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NAM: Monday Economic Report

Real GDP grew 2.0 percent at the annual rate in the first quarter, boosted by strength in business spending but weighed down by softness in consumer spending, net exports and residential investment. According to new data from the Bureau of Economic Analysis, manufacturing added 0.40 percentage points to top-line growth in the first quarter, with that contribution equally split between durable and nondurable goods businesses. Real value-added output rose 3.4 percent for manufacturers in the first quarter, extending the 5.3 percent gain in the sector in the fourth quarter. It was the fifth straight quarter with manufacturing providing a positive contribution to real GDP, which has seen solid growth since the end of 2016. Improvements in the global economy and pro-growth policies have helped to buoy the sector, which has experienced healthy expansions in demand, production and hiring over that time frame.

Overall, manufacturing gross output increased to $6.347 trillion in the first quarter, a new all-time high. After struggling a few years ago on global headwinds, the manufacturing sector has improved notably since gross output bottomed out at $5.607 trillion in the first quarter of 2016. Those findings closely mirrored the value-added data for manufacturing, which rose to $2.330 trillion in the first quarter, also a new all-time high. The bottom line is that manufacturing accounted for 11.7 percent of real GDP in the first quarter, up from 11.6 percent in the prior report. Adjusting for inflation, a new all-time high also occurred for real value-added output in manufacturing, up to $2.000 trillion in chained 2009 dollars.

Other data on the sector have also been encouraging. For instance, manufacturing production rebounded strongly in June after pulling back in May due to a fire at an auto supplier. Output in the sector increased 0.8 percent in June after falling 1.0 percent in May. So far in 2018, manufacturing production has seesawed from month to month, but up 1.0 percent over that time frame. Over the past 12 months, production in the sector has risen a respectable 1.9 percent, up from 1.7 percent in the previous release. My forecast for 2018 is for manufacturing production to increase 2.2 percent, which would indicate an uptick in output in the second half of this year. At the same time, total industrial production also recovered in June, up 0.6 percent after declining 0.5 percent in May. Over the past 12 months, industrial production has risen 3.8 percent, up from 3.2 percent in the prior release and the fastest year-over-year pace since July 2014.

At the regional level, there continued to be solid expansions reported in both the New York and Philadelphia Federal Reserve Bank districts. This included healthy gains in July for new orders, shipments, employment and the average employee workweek, with respondents continuing to be upbeat about activity over the next six months. Yet, pricing pressures remained highly elevated in both surveys, mirroring other indicators. In the Philadelphia release, for example, the index for prices paid for raw materials jumped to the highest level since June 2008. Nearly 63 percent of those completing the survey said input costs increased in July, with no one citing declines. Respondents also predict input costs rising sharply moving forward, even with that measure easing a bit in the July data.

There have also been signs that American consumers have sharply accelerated their purchasing midyear after some hesitance to do so earlier in the year. Indeed, retail spending rose 0.5 percent in June, extending the solid 1.3 percent gain in May. It was the fifth straight monthly increase in consumer spending, and more importantly, retail sales have jumped 6.6 percent over the past 12 months, the fastest year-over-year pace since February 2012. Notable sales increases for both gasoline stations (up 1.0 percent) and motor vehicles and parts dealers (up 0.9 percent) boosted activity in June, with the former buoyed by higher gasoline prices. Excluding autos, the year-over-year rate registered 7.1 percent, the best reading since October 2011, and if gasoline station sales were also omitted, retail sales have increased 5.6 percent since June 2017. These measures illustrate how consumer spending remains a bright spot, with robust gains over the past 12 months.

Nonetheless, housing starts disappointed in June, off by 12.3 percent for the month. New residential construction activity plunged from an annualized 1,337,000 units in May—the fastest pace since July 2007—to 1,173,000 units in June. Despite the weak figures for June, housing starts are expected to rebound in the second half of the year, with the current forecast calling for 1.32 million units by year’s end. Indeed, homebuilders remain very upbeat about sales over the next six months, even as higher costs have started to hurt their bottom line and will likely eat into affordability. Along those lines, housing permits continued to be mostly promising despite some easing in the June data, which fell for the third straight month. Permits are a good proxy of future activity. Housing permits decreased from 1,301,000 units at the annual rate in May to 1,273,000 units in June, a nine-month low and the first reading below 1.3 million units since September.

A first estimate of real GDP for the second quarter of 2018 will be released on Friday, which should indicate growth of at least 3.5 percent. Some forecasts put the U.S. economy expanding much stronger than that, exceeding 4 percent and rebounding from 2 percent growth in the first quarter. Strong consumer and business spending should help to support that figure, with manufacturers benefiting from that growth. Along those lines, IHS Markit and the Kansas City and Richmond Federal Reserve Banks will release new surveys on manufacturing activity. In addition, the Census Bureau will report advance durable goods orders and shipments for June. Other highlights this week include updates on consumer sentiment, existing and new home sales and the international trade in goods.

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

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