NAM: Monday Economic Report
Americans have stepped up their purchases in recent months, which is encouraging given some hesitance in opening their wallets earlier in the year. Indeed, personal spending increased by 0.3 percent in July, extending the 0.4 percent gains seen in both May and June. Overall, consumer spending has remained a bright spot in the economy, with personal consumption expenditures (PCE) soaring 5.2 percent over the past 12 months. At the same time, personal income rose by 0.4 percent in July for the second consecutive month, with 4.7 percent growth year-over-year. For manufacturers, total wages and salaries edged up to $892.9 billion in July. Over the past 12 months, manufacturing wages and salaries have increased by a very robust 5.1 percent, up from $849.3 billion in July 2017.
For their part, the closely-watched consumer confidence data have diverged, which is interesting given the solid growth figures for retail sales. On the one hand, the Consumer Confidence Index jumped to 133.4 in August, its highest point since October 2000. Respondents were mostly optimistic about the economy, especially in the outlook for jobs and future income. With that in mind, the percentage of respondents saying that business conditions were “good” increased from 38.1 percent to 40.2 percent, with the percentage suggesting that conditions were “bad” off from 10.3 percent to 9.1 percent. In contrast to that survey, the University of Michigan and Thomson Reuters said that the Index of Consumer Sentimentdeclined to 96.2 in August, its lowest point since January (but up from the preliminary estimate released earlier). In that release, pricing pressures and affordability were top concerns despite still-strong perceptions about the economy and future income.
On the inflation front, the PCE deflator was up 0.1 percent in July for the second straight month. Core inflation, which excludes food and energy, rose by 0.2 percent for the month. More importantly, the PCE deflator has risen 2.3 percent over the past 12 months in July, its fastest year-over-year pace since March 2012. Excluding food and energy, core PCE inflation was up 2.0 percent year-over-year in July. As such, core inflation is at the Federal Reserve’s stated target, even as it reflects a general appreciation in pricing pressures over the course of the past year, mirroring other indicators. Core PCE prices should continue to accelerate, with an expectation of 2.2 percent year-over-year growth by end of 2018. The Federal Open Market Committee is anticipated to hike short-term rates for the third time this year at its September 25–26meeting, with a fourth increase likely at its December 18–19 meeting.
Meanwhile, there was an ever-so-slight upward revision to real GDP growth in the second quarter, with the release mainly reconfirming robust growth in the data. The U.S. economy grew by an annualized 4.2 percent in the second quarter, up slightly from a previous estimate of 4.1 percent growth. It remained the best reading since the third quarter of 2014 and was up from 2.2 percent growth in first quarter. The revised figures mainly reflected stronger nonresidential fixed investment and net exports than previously thought, with a slight downward revision for consumer spending. Even with those changes, consumer and business spending and net exports remained bright spots. Nonresidential fixed investment has likely been sparked by pro-growth policies, including tax reform and regulatory changes, with the business outlook at record levels.
Since the end of the Great Recession, the U.S. economy has expanded 2.2 percent each year on average, with 2.3 percent growth in 2017. Moving forward, real GDP should grow by roughly 3 percent in 2018, which would be the strongest growth rate since 2005. The third quarter data are currently consistent with at least 3.5 percent growth at the annual rate.
Beyond those releases on the general macroeconomy, there were also two more surveys highlighting the solid health of the manufacturing sector. Manufacturing activity in the Dallas and Richmond Federal Reserve Bank districts continued to expand robustly in August, even with some easing in a few of the key underlying measures. In the Texas region, the index for wage growth matched what was seen in February, which was the fastest rate since January 2007, and the pace of hiring remained at an all-time high in the survey’s history. This was indicative of a strong labor market, with the Richmond release citing a continued negative reading for the index for skills needs. This suggests continued shortages regarding workforce talent. At the same time, manufacturing leaders in both regions were very upbeat about new orders, production, employment and capital spending for the next six months, but raw materials costs were predicted to remain highly elevated.
There will be additional insights about the state of the manufacturing sector this week. For instance, this morning, the Institute for Supply Management will release its Manufacturing Purchasing Managers’ Index for August. Respondents to that survey have been positive about demand, output and hiring over the course of the past year or so, but there was some easing in sentiment in the July data. The expectation is continued strength in the sector. Moreover, the jobs data should also be reflective of solid growth. In the July data, manufacturers added 37,000 net new workers, with 327,000 additional jobs created over the past 12 months. That year-over-year rate was the best in 23 years, and the forecast is for healthy employment growth in August and for the coming months. Other highlights this week include new data on construction spending, factory orders and shipments, international trade and labor productivity and costs.
Chad Moutray, Ph.D., CBE Chief Economist National Association of Manufacturers