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NAM: Monday Economic Report

The U.S. economy grew by an annualized 4.1 percent in the second quarter of 2018, the best reading since the third quarter of 2014 and up from 2.2 percent growth in the first quarter. After some softness in the first quarter, consumer spending rebounded significantly in the second quarter, up 4.0 percent, providing the largest boost to growth in the headline number. Nonresidential fixed investment was also strong, up 7.3 percent in the second quarter and extending the solid 11.5 percent gain in the first quarter. On the international trade front, goods exports soared by an annualized 13.3 percent in the second quarter, the highest rate since the fourth quarter of 2013. This could indicate some time-shifting of export purchases due to ongoing trade negotiations and tariffs, and it was more than enough to offset the 1.0 percent increase in goods imports in the second quarter.

Since the end of the Great Recession, the U.S. economy has expanded 2.2 percent on average. Moving forward, real GDP should grow by roughly 3 percent in 2018, which would be the strongest growth rate since 2005. Over the past six months, tax reform and regulatory relief have sparked the robust manufacturing job growth manufacturers predicted. The business optimism of our member companies stands at a record high, and 86 percent of them plan to invest in new plants and equipment, 77 percent plan to increase hiring, and 72 percent plan to increase wages and benefits for workers. That is driving the robust growth we are now seeing reflected in the latest GDP report, placing an urgent need to grow and upskill the manufacturing workforce.

Several releases last week showed robust growth in the manufacturing sector. For instance, new durable goods orders jumped 1.0 percent in June to $251.9 billion, which remained not far from March’s all-time high reading ($252.8 billion). With the highly volatile transportation equipment sector excluded, new durable goods orders rose 0.4 percent in June, and new orders for core capital goods (or nondefense capital goods excluding aircraft) increased 0.6 percent. The latter measure is often seen as a proxy for capital spending in the U.S. economy. More importantly, new durable goods orders have been solid across the past year, rising by a modest 3.2 percent since June 2017, but with a very healthy 9.1 percent gain with transportation equipment excluded. Likewise, new orders for core capital goods increased a robust 8.3 percent year-over-year.

Sentiment surveys also showed encouraging signs. The IHS Markit Flash U.S. Manufacturing PMI inched up from 55.4 in June to 55.5 in July. While this was off from April’s reading (56.5), which was the best since September 2014, activity in the sector continues to expand at a relatively solid pace. Nonetheless, rising raw material prices continued to be a challenge, with the index for input costs exceeding 60 for the sixth consecutive month. In a similar way, the Kansas City and Richmond Federal Reserve Bank surveys showed manufacturing activity continuing to expand, even as both eased somewhat in July. Manufacturing leaders remained very upbeat about new orders, production, hiring and capital spending over the next six months, but like the national reports, accelerated costs are a concern. In the Richmond Federal Reserve survey, respondents said prices paid for raw materials increased 3.54 percent at the annual rate in July, the fastest pace since October 2012 and up from 3.14 percent in June.

This week will be busy as there will be much data to digest, including the latest jobs numbers for July. Manufacturers added 36,000 workers in June, with more than 27,000 jobs created per month over the past nine months. Overall, the labor market remains tight—a trend that should continue over the coming months. The Institute for Supply Management will release its new manufacturing survey, which is expected to show continued strength for new orders, output and employment, but with accelerated raw material cost increases. Similar findings should be anticipated in the survey from the Dallas Federal Reserve Bank.

In other news, the Federal Open Market Committee (FOMC) will meet on July 31 and August 1, with markets closely following how the Federal Reserve communicates future rate hikes and overall economic trends. The FOMC will likely wait until its September meeting for the next increase in short-term rates. Other highlights this week include new data on construction spending, consumer confidence, employment costs, factory orders and shipments, international trade and personal income and spending.

Chad Moutray, Ph.D., CBE

Chief Economist

National Association of Manufacturers

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