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NAM: Monday Economic Report

The Federal Reserve said that manufacturing production grew 0.3 percent in July, extending the strong rebound of 0.8 percent seen in June. After some choppiness in the data in the spring, it is nice to see some traction in the summer months. Indeed, the June increase was revised higher, as it was originally estimated to be a gain of 0.2 percent. More importantly, the long-term trend for output among manufacturers has been positive. Over the course of the past 12 months, manufacturing production has risen 2.8 percent, its best year-over-year reading since June 2012. Similarly, manufacturing capacity utilization edged up to 75.9 percent in July, its highest rate since August 2015. In contrast, total industrial production (which also includes mining and utilities) inched up just 0.1 percent in July, but with year-over-year growth of 4.2 percent, the strongest since February 2012.

At the same time, the two regional manufacturing sentiment surveys were mixed last week. On the positive side, the latest Empire State Manufacturing Survey from the New York Federal Reserve Bank found that activity expanded solidly in its district, as its composite index of general business conditions expanded at its fastest rate in 10 months. This differed from the results seen in the Federal Reserve Bank of Philadelphia’s release, where growth in manufacturing activity weakened in August to its slowest pace since November 2016. It should be noted that each of these reports noted continued expansions in new orders, shipments and employment, and manufacturers were upbeat about growth for the next six months. Nonetheless, pricing pressures remained highly elevated in the August data. In a series of special questions in the Philly Fed survey, respondents predict 3 percent growth in inflation for consumers and wages over the next year.

The National Federation of Independent Business (NFIB) said that the Small Business Optimism Indexwas just shy of its all-time high, up to 107.9 in July. The record was set in July 1983, at 108.0. The elevated level of sentiment was consistent with strong measures for other indicators as well, with small business owners upbeat in the aftermath of tax reform and the changed regulatory environment. The percentage of respondents saying that the next three months would be a “good time to expand” increased to 32 percent, returning to the level seen in both January and February and not far from May’s all-time high of 34 percent. The labor market also remained solid. The net percentage planning to hire new workers in the next three months increased to 23 percent, and 37 percent of those completing the survey said that they have job openings to fill, which was a new record high in the survey’s history. Labor was the top “single most important problem” for the seventh consecutive month, illustrating the current difficulty in finding new workers.

Meanwhile, consumer spending has been one of the bright spots in the U.S. economy—a trend that continued in the latest data, with retail sales up 0.5 percent in July. Overall, we have seen the American consumer step up their purchasing over the past three months after some hesitance to do so in the early months, which is encouraging. It was the sixth straight monthly increase in consumer spending and, more importantly, retail sales have jumped 6.4 percent over the past 12 months. Excluding autos, the year-over-year rate was 7.2 percent, the best reading since October 2011. If gasoline station sales were also omitted, retail sales were up 5.1 percent since July 2017. With that said, there was also a sign that the public might be getting more anxious. The Index of Consumer Sentiment from the University of Michigan and Thomson Reuters declined to 95.3 in August, its lowest point in 11 months. The press release asserts that this decline might be due to increased price sensitivity and perceived challenges with affordability, particularly for the bottom third of the income distribution.

The residential sector was also a disappointment in the July data. While new housing starts edged up to 1,168,000 units in July, this followed the 1,329,000 units started in May, the fastest pace since August 2007. New residential activity for both single-family and multifamily units were well off from the rates seen in May, and starts have declined 1.4 percent over the past 12 months. Despite the weak figures over the past two months, housing starts are expected to rebound in the second half of the year, with the current forecast calling for 1.3 million units by year’s end. Indeed, home builders remain 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 housing permits data continue to provide some confidence for the coming months, with permitting activity exceeding 1.3 million units in 9 of the past 10 months.

This week, there will be additional insights in the health of the manufacturing sector, including the first read on durable goods orders and shipments for July and new surveys from IHS Markit and the Kansas City Federal Reserve Bank. There will also be updates on existing and new home sales that will be closely watched. Beyond those data points, there will be focus on the minutes of the July 31–August 1 meeting of the Federal Open Market Committee (FOMC). While the Federal Reserve did not increase short-term rates at that meeting, analysts will be looking for policy clues about upcoming actions. It is widely expected, for instance, that the FOMC will raise the federal funds rate two more times this year, with the next increase coming at the conclusion of its September 25–26 meeting.

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

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