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NAM: Monday Economic Report

The Institute for Supply Management’s Manufacturing Purchasing Managers’ Index rebounded in May from a softer but still modest expansion in April. For the most part, the underlying data increased, with the index for new orders at or above 60—a threshold suggesting robust growth—for 13 straight months. With ever-stronger economic growth, manufacturers report accelerated input costs. Indeed, prices for raw materials have remained highly elevated, with the measure at a level not seen in seven years. More than 62 percent of manufacturing respondents said their costs had risen in May, with just 3.1 percent saying they decreased. There were similar findings in the latest manufacturing survey from the Dallas Federal Reserve Bank, which found stronger growth in manufacturing activity but highly elevated pricing pressures.

In both surveys, respondents also noted continued workforce challenges. That is consistent with our recent Manufacturers’ Outlook Survey, which found the inability to attract and retain workers was manufacturers’ top concern, and with the latest jobs numbers. Indeed, manufacturers added 18,000 workers in May, and across the past eight months, the sector has seen robust hiring growth, averaging 25,500 new workers per month on average. In addition, manufacturing employment has risen by 1,220,000 workers since the end of the Great Recession, with 12,673,000 employees in the sector in this report. That is the highest level of manufacturing employment since December 2008.

At the same time, nonfarm payrolls rose at a healthy pace, up 223,000 in May, the strongest monthly gain since February and better than the consensus estimate of around 180,000. In addition, the unemployment rate dropped to 3.8 percent in May, the lowest level since April 2000. Similarly, the so-called “real” unemployment rate, which includes discouraged, other “marginally attached” workers, fell from 7.8 percent to 7.6 percent, the best rate since May 2001.

Strong job growth in May is more evidence that tax reform is fueling our economy. These numbers also show that manufacturers in the United States, who are more confident than ever, are reinvesting in their businesses and workers. According to a recent NAM survey, 77 percent of manufacturers are already planning to increase hiring following enactment of the tax bill. These numbers also help to cement another federal funds rate hike in a few weeks at the Federal Reserve’s June 12–13 meeting, increasing the rate for the second time this year, largely on improvements in the overall economy and labor market.

Meanwhile, the Conference Board reported that the Consumer Confidence Index rose to 128.0 in May, with optimism not far from February’s 18-year high (130.0). In general, Americans remain upbeat about the economy, with the index for current economic conditions rising to the highest point since March 2001. In addition, consumers also improved their perceptions about the future economic outlook. Stronger labor market and income expectations have buoyed the increased perceptions about the economy. Along those lines, personal income increased 0.3 percent in April, with 3.8 percent growth over the past 12 months, the best year-over-year rate since January and up significantly from 2.9 percent one year ago. For manufacturers, total wages and salaries were $873.7 billion in April, up a very healthy 5.1 percent year-over-year.

As a result, consumers have begun to accelerate their purchases. Personal spending increased 0.6 percent in April, building from a solid gain of 0.5 percent in March. Overall, consumer spending remained a bright spot in the economy, with personal consumption expenditures (PCEs) up 4.7 percent over the past 12 months. With the recent pickup in spending, the saving rate has declined to 2.8 percent in April. The saving rate had fallen to 2.4 percent in December, the lowest rate since September 2005, but it has ticked higher since then. For comparison purposes, the saving rate was 3.7 percent one year ago.

In other news, the PCE deflator rose 0.2 percent in April, picking up after being unchanged in March. Core inflation—which excludes food and energy—also increased 0.2 percent in April. More importantly, the PCE deflator has risen 2.0 percent over the past 12 months, the same rate as observed in the prior release and remaining the fastest year-over-year pace since February 2017. Excluding food and energy, core PCE inflation rose 1.8 percent year-over-year in April. The PCE deflator has accelerated since bottoming out at 1.3 percent in August. This mirrors the recent pickup in other price measures, as noted above, and since this is the Federal Reserve’s preferred measure of inflation, its appreciation continues to garner a lot of attention.

This week, there will be important updates on consumer credit, factory orders and shipments, international trade, job openings and labor productivity. Given the trade discussion of the past week, the export data will be closely watched.

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

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