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NAM: Monday Economic Report

With the stock market hitting new record highs, manufacturers continued to cite strong growth in the sector. Indeed, the IHS Markit® Flash U.S. Manufacturing PMI rose from 54.7 in August to 55.6 in September, the best reading since May. Faster expansions for new orders, output and exports buoyed the headline number. More importantly, respondents remained upbeat about production for the next six months, even with some slippage in the latest survey. In a similar way, manufacturing business leaders in the New Yorkand Philadelphia Federal Reserve Bank districts also felt optimistic about activity, especially for increased demand, production and employment. Yet, pricing pressures remain a concern in each of these surveys, with elevated raw material costs. For instance, in the Empire State Manufacturing Survey, the expected prices paid index jumped to the highest level since May 2012, with 60.2 percent of respondents forecasting increased input costs over the next six months. That is consistent with the acceleration in input costs seen in other reports.

In contrast to the U.S. data, manufacturing growth softened once again abroad. As an example, the IHS Markit® Flash Eurozone Manufacturing PMI expanded at the slowest pace since September 2016, with growth continuing to decelerate since reaching an all-time high in December. The composite index declined from 54.6 in August to 53.3 in September in preliminary figures, with very modest growth overall. The underlying data eased across the board, and the index for future output grew at the slowest pace since November 2014, albeit with healthy production gains still expected for the next six months. The preliminary figures for France and Germany also decelerated, with production growth expanding in September at the slowest rate since 2016 and with exports contracting in both markets.

Meanwhile, housing starts rebounded in August after disappointing numbers in both June and July. New residential construction activity jumped 9.2 percent from an annualized 1,174,000 units in July to 1,282,000 units in August. Stormy weather was one of the contributing factors to the weaker performance in July, and with that in mind, the pickup in activity in August was largely anticipated. The current pace remains shy of May’s 11-year high, with 1,329,000 units started being the fastest rate since August 2007. Despite the optimism for stronger data in the coming months, housing permits activity in August weakened. Permits dropped 5.7 percent from 1,303,000 units at the annual rate in July to 1,229,000 units in August, a 15-month low. To the extent that permits are a proxy of future activity, this is a little worrisome, and yet, it is likely a one-month aberration, as the trendline had been solidly positive up to this point.

Housing starts should hover closer to the May rate by year’s end, continuing to bounce back from summer softness, according to the latest forecast. For their part, homebuilders remain very upbeat about sales over the next six months, even as higher costs have started to hurt the bottom line and will likely eat into affordability. Builders also struggle to find talent, much like manufacturers and trucking firms.

The Federal Reserve will once again become the primary focus this week. The Federal Open Market Committee (FOMC) is widely expected to raise the federal funds rate for the third time this year. Participants intend to normalize monetary policies gradually as they adjust to strength in the economy, especially in the labor market, and to some acceleration in prices. The FOMC is also likely to hike short-term rates one more time this year, perhaps at its December 18–19 meeting.

In addition, it will be a busy week on the economic front. The Bureau of Economic Analysis will release its second update on second-quarter real GDP, which likely will not change much from the previous estimate of 4.2 percent growth, and the Dallas, Kansas City and Richmond Federal Reserve Banks are expected to show continued strength in manufacturing activity in their districts. Other highlights this week include updates on consumer confidence, durable goods orders and shipments, the international trade in goods, new home sales and personal income and spending.

Chad Moutray, Ph.D., CBE

Chief Economist

National Association of Manufacturers

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