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NAM: Monday Economic Report

Encouragingly, manufacturing leaders in both the New York and Philadelphia Federal Reserve Bank districts were more upbeat in the latest surveys. The Empire State Manufacturing Survey’s composite index of general business conditions increased to a three-year high, with the similar measure in the Philadelphia region rising to a five-month high. The strengthening labor market was a bright spot in both reports, and new orders, shipments and capital expenditures continued to expand at healthy rates as well. Moreover, manufacturers remain optimistic in their outlook for the next six months. On the other hand, those completing these surveys also see pricing pressures for raw materials accelerating robustly over the coming months.

Meanwhile, there was mixed news on the housing market. On the negative side, new housing starts fell for the sixth time in the past seven months, down 4.7 percent in September and continuing a disappointing trend in the overall data. A fair share of the decline stemmed from the impacts of recent hurricanes, but the Midwest and the Northeast saw decreases in activity, suggesting some broader softness in the market, especially for multifamily construction. Indeed, housing starts have been weaker than desired year to date, drifting lower since February. With that said, starts have risen 6.1 percent over the past 12 months. As such, the residential segment—especially for single-family activity—has had a more favorable trend over the past year than the headline numbers might suggest.

Indeed, housing permits have remained elevated, albeit also with some deceleration in the latest figures. Residential permits decreased somewhat in September but have now exceeded 1.2 million units in 12 of the past 13 months. Permits are a proxy of future activity, so the data suggest strong growth moving forward. In fact, single-family permitting has risen from 800,000 to 819,000, a six-month high. Single-family residential permits have increased by a rather healthy 9.3 percent over the past 12 months. In contrast, multifamily permits have seesawed wildly from report to report for much of this year, down 4.3 percent since September 2016. For their part, homebuilders felt more upbeat in October about future sales, with the Housing Market Index up to its highest level in five months.

At the same time, existing home sales rose 0.7 percent in September, increasing for the first time since May. Sales of existing homes edged up from 5.35 million at the annual rate in August to 5.39 million in September. After peaking at 5.70 million units in February, existing home sales activity has drifted lower since then. Along those lines, National Association of Realtors Chief Economist Lawrence Yun said, “Home sales in recent months remain at their lowest level of the year and are unable to break through, despite considerable buyer interest in most parts of the country.” He also noted that sales in September might have been stronger if not for Hurricanes Harvey and Irma, with existing home sales off 0.9 percent in the South.

This Friday will bring the first look at third quarter GDP; the consensus estimate of growth is around 2.5 percent. While this reflects modest growth overall, the data will also likely show some of the negative impacts from the recent hurricanes, as seen in other releases. New information will also be released this week on the current level of manufacturing activity, including an advance reading of durable goods orders and shipments and new surveys from IHS Markit and the Kansas City and Richmond Federal Reserve Banks. There will also be updates on consumer sentiment, international trade in goods and new home sales.

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