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NAM: Monday Economic Report

In the most recent NAM Manufacturers’ Outlook Survey, respondents cited accelerating raw material costs as the number two business concern (after workforce recruitment and retention), with prices expected to rise over the next 12 months at the fastest pace in seven years. New data out last week tend to confirm this challenge. Producer prices for final demand goods and services rose 0.3 percent in June, largely on higher energy costs. More importantly, producer prices have increased 3.3 percent since June 2017, up from 3.1 percent year-over-year in the prior release and the fastest pace since December 2011. This measure has drifted higher since being 1.9 percent in June 2017. At the same time, core producer prices—which exclude food, energy and trade services—have increased 2.7 percent over the past 12 months, up slightly from the 2.6 percent year-over-year rate in May.

Similarly, consumer prices edged up 0.1 percent in June, slowing a bit from the 0.2 percent gains in both April and May. Higher food prices, which rose 0.2 percent in June, boosted the index, but energy costs decreased 0.3 percent. Sharply reduced electricity and piped gas expenses were enough to offset higher gasoline costs in June. Excluding food and energy, core consumer inflation rose 0.2 percent in June for the second straight month. The bottom line was that the consumer price index has risen 2.8 percent over the past 12 months, up from 2.7 percent in the prior release. It was the highest year-over-year rate since February 2012 and continued an upward trend since the 1.6 percent pace in June 2017. At the same time, core consumer prices, which exclude food and energy costs, have risen 2.3 percent over the past 12 months, essentially matching the pace in May, which was a 15-month high. With these data points, the Federal Reserve will likely keep a close eye on inflation, especially given strength in the overall economy, including the labor market.

Along those lines, job openings in the manufacturing sector pulled back in May from April’s pace, which was the best reading since January 2001. Manufacturers posted 441,000 job openings in May, down slightly from 452,000 in April. The number of manufacturing job postings has remained highly elevated even with the easing in May, exceeding 400,000 for the fifth consecutive month (and in nine of the past 12 months). In addition, job openings for nonfarm payroll businesses declined from April’s all-time high, dropping from 6,840,000 in April to 6,638,000 in May. It remained the second-highest reading, however, and job openings in the U.S. economy continued to exceed the number of people looking for work(6,065,000 in May and 6,564,000 in June). This is a sign of a very tight labor market and helps to explain why difficulty in attracting talent remains such a large challenge right now. This includes small business owners, with respondents to the most recent National Federation of Independent Business survey citing the quality of labor as the top “single most important problem” for the sixth consecutive month.

Meanwhile, there was mixed news on the consumer front last week. The University of Michigan and Thomson Reuters reported that consumer confidence dipped somewhat in preliminary July figures, declining to the lowest point since January. Even with some slippage, the press release notes “favorable job and income prospects, with consumers under age 45 anticipating the largest income gains since July 2000.” With that said, trade concerns weighed heavily on people’s minds, dampening enthusiasm a bit in July. Nonetheless, U.S. consumer credit outstanding jumped 7.6 percent at the annual rate in May, the strongest monthly increase since November and up significantly from the 3.2 percent gain in April. This mainly reflected a strong rebound in revolving credit, with Americans more willing to take on credit card debt once again. This should be consistent with healthy gains in consumer spending, particularly in May. Indeed, retail sales did jump 0.8 percent in May, with a brisk 5.9 percent year-over-year growth rate.

Manufacturing production decreased by 0.7 percent in May, falling largely on a sharp pullback in automotive activity. A fire at a supplier helped to reduce output in the motor vehicles and parts sector, which suggests there could be a turnaround in this week’s figures for June. Even with some softness in the May data, manufacturing production has risen a respectable 1.7 percent over the past 12 months, with 2.3 percent growth expected for 2018 as a whole. There will also be new July manufacturing surveys released from the New York and Philadelphia Federal Reserve Banks, both of which reflected strength in June. Other highlights this week include updates on GDP by industry, housing starts and permits, leading indicators, retail sales and state employment.

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

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