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NAM: Monday Economic Report

With better economic and labor market data, the Federal Reserve would seem poised to increase the federal funds rate at its September meeting. This had been the consensus as recently as a few months ago. Yet, the pressure to act next month has been lessened, some analysts suggest, because prices have decelerated since the spring. The consumer price index increased 1.7 percent year-over-year in July, inching up from 1.6 percent in June. Pricing pressures had accelerated over much of the past year, increasing from 0.9 percent year-over-year in July 2016 to 2.8 percent year-over-year in February. However, inflation has eased since then. Similar trends exist for producer prices, including at the core level, which excludes food and energy prices. As a result, nearly three-quarters of economists now predict that the FOMC might wait until December to raise rates, according to the latest survey from The Wall Street Journal. With that said, I believe action in September remains possible, especially if incoming data between now and then are healthy.

For their part, small business owners were more upbeat in July. The National Federation of Independent Business reported that the Small Business Optimism Index rebounded, up from 103.6 in June to 105.2 in July. The previous reading had been a post-election low—albeit one that still represented a highly positive outlook—and the new one was the highest since February. Overall confidence remained not far from January’s assessment (105.9), which was a 12-year high. To illustrate the boost in optimism across the past 12 months, the headline index stood at 94.6 one year ago. Along those lines, the percentage of respondents suggesting that the next three months would be a “good time to expand” increased from 21 percent to 23 percent. In July 2016, just 8 percent said the same thing.

Meanwhile, manufacturing labor productivity grew modestly in the second quarter, up 2.5 percent, rebounding from the 0.3 percent gain in the first quarter. It was the third straight quarterly increase in productivity in the sector, improving from two consecutive declines in mid-2016. This report represents some progress in terms of overall manufacturing productivity, but the longer-term trend remains a concern. Labor productivity in the sector has been essentially stagnant since the Great Recession, and in 2016, it averaged just 0.2 percent. Through the first half of 2017, the annual rate was 1.4 percent. Still, that is well below the 5.2 percent pace for manufacturing output per worker from 2002 to 2008. In general, manufacturers have benefited from being leaner, but the recent sluggishness in productivity and output growth has meant that unit labor costs have risen 9.0 percent since the end of 2011.

This week, there will be a number of economic releases that discuss the status of the manufacturing sector. On Wednesday, July industrial production data are released, which reflected a bounce-back in activity in June but have been highly volatile over the past four months. Manufacturing production rose 0.2 percent in July, with growth of 1.2 percent year-over-year. Overall, manufacturers have made significant progress after global headwinds hit the sector hard in both 2015 and 2016, and continued progress in demand and output growth in the sector should be expected moving forward. The New York and Philadelphia Federal Reserve Bank surveys for August will also be released this week, both of which slowed in July data even as respondents remained optimistic about the next six months. Other highlights this week include the latest data on consumer sentiment, housing starts and permits, leading indicators, retail sales and state employment.

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