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NAM: Monday Economic Report

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For their part, manufacturers continued to be mostly upbeat about current and future activity. Surveys from the Kansas City and Richmond Federal Reserve Banks both reflected modest expansions in January. New orders, shipments and employment each reflected recent progress in both districts, even as exports remained weak in the Kansas City region as manufacturing leaders struggle with global headwinds and the strong U.S. dollar. Similarly, the Markit Flash U.S. Manufacturing PMI rose to its highest level since March 2015. Looking ahead 12 months, manufacturers in the Markit release were optimistic about future output, with that forward-looking index at a nine-month high. Overall, these reports provide some encouragement for manufacturers, many of whom have been rather cautious in their economic outlook for much of the past two years.

The Census Bureau reported that new durable goods orders declined 0.4 percent in December. New orders decreased from $228.0 billion in November to $227.0 billion in December. However, the data have been skewed by volatility in the transportation equipment segment. Defense aircraft and parts orders plummeted 63.9 percent in December after soaring by 99.1 percent in November. Excluding transportation, new orders for durable goods increased 0.5 percent, rising from $152.6 billion to $153.4 billion, its fastest pace since October 2014. In general, the data reflect better performance after the sector has struggled mightily recently. On a year-over-year basis, new durable goods orders have risen 1.6 percent, with 3.5 percent growth since December 2015 when excluding transportation equipment.

Improvements in manufacturing activity have not been limited to the United States. The Markit Flash Eurozone Manufacturing PMI increased to a level not seen since April 2011. As such, the continent’s economy continues to move in the right direction, with activity accelerating at a modest rate. The headline PMI has trended higher since bottoming out earlier last year in February. Nonetheless, the underlying data were mixed—albeit still at decent paces—in the latest survey. New orders and output both eased slightly in January, with the index for exports unchanged. On the positive side, hiring expanded at its fastest rate since March 2011, helping to buoy the headline number. There was stronger manufacturing performance in Germany in January, with activity at a three-year high.

Beyond those data points, there were other signs that the U.S. economy was strengthening. For instance, the Conference Board’s Leading Economic Index (LEI) increased 0.5 percent in December, its strongest showing since July. Manufacturing provided a small contribution to headline growth, which signified progress after serving as a drag on the LEI for four straight months prior to that. Meanwhile, the Index of Consumer Sentiment from the University of Michigan and Thomson Reuters increased to its best reading in 13 years, with Americans expressing more optimism about future economic conditions since the election. In contrast to those reports, existing and new home sales were lower in December, with both likely impacted negatively by the recent run-up in mortgage rates.

This week, there will be two big economic stories that will dominate the news. First, the Federal Open Market Committee will meet for the first time after raising short-term rates at its December meeting. We do not anticipate the Federal Reserve to change policies at this meeting, but the current expectation is for two to three interest rate hikes in 2017. Job growth will be an important part of the discussion at the meeting, and we will get new employment figures on Friday, likely along the lines of the gains in December.

The Institute for Supply Management will release its Manufacturing Purchasing Managers’ Index for January, which should build on the rebound in the past four months. The Dallas Federal Reserve Bank’s monthly survey will also be released, which we hope will build on better data in recent reports. Other highlights this week include new figures for construction spending; consumer confidence; employment costs; factory orders and shipments; international trade in goods; personal income and spending; and productivity and costs.

Chad Moutray, Ph.D., CBE Chief Economist National Association of Manufacturers

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