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NAM: Monday Economic Report

Manufacturing production increased 0.2 percent in September, rising for the fourth straight month and five of the past six months. The sector continues to see strong growth, with manufacturing output up 3.5 percent over the past 12 months, the best year-over-year rate since April 2012. Similarly, manufacturing capacity utilization inched up from 75.8 percent in August to 75.9 percent in September, matching the rate in April, with both at utilization rates not seen since August 2015. In September, durable goods production rose 0.6 percent, but output among nondurable goods manufacturers edged down for the second consecutive month, off 0.1 percent for the month.

Similarly, total industrial production rose 0.3 percent in September, extending the 0.4 percent gain in August. In addition to increased manufacturing output, mining production grew 0.5 percent, with utilities output flat. Over the past 12 months, industrial production has risen a robust 5.1 percent, the fastest year-over-year pace since December 2010. Mining and utilities have grown 13.4 percent and 5.4 percent year-over-year, respectively. In addition, capacity utilization remained at 78.1 percent in September, just shy of the 78.2 percent reading in April, which was the best rate since February 2015.

On a regional level, there were continued solid readings for manufacturing activity in both the New Yorkand Philadelphia Federal Reserve Bank districts in October. New orders, shipments and employment expanded strongly for the month, even with mixed results between the two surveys, and business leaders remained upbeat about growth over the next six months. Pricing pressures have lessened somewhat, but with raw materials costs still expected to increase decisively over the coming months. Strength in new orders for manufactured goods helped lift the Conference Board’s Leading Economic Index 0.5 percent in September, continuing to make the sector one of the brighter spots in the economy. The data suggest modest growth in the U.S. economic outlook for the months ahead.

Robust economic growth has also tightened the labor market significantly, with the inability to find talent being the top challenge cited in the most recent NAM Manufacturers’ Outlook Survey. To further illustrate why that is such a significant problem, job openings for nonfarm payroll businesses soared to a new all-time high, up to 7,136,000 in August. There are more job openings in the U.S. economy than the number of people looking for work (6,234,000 in August and 5,964 in September), and total quits in the nonfarm sector were 3,577,000 in August, off just slightly from 3,608,000 in July, which was a record high. The August quits number was the second-highest level in the history of the JOLTS data. This suggests Americans are feeling more comfortable leaving their job, likely to pursue other opportunities.

Nonetheless, manufacturing job openings pulled back slightly from a 17-year high in July but remained highly elevated in August. Manufacturers posted 488,000 job openings in August, down from a revised 496,000 in July, which was the best reading since January 2001.

Meanwhile, there were also signs that the impacts of Hurricane Florence weakened economic activity somewhat in September. This was especially the case for housing starts, which declined 5.3 percent to 1,201,000 units at the annual rate in September. Single-family and multifamily construction activity both fell, and over the past 12 months, new housing starts have risen a modest 3.7 percent. Housing permits also declined, down to 1,241,000 units, a 16-month low. Aside from the weather, the lack of sufficient construction workers, higher costs and increased mortgage rates have been cited as concerns. Largely along the same lines, existing home sales fell for the sixth straight month, down 3.4 percent in September to the lowest level since November 2015. Even with those issues, homebuilders remain upbeat about sales over the next six months, and housing starts should hover closer to 1.3 million units by year’s end, according to the latest forecast.

Hurricane Florence also likely negatively impacted retail spending, which edged up 0.1 percent in September, well below the consensus estimate of 0.6 percent growth, and as such, it represents a bit of a disappointment. On the positive side, retail spending rose for the eighth straight month, and sales have increased 4.7 percent over the past 12 months. However, retail spending registered the slowest year-over-year pace since February, down from 6.5 percent year-over-year growth in August. Overall, however, retail sales should rebound over the coming months, especially over the holidays.

The highlight this week on the economic front will be Friday’s release of preliminary third quarter real GDP data. The U.S. economy grew an annualized 4.2 percent in the second quarter, the best reading since the third quarter of 2014 and up from 2.2 percent growth in the first quarter. The current estimate for third quarter growth is 3.5 percent at the annual rate, boosted by solid consumer and business spending. For the year, the economy remains on track for roughly 3 percent growth in 2018, which would be the strongest growth rate since 2005.

Aside from GDP, there will also be several readings on the manufacturing sector, including the latest figures for durable goods orders and shipments and new surveys from IHS Markit® and the Kansas City and Richmond Federal Reserve Banks. Other highlights include updates on consumer confidence, the international trade in goods and new home sales.

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

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