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NAM: Monday Economic Report

In the latest NAM Manufacturers’ Outlook Survey, businesses continue to experience highly elevated levels of activity as a result of pro-growth policies like tax reform, with optimism once again breaking records: 95.1 percent of respondents felt either somewhat or very positive about their own company’s outlook, the highest rate since the 20-year-old survey was introduced in the fourth quarter of 1997. In general, respondents have been upbeat since the end of 2016, averaging 92.6 percent positive over the past six quarters. In addition, the Manufacturing Outlook Index also rose to an all-time high in this report, the seventh straight quarter where the outlook exceeded the survey’s historical average.

Manufacturers also posted near or all-time high numbers in this quarter’s survey when it came to their expectations for hiring workers (highest ever), raising wages (highest since 2001), increasing investments (highest ever) and increased sales (highest since 1997). Outlook measures for medium-sized and large manufacturers also reached an all-time high in this survey. Clearly, manufacturers continue to be upbeat following Congress’ passage of the comprehensive tax cuts package mentioned earlier as well as other positive policy changes out of Washington like a less burdensome approach toward regulatory policy—pro-growth stances that will help manufacturers compete in the global marketplace.

Along those lines, the business environment is no longer the concern that it once was, with just 19.1 percent citing the tax and regulatory climate as being a top concern. Respondents cited an unfavorable business climate as their primary business challenge as recently as two years ago, with three-quarters of manufacturers noting it as their top problem in the second quarter of 2016. This quarter’s survey found manufacturers citing instead the inability to attract and retain a quality workforce as their top concern, followed by the price of raw materials.

On the latter, manufacturers anticipate raw material prices and other input costs rising 5.6 percent over the next 12 months. This is a new question, making it difficult to make comparisons, but product price growth—a likely proxy—was seen increasing at the fastest pace in seven years (up 3.2 percent), with wages expected to expand at the best rate in more than 17 years (2.7 percent).

At the same time, other surveys of manufacturing activity have shown some softening in the pace of growth in June. For instance, the IHS Markit Flash U.S. Manufacturing PMI eased in the latest survey, showing slower growth for new orders, output and employment, with exports slipping into contraction territory for the first time in 10 months. There was a similar story in the June manufacturing survey from the Federal Reserve Bank of Philadelphia, with its headline measure dropping to the weakest reading since November 2016 but still indicating a healthy expansion overall. More favorably, two-thirds of manufacturing respondents to the Philadelphia Federal Reserve survey said that second-quarter production was stronger than in the first quarter, with 15.8 percent citing declines. In addition, 58.0 percent anticipate higher production in the third quarter than in the second, with 28.0 percent predicting some deceleration.

Meanwhile, manufacturing activity in Europe continued to soften, with growth easing to the slowest pace since December 2016 even with a still modest expansion. The IHS Markit Flash Eurozone Manufacturing PMI slipped for the sixth straight month, down to 55.0 in June. In addition to data on Europe as a whole, IHS Markit also released figures for France and Germany. Both indicators fell to their lowest levels since late 2016, mirroring the headline Eurozone number.

In other headlines, housing starts rose to an annualized 1,350,000 units in May, the fastest pace since July 2007. This represents a very healthy gain of 20.3 percent over the past 12 months, up from 1,122,000 units in May 2017. In addition, single-family and multifamily starts both increased in May, with single-family activity not far from November’s pace of 948,000 units, which was the best reading since August 2007. On a year-over-year basis, single-family and multifamily starts increased 18.3 percent and 25.1 percent, respectively. As such, the residential construction figures were very encouraging overall. Indeed, housing permits remained solid even with some easing, down for the second straight month to 1,301,000 in May. Even with some deceleration in the latest figures, it was the eighth consecutive month with permitting above 1.3 million units.

Nonetheless, the National Association of Home Builders and Wells Fargo reported that the Housing Market Index dropped from 70 in May to 68 in June. The press release attributed the easing in confidence in the latest survey to a steep increase in lumber prices, even as overall optimism remains very strong. With that said, the headline measure remains not far from December’s reading of 74, which was the best since July 1999. In addition, builders remain extremely confident about single-family sales over the next six months.

At the same time, the National Association of Realtors (NAR) reported that existing home sales slipped 0.4 percent in May, down from 5.45 million units at the annual rate in April to 5.43 million units in May. NAR Chief Economist Lawrence Yun attributed much of the weakness in May to reduced inventories and affordability. Fewer available listings of existing homes for sale have helped boost the median sales price, up 4.9 percent over the past 12 months, from $252,500 in May 2017 to $264,800 in the latest figures, a new all-time high.

There will be plenty of data coming out this week that will show the current health of the manufacturing sector. New durable goods orders pulled back in April from March’s all-time high, largely on volatility in the nondefense aircraft and parts segment, but activity has been very robust over the past 12 months, jumping 7.8 percent since April 2017. It is hoped the May data will build on that strength. There will also be insights from regional surveys for June in the Dallas, Kansas City and Richmond Federal Reserve Bank districts, each of which had notable improvements in May. Other highlights this week include a second revision for first-quarter real GDP growth and the latest data on consumer confidence, the international trade in goods, new home sales and personal income and spending.

Chad Moutray, Ph.D., CBE

Chief Economist

National Association of Manufacturers

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