Monday Economic Report - March 5, 2018

A Publication of the National Association of Manufacturers

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

There were more encouraging signs for manufacturers last week in the economic data. For instance, the Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers’ Index rose to 60.8 in February, the highest level since May 2004. Given the strength of that headline figure, it should not be a surprise that many of the underlying data points are near or exceed 60, including new orders, production, employment and exports. Regarding the latter number, exports once again expanded at their best rate since April 2011, with international sales helping to fuel stronger overall demand. Regional surveys from the Dallas and Richmond Federal Reserve Banks also reported robust expansions in manufacturing activity in their districts in February. Texas manufacturing sentiment was the highest since December 2005, and the Richmond Fed’s headline index was just shy of November’s all-time high. These surveys cited optimism in the outlook for the next six months.

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 6.8 percent since December 2016. Nonetheless, new durable goods orders fell 3.7 percent in January following two months of solid gains in both November and December. The decline in the latest data stemmed largely from significant decreases in defense and nondefense aircraft and parts sales, which can be highly volatile from month to month. Excluding transportation equipment, new durable goods orders edged down 0.3 percent in January, falling (ever-so-slightly) for the first time since June. As such, broader activity in the durable goods sector started 2018 on a soft note.

At the same time, the sentiment surveys out last week also continued to note accelerating input costs, with indices for raw material prices soaring to multiyear highs. In the Richmond Fed report, respondents said that they expect raw material prices to grow by 2.69 percent at the annual rate six months from now, up from 2.33 percent in the prior survey. That is the highest expected growth rate for inflation since May 2013.

In addition, the personal consumption expenditure (PCE) deflator—which is the preferred measure used by the Federal Reserve—increased by 0.4 percent in January, its strongest monthly gain since September. Despite the large gains in prices in January, overall inflation remains quite modest and largely under control, at least for now. After seeing pricing pressures accelerate strongly earlier in 2017—with the PCE deflator peaking at 2.2 percent year-over-year in February—inflation has pulled back since then. Since December 2016, the PCE deflator has risen by 1.7 percent, unchanged from the previous report. In addition, core PCE inflation was up 1.5 percent year-over-year in January for the third straight month, well below the Fed’s goal of 2 percent.

The stronger economic outlook has also helped to boost private manufacturing construction spending, which was up 1.2 percent in January, rising for the fourth straight month. The value of construction put in place in the sector increased to $64.50 billion in January. Since falling to $61.18 billion in September, private manufacturing construction has started to trend higher, which would be consistent with the recent uptick in economic activity and a stronger overall outlook. With that said, construction in the sector has drifted lower since achieving the all-time high of $82.13 billion in May 2015. Along those lines, manufacturing construction has declined by 9.7 percent year-over-year. For now, though, the good news is that the sector appears to have turned a corner, moving in the right direction.

Consumers have been one of the bright spots in the U.S. economy, and there were also promising headlines on that front. Personal income increased by 0.4 percent for the second straight month in January, with 3.8 percent growth over the past 12 months. For manufacturers, total wages and salaries were $847.8 billion in January, up 4.0 percent year-over-year. At the same time, personal spending eased from a very robust 0.7 percent increase in December to 0.4 percent growth in January. 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 by 4.4 percent. The savings rate rose from 2.5 percent in December, its lowest rate since September 2005, to 3.2 percent in January. Despite the uptick in the savings rate, it has largely trended lower since peaking at 4.1 percent in February 2017.

Meanwhile, the housing market data were soft in January, with weather likely a factor. Along those lines, new home sales fell sharply for the second straight month, down 7.6 percent and 7.8 percent in December and January, respectively. New single-family residential sales declined from 696,000 units at the annual rate in November, its fastest pace since October 2007, to 643,000 in December to 593,000 in January. This was a disappointing reading, with sales starting the new year on a weak note. Sales were lower in every region of the country. On a year-over-year basis, new single-family home sales were off 1.0 percent from 599,000 units in January 2017. We would anticipate faster growth moving forward, so hopefully this pullback is short-lived.

The labor market has tightened considerably over the past year, with the inability to attract and retain workers being the top concern in the most recent NAM Manufacturers’ Outlook Survey. (A new survey is currently in the field; if you have not already done so, please take a few minutes to answer the survey questions here.) This week, we will get new data on employment. Manufacturers have added roughly 15,700 workers per month over the past 13 months on average, and the expectation is that the sector will build on those gains in February. Other highlights this week include updates on consumer credit, factory orders and shipments, international trade, and labor productivity.

Economic Indicators

Last Week’s Indicators (Summaries Appear Below)

Monday, February 26
Chicago Fed National Activity Index
Dallas Fed Manufacturing Survey
New Home Sales

Tuesday, February 27
Conference Board Consumer Confidence
Durable Goods Orders and Shipments
International Trade in Goods (Preliminary)
Richmond Fed Manufacturing Survey

Wednesday, February 28
Gross Domestic Product (Revision)

Thursday, March 1
Construction Spending
ISM Manufacturing Purchasing Managers’ Index
Personal Income and Spending

Friday, March 2
University of Michigan Consumer Sentiment (Revision)

This Week’s Indicators

Monday, March 5
None

Tuesday, March 6
Factory Orders and Shipments

Wednesday, March 7
ADP National Employment Report
Consumer Credit
International Trade Report
Productivity and Costs (Revision)

Thursday, March 8
None

Friday, March 9
BLS National Employment Report

Summaries for Last Week’s Economic Indicators

Chicago Fed National Activity Index
The Chicago Federal Reserve Bank said that the U.S. economy continued to expand in January, growing ahead of its historic trend for the fifth straight month. With that said, the National Activity Index (NAI) edged down from 0.14 in December to 0.12 in January, and its three-month moving average dropped from 0.43 to 0.17 in this report. The three-month average decline mostly reflects the loss of October’s sky-high 0.91 reading, which was the highest level since November 2005. Overall, the NAI continues to be encouraging, even if the data have stabilized more recently, as positive readings indicate growth above the historic trend.

Nonetheless, production-related indicators subtracted 0.01 from the NAI in January, with industrial production pulling back slightly on reduced mining output for the month. For its part, manufacturing production was unchanged in January, with 1.8 percent year-over-year growth. Employment-related indicators added 0.09 to the headline number in January, with nonfarm payroll and manufacturing employment up 200,000 and 15,000, respectively. The unemployment rate was unchanged at 4.1 percent and remained at its lowest level since December 2000.

Conference Board Consumer Confidence
The Conference Board said that consumer sentiment was at its highest level in more than 17 years in February. The Consumer Confidence Index rose from 124.3 in January to 130.8 in February. Americans were more upbeat in their assessments of both current (up from 154.7 to 162.4) and future (up from 104.0 to 109.7) economic conditions. Along those lines, the percentage of respondents saying that business conditions were “good” increased from 35.0 percent to 35.8 percent, with those suggesting that conditions were “bad” dropping from 13.0 percent to 10.8 percent.

Overall, pocketbook issues remained important, with the public more upbeat about labor market conditions. The percentage of respondents feeling that jobs were “plentiful” increased from 37.2 percent to 39.4 percent, with those saying that jobs were “hard to get” inching down from 16.3 percent to 14.7 percent. At the same time, 23.8 percent felt that their incomes would rise in the coming months, up from 20.6 percent in the prior survey. In contrast, just 8.6 percent anticipate reduced incomes over the next six months.

Construction Spending
The Census Bureau said that private manufacturing construction spending was up 1.2 percent in January, rising for the fourth straight month. The value of construction put in place in the sector increased from $63.71 billion in December to $64.50 billion in January. Since falling to $61.18 billion in September, private manufacturing construction has started to trend higher, which would be consistent with the recent uptick in economic activity and a stronger overall outlook. With that said, construction in the sector has drifted lower since achieving the all-time high of $82.13 billion in May 2015. Along those lines, manufacturing construction has declined by 9.7 percent year-over-year. For now, though, the good news is that the sector appears to have turned a corner, moving in the right direction.

Overall, private nonresidential construction spending decreased by 0.5 percent in January, pulling back from its best reading since June. Over the past 12 months, this figure has risen 1.7 percent. In the latest figures, the data were mixed. In addition to increased manufacturing construction spending, there were more dollars spent on construction projects in the communication (up 5.4 percent), amusement and recreation (up 2.4 percent), lodging (up 1.9 percent), and transportation (up 1.7 percent) sectors. At the same time, activity was lower in the following segments: power (down 6.2 percent), educational (down 3.1 percent), commercial (down 2.7 percent), health care (down 1.0 percent), office (down 1.0 percent) and religious (down 0.7 percent).

Meanwhile, private residential construction spending was up 0.3 percent in January, with a modest 4.2 percent year-over-year gain. More importantly, private residential construction spending was $523.17 billion in January, its best reading since April 2007. In the latest data, single-family construction rose by 0.6 percent for the month and 8.8 percent over the past 12 months, with multifamily activity off 1.3 percent for the month and down 2.4 percent year-over-year. In addition to those components, public construction spending jumped 1.8 percent in January, with a gain of 8.2 percent over the past year.

Dallas Fed Manufacturing Survey
The Dallas Federal Reserve Bank reported that manufacturing activity expanded in February at its fastest rate since December 2005, with the Texas economy continuing to rebound with robust growth. The composite index of general business conditions increased from 33.4 in January to 37.2 in February. Despite the solid headline reading, the pace of new orders growth edged down from 25.5 to 25.3, but that figure remained very healthy overall. Indeed, 39.1 percent of respondents said that sales were higher in February, with just 13.8 percent saying that they were lower. Other underlying data were higher across the board, including production (up from 16.8 to 27.9), capacity utilization (up from 14.5 to 19.6), shipments (up from 27.1 to 32.1), employment (up from 15.2 to 19.1), hours worked (up from 13.4 to 16.3) and capital expenditures (up from 20.0 to 23.7).

As we have seen in other recent releases, manufacturers in Texas cited accelerating pricing pressures in February. The index for raw material prices (up from 33.5 to 39.8) rose to its highest point since May 2011. In addition, input prices are expected to remain highly elevated over the next six months, even with that measure off from 44.0 to 43.0. Along those lines, 48.0 percent of those completing the survey see input costs rising over the coming months, with 5.0 percent predicting reduced raw material prices.

With that said, manufacturers in the Dallas Fed’s district continued to be very positive in their overall outlook for the next six months. The forward-looking measure dropped from 44.5, its best pace since December 2004, to 40.6, a reading that suggested extreme levels of optimism. More than half of manufacturing respondents anticipate new orders, production and shipments increasing over the next six months, with 41.9 percent and 43.6 percent planning to hire more workers and spend more on capital investments, respectively.

Durable Goods Orders and Shipments
The Census Bureau said that new durable goods orders fell 3.7 percent in January following two months of solid gains in both November and December. The decline in the latest data stemmed largely from significant decreases in defense and nondefense aircraft and parts sales, which were off by 45.6 percent and 28.4 percent, respectively. It is important to note that aircraft orders can be highly volatile from month to month. Excluding transportation equipment, new durable goods orders edged down 0.3 percent in January, falling (ever-so-slightly) for the first time since June. As such, broader activity in the durable goods sector started 2018 on a soft note.

Nonetheless, 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 6.8 percent since December 2016. With transportation equipment excluded, the year-over-year rate was 6.9 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 January, new orders for core capital goods were off by 0.2 percent, but like the headline number above, the year-over-year pace was a very healthy 6.3 percent.

Looking more closely at the various durable goods sectors in January, the data were mixed. There were increased sales for computers and electronic products (up 0.6 percent), fabricated metal products (up 0.5 percent) and motor vehicles and parts (up 0.1 percent). In contrast, orders were lower for other durable goods (down 1.1 percent), primary metals (down 0.9 percent), electrical equipment and appliances (down 0.8 percent) and machinery (down 0.4 percent).

Meanwhile, durable goods shipments increased 0.2 percent in January, or with transportation equipment excluded, shipments inched up by 0.1 percent. Much like the new orders data described above, shipments have trended strongly higher over the past year. Since January 2017, durable goods shipments have risen at solid rates, up 6.0 percent, with year-over-year growth of 6.9 percent when transportation equipment shipments were excluded. In addition, shipments of core capital goods have also improved mightily over the past 12 months, up 8.8 percent year-over-year.

Gross Domestic Product (Revision)
The Bureau of Economic Analysis said that the U.S. economy grew by an annualized 2.5 percent in the fourth quarter, off marginally from the previous estimate of 2.6 percent growth. The overall findings were little changed from the preliminary report, with somewhat better residential investment and service-sector consumer spending being offset by slightly reduced estimates for durable and nondurable goods spending and inventory spending. Nonetheless, the latest figures continued to find 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 4.36 percent absent the drag from net exports and inventories, which subtracted 1.83 percentage points from the top-line growth figure.

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, we anticipate 3.0 percent growth in 2018. There continues to be 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, hopefully allowing 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 13.8 percent and 4.3 percent, respectively, for the quarter. Service-sector spending increased by 2.1 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 were also encouraging. Nonresidential fixed investment rose by 6.6 percent in the fourth quarter, led by robust growth in equipment spending, up 11.8 percent, 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 2.5 percent in the fourth quarter. Similarly, residential investment ended two quarters of sharp declines to jump by 13.0 percent in the fourth quarter. As a result, fixed investment in the economy rose 8.1 percent at the annual rate in the fourth quarter, adding 1.29 percentage points to real GDP.

Likewise, federal and state and local government spending increased 3.2 percent and 2.7 percent, respectively, in this report, with government expenditures adding another 0.49 percentage points to top-line growth.

In contrast to those readings, businesses spent less on inventories in the fourth quarter, subtracting 0.70 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 12.0 percent at the annual rate in the fourth quarter, its strongest growth rate in four years. Yet, those were more than offset by a 16.9 percent jump in goods imports in the quarter, its largest growth rate since the second quarter of 2010.

International Trade in Goods (Preliminary)
The Census Bureau released advance statistics on international trade in goods. Specifically, the goods trade deficit rose from $72.26 billion in December to $74.40 billion in preliminary data. The jump in the monthly trade deficit stemmed from a decline in goods exports (down from $137.00 billion to $133.92 billion) that was larger than the reduction in goods imports (down from $209.26 billion to $208.32 billion). Final data will be released on March 7. Note that a surplus in service-sector activity, which was $20.23 billion in December, helped to improve the overall U.S. trade deficit.

In January, goods exports were mostly lower, including notable declines for capital goods (down $2.48 billion), industrial supplies (down $1.27 billion) and other goods (down $1.00 billion). In contrast, there were improved goods exports for consumer goods (up $1.30 billion) and automotive vehicles (up $487 million). Meanwhile, higher goods imports for industrial supplies (up $1.79 billion) were more than offset by reductions for capital goods (down $1.38 billion) and consumer goods (down $1.21 billion), among others.

ISM Manufacturing Purchasing Managers’ Index
The Institute for Supply Management (ISM) said that manufacturing activity continued to expand solidly in February. The ISM Manufacturing Purchasing Managers’ Index (PMI) rose from 59.1 in January to 60.8 in February, the highest level since May 2004. Given the strength of that headline figure, it should not be a surprise that many of the underlying data points are near or exceed 60, which would indicate robust growth for the month. This included new orders (down from 65.4 to 64.2), production (down from 64.5 to 62.0), employment (up from 54.2 to 59.7) and exports (up from 56.2 to 59.8). Regarding the latter number, exports once again expanded at their best rate since April 2011, with international sales helping to fuel stronger overall demand.

The sample comments tended to echo those findings, with healthy gains in demand, production and hiring and a very optimistic outlook for the coming months. Tax reform was seen by one respondent as “making a difference” for their business, spurring more capital spending on equipment, among other things. In addition, several of those completing the latest ISM survey noted the inability to attract and retain workers, with the labor market continuing to tighten.

Meanwhile, prices for raw materials (up from 72.7 to 74.2) have remained highly elevated, with the measure at a level not seen since May 2011. This reflects a rebound in some commodity costs, even as overall pricing pressures continue to be largely under control, at least for now. In other news, inventories (up from 52.3 to 56.7) also accelerated in February for the second straight month, rising to its highest point since March 2010. More than anything, the uptick in inventories is consistent with the healthy growth in overall production.

New Home Sales
The Census Bureau and the Department of Housing and Urban Development reported that new home sales fell sharply for the second straight month, down 7.6 percent and 7.8 percent in December and January, respectively. New single-family residential sales declined from 696,000 units at the annual rate in November, its fastest pace since October 2007, to 643,000 in December to 593,000 in January. This was a disappointing reading, with sales starting the new year on a weak note. In addition, sales were lower in every region of the country. On a year-over-year basis, new single-family home sales were off 1.0 percent from 599,000 units in January 2017, further illustrating the softness of the latest figures. We would anticipate faster growth moving forward, so hopefully this pullback is short-lived.

With weaker sales growth in the latest data, inventories of new homes for sale widened for the month. The number of months of supply on the market has jumped from 4.9 months in November to 5.5 months in December to 6.1 months in January, the most since July 2014. Even with the additional supply, the median sales prices have increased by 2.5 percent over the past 12 months, up from $315,200 one year ago to $323,000 in January.

Personal Income and Spending
The Bureau of Economic Analysis said that personal income increased by 0.4 percent for the second straight month in January, exceeding the consensus estimate of 0.3 percent growth. Over the past 12 months, personal incomes rose 3.8 percent in January, down from 4.3 percent in December. Even with that easing, income growth remains quite healthy. For manufacturers, total wages and salaries rose from $840.9 billion in December to $847.8 billion in January. That translated into a 4.0 percent increase in manufacturing wages and salaries year-over-year, up from $815.5 billion in January 2017.

At the same time, personal spending eased from a very robust 0.7 percent increase in December to 0.4 percent growth in January. 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 by 4.4 percent, off slightly from the 4.5 percent pace observed in the prior report. In January, nondurable goods spending rose 1.0 percent, but purchases of durable goods fell by 1.5 percent. On a year-over-year basis, goods spending for durable and nondurable goods increased at very healthy rates, up 4.6 percent and 4.3 percent, respectively, since January 2017.

The savings rate rose from 2.5 percent in December, its lowest rate since September 2005, to 3.2 percent in January. Despite the uptick in the savings rate, it has largely trended lower since peaking at 4.1 percent in February 2017.

In other news, the personal consumption expenditure (PCE) deflator increased by 0.4 percent in January, its strongest monthly gain since September. Total prices for consumers largely accelerated on a jump in energy goods and services costs, up 3.0 percent in January. Yet, core inflation—which excludes food and energy—was also higher, up 0.3 percent in January.

Despite the large gains in prices in January, overall inflation remains quite modest and largely under control, at least for now. After seeing pricing pressures accelerate strongly earlier in 2017—with the PCE deflator peaking at 2.2 percent year-over-year in February—inflation has pulled back since then. Since December 2016, the PCE deflator has risen by 1.7 percent, unchanged from the previous report. In addition, core PCE inflation was up 1.5 percent year-over-year in January for the third straight month, well below the Fed’s goal of 2 percent.

Richmond Fed Manufacturing Survey
The Richmond Federal Reserve Bank said that manufacturing activity in its district accelerated strongly in February. The composite index for the general business assessment doubled from 14 in January to 28 in February. This was not far 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 through the first two months of 2018, continuing the trend of decent growth experienced for much of 2017. The underlying data were also encouraging, including healthy expansions in new orders (up from 16 to 27), shipments (up from 15 to 31), capacity utilization (up from 13 to 32), employment (up from 10 to 25) and capital expenditures (up from 18 to 28).

The Richmond Fed has also added several measures to provide even more details on this activity, with improvements seen in February for equipment and software expenditures (up from 22 to 27) and local business conditions (up from 13 to 29). In addition, an index was created for the availability of skills needed (down from -10 to -17), which continued to illustrate just how much tightness in the labor market has challenged manufacturers’ ability to hire new workers.

Moving forward, manufacturing respondents in the Richmond Fed’s district were very optimistic in their outlook for the next six months. Forward-looking measures for new orders (up from 36 to 40), shipments (unchanged at 45), capacity utilization (up from 30 to 34), employment (up from 21 to 22) and capital expenditures (up from 30 to 36) remained quite robust in February.

Meanwhile, manufacturers in the district see pricing pressures picking up in the months ahead, mirroring data seen in other reports. Those completing the survey said that prices paid for raw materials increased by 1.89 percent at the annual rate in February, up from 1.79 in January. Moreover, raw material prices are expected to grow by 2.69 percent at the annual rate six months from now, up from 2.33 percent in the prior survey. That is the highest expected growth rate for inflation since May 2013. (To be fair, input costs were seen growing 2.68 percent one year ago, but decelerated sharply after that.)

University of Michigan Consumer Sentiment (Revision)
The University of Michigan and Thomson Reuters reported that consumer confidence rebounded in February, ending three straight months of easing perceptions. The Index of Consumer Sentiment rose from 95.7 in January to 99.7 in February, its highest level since October’s robust reading (100.7), which was the highest point since January 2004. In the February data, respondents were more upbeat in their assessment of both current (up from 110.5 to 114.9) and expected (up from 86.3 to 90.0) economic conditions. Overall, these data are consistent with 2.9 percent growth in real consumer spending in 2018.

According to Richard Curtin, the Survey of Consumers Chief Economist, “Consumers based their optimism on favorable assessments of jobs, wages, and higher after-tax pay. The highest proportion of households since 1998 reported that their finances had improved compared with a year ago and anticipated continued gains during the year ahead. Economic news heard by consumers continued to be dominated by the tax reform legislation and net job gains, which was untarnished by the consensus view that interest rates would increase and stock prices would remain volatile.”

Questions or Comments?

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

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