. Meanwhile, net hiring among nonfarm businesses continued to be decent, at 210,000 and 174,000 in November and December, respectively.

NAHB Housing Market Index
The National Association of Home Builders (NAHB) and Wells Fargo reported that the Housing Market Index (HMI) eased marginally, down from 71 in February to 70 in March. Yet, the headline measure remained not far from December’s reading (74), which was the best since July 1999. More importantly, homebuilders are very optimistic about the next six months, despite the index for expected sales of single-family homes declining from 80—the best reading since June 2005—to 78. NAHB Chairman Randy Noel noted, “Builders’ optimism continues to be fueled by growing consumer demand for housing and confidence in the market.” NAHB Chief Economist Robert Dietz added, “A strong labor market, rising incomes and a growing economy are boosting demand for homeownership even as interest rates rise.”

To put the current numbers in perspective, the HMI stood at 58 and 71 in March 2016 and March 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 19 straight months. In the latest data, sentiment strengthened in the Northeast but was somewhat softer in other regions.

New York Fed Manufacturing Survey
Manufacturing activity in the New York Federal Reserve Bank’s district continued to show solid gains in manufacturing activity in March. In the latest Empire State Manufacturing Survey, the composite index of general business conditions rose from 13.1 in February to 22.5 in March. After decelerating for four straight months from the three-year high of 28.8 in October, it was encouraging to see the headline index rebound once again. Many of the key underlying data points also increased in March, including faster expansions for new orders (up from 13.5 to 16.8), shipments (up from 12.5 to 27.0), the average workweek (up from 4.6 to 5.9) and inventories (up from 4.9 to 5.6).

Hiring slowed somewhat on net (down from 10.9 to 9.4), but, interestingly, the percentage of respondents suggesting that employment for their firms had increased for the month improved, up from 18.9 percent in February to 25.8 percent in March. The easing in the index stemmed from a pickup in those suggesting that hiring was lower, up from 8.0 percent to 16.4 percent.

As we have seen in recent months, pricing pressures continued to increase. The prices paid index rose from 48.6 to 50.3, the highest level since March 2012. Indeed, more than half of respondents said their input costs increased in March, with just 2.8 percent saying they were lower. The forward-looking inflationary measure suggested this trend should continue, with the expected prices paid index rising from 52.1 to 55.9, the fastest pace since May 2012.

Despite the increased pricing pressure, manufacturers in the New York Federal Reserve’s district remained very upbeat about the next six months. The future-oriented composite index declined from 50.5 in February—the best reading since January 2011—to 44.1 in March, a number that still suggests a very robust outlook. The underlying data mostly decreased, but showed promising signs overall, including new orders (down from 47.2 to 43.0), shipments (down from 46.7 to 43.3), employment (up from 19.5 to 23.3), the average workweek (down from 20.8 to 14.7), capital expenditures (down from 31.9 to 29.4) and technology spending (down from 23.6 to 18.9).

NFIB Small Business Survey
The National Federation of Independent Business reported that the Small Business Optimism Index accelerated once again, up from 106.9 in January to 107.6 in February. This edged out November’s reading (107.5) as the highest since July 1983 (108.0). Note that readings above 100 are consistent with strong growth among small business owners, and the robust data seen for much of the past year would suggest a healthy outlook overall in the economy. In that spirit, the percentage of respondents saying the next three months would be a “good time to expand” remained at 32 percent (an all-time high), and the percentage of those expecting sales to rise over the next three months increased from 25 percent to 28 percent.

In addition, the labor market remained strong. Those with positions they are unable to fill right now remained at 34 percent. Along those lines, respondents cited the quality of labor (22 percent) as the top “single most important problem,” illustrating the tightness of the job market for small businesses. Taxes and government regulations and red tape both came in second (15 percent). With that said, the net percentage planning to add workers in the next three months eased from 20 percent to 18 percent, a four-month low but still suggesting healthy growth.

Similarly, capital expenditures activity remained promising, with those investing in capital during the past six months jumping from 61 percent to 66 percent—the highest point since 2004. Those planning to make a capital expenditure over the next three to six months remained the same at 29 percent.

Philadelphia Fed Manufacturing Survey
The Federal Reserve Bank of Philadelphia reported that manufacturing activity continued to be healthy in its district in March. The composite index of general business activity eased somewhat from 25.8 in February to 22.3 in March, but new orders (up from 24.5 to 35.7) and shipments (up from 15.5 to 32.4) accelerated strongly at their fastest paces in 12 months. More importantly, just more than 52 percent of respondents said new orders had increased in March, with just 16.4 percent noting declines. In addition, the labor market remained tight, with employment strengthening slightly (up from 25.2 to 25.6) and nearly 35 percent of respondents suggesting hiring had picked up in March. The average workweek slowed a bit in this report (down from 13.7 to 12.8) but remained strong overall.

If there is any concern in the data, it is in the pricing figures, as noted in last month’s survey. The index for prices paid pulled back somewhat from 45.0 in February—the highest level since May 2011—to 42.6 in March but remained highly elevated. Moreover, 64.0 percent of manufacturing firms predict higher input costs over the next six months, with that index easing from 65.2—a pace not seen in seven years—to 62.8. This mirrors an acceleration in other pricing data.

Meanwhile, manufacturers in the Philadelphia Federal Reserve district continued to be very upbeat in their outlook. The forward-looking composite index increased from 41.2 to 47.9, indicating vigorous expectations for growth in the next six months. More than 60 percent of respondents see new orders rising in the months ahead, with 54.7 percent forecasting higher shipments. In terms of investments in the company, 43.2 percent and 45.4 percent anticipate additional hiring and capital spending, respectively, for the next six months.

Producer Price Index
The Bureau of Labor Statistics reported that producer prices for final demand goods and services rose 0.2 percent in February, easing somewhat from the 0.4 percent gain in January. For manufacturers, producer prices for final demand goods edged down 0.1 percent in February, pulling back from the 0.7 percent increase in January. Energy costs helped to boost January’s jump in input costs, with energy prices up 3.4 percent in that release; in the latest figures, energy fell 0.5 percent. Food prices declined 0.4 percent, drifting lower for the third straight month. On a year-over-year basis, final demand food and energy costs have risen 0.6 percent and 9.3 percent, respectively. Excluding food and energy, producer prices for final demand goods rose 0.2 percent in this report, increasing for the seventh consecutive month.

Overall, producer prices for final demand goods and services have increased 2.9 percent since February 2017. This was up from 2.6 percent year-over-year in January but down from the 3.1 percent pace in November. In general, raw material costs have accelerated over the past year, with the year-over-year pace being 2.0 percent in February 2017. Recent sentiment surveys have tended to echo this finding, with input prices at multiyear highs in many such reports.

Similarly, core producer prices, which exclude food, energy and trade services, have increased 2.7 percent over the past 12 months, up from 2.4 percent in January. For comparison purposes, core producer prices were 1.8 percent year-over-year at this point last year.

Retail Sales
Retail spending declined 0.1 percent in February for the third straight month, starting the new year off with disappointing consumer data. Motor vehicle and parts sales fell 0.9 percent in February, decreasing for the fourth consecutive month and one of the larger drags in the latest report. Along those lines, retail spending excluding automobiles increased 0.2 percent in February, extending the 0.1 percent gain in January. Despite the softer figures, the larger narrative remains encouraging, with consumers being a bright spot over the past year. Indeed, retail sales have risen 4.0 percent year-over-year in February, suggesting a decent pace overall even if it represented a deceleration from the more robust rate of 5.9 percent in November. Excluding motor vehicles and parts, the pace was somewhat stronger, with retail sales up 4.4 percent over the past 12 months.

Retail spending data provided mixed results in February. The largest increases included sporting goods and hobby stores (up 2.2 percent), building material and garden supply stores (up 1.9 percent), nonstore retailers (up 1.0 percent), clothing and accessory stores (up 0.4 percent), food services and drinking places (up 0.2 percent) and miscellaneous store retailers (up 0.1 percent). In addition to declining motor vehicles sales, other segments with reduced spending in February included furniture and home furnishings (down 0.8 percent), general merchandise (down 0.4 percent), health and personal care (down 0.4 percent), electronics and appliances (down 0.1 percent) and food and beverage (down 0.1 percent) stores.

Over the past 12 months, the fastest growth in retail sales included nonstore retailers (up 10.1 percent), gasoline stations (up 7.9 percent), miscellaneous store retailers (up 7.5 percent), clothing and accessory stores (up 4.9 percent), building material and garden supply stores (up 4.6 percent) and electronics and appliance stores (up 4.5 percent). Higher prices boosted the jump in sales for gasoline stations.

State Employment Report (January)
South Carolina created the most net new manufacturing jobs in January, according to the Bureau of Labor Statistics, adding 3,100 workers in the month. Texas (up 2,400), California (up 2,100), Wisconsin (up 2,000) and Iowa (up 1,300) also topped the list of manufacturing employment gains in January. In addition, Illinois saw the greatest job gains in the sector over the past 12 months, with manufacturing employment in the state up 20,200 since January 2017. Other states with the fastest manufacturing job growth year-over-year included Texas (up 18,700), Iowa (up 11,000), Wisconsin (up 9,000), Arizona (up 7,800), Ohio (up 7,600) and South Carolina (up 7,200).

The national unemployment rate remained at 4.1 percent in January (and February), staying at its lowest level since December 2000. For January, Hawaii had the lowest unemployment rate in the country (2.1 percent), followed by New Hampshire (2.6 percent), North Dakota (2.6 percent), Iowa (2.9 percent), Nebraska (2.9 percent) and Vermont (2.9 percent). In contrast, Alaska (7.3 percent), New Mexico (5.9 percent), the District of Columbia (5.8 percent) and West Virginia (5.4 percent) had the highest unemployment rates.

University of Michigan Consumer Sentiment
The University of Michigan and Thomson Reuters reported that consumer confidence rose strongly in preliminary March data. The Index of Consumer Sentiment jumped from 99.7 in February to 102.0 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 122.8), 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 88.6).

Questions or Comments?

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

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