• AIM Team

NAM: Monday Economic Report

The U.S. economy grew by an annualized 2.3 percent in the first quarter, according to preliminary data. This was slightly better than the consensus estimate of around 2 percent, even as real GDP eased from 2.9 percent growth in the fourth quarter data. In addition, this was the strongest first quarter reading in three years. Overall, the latest report found healthy growth in nonresidential fixed investment and service-sector spending, with inventory spending and net exports rebounding in the first quarter after being notable drags in the prior release. At the same time, goods spending and the housing market were sluggish, with durable goods spending pulled lower by weak motor vehicle and parts demand.

Real GDP should grow by roughly 3 percent in 2018, which would be the strongest growth rate since 2005. Passage of tax reform and other pro-growth measures should help to stimulate economic activity, allowing us to reach that goal. Along those lines, manufacturers continue to increase capital spending, investment and wages because of tax reform and the changed regulatory environment, and the NAM has highlighted those stories on its “Keeping Our Promise” web page. In my testimony before the Joint Economic Committee earlier this month, I said that tax reform should lead to $55 billion in additional fixed investment in manufacturing this year, with the sector adding at least 100,000 more workers. These data were mostly consistent with that optimism, as business spending was one of the larger bright spots in the first quarter GDP data.

On the manufacturing front, new durable goods orders rose for the second straight month, up 2.6 percent in March and extending the 3.5 percent gain in February. New durable goods orders jumped from $248.6 billion in February to $254.9 billion in March, a new all-time high. With that said, much of the increase in both months came from nondefense aircraft and parts orders, which can have large monthly swings. Indeed, new orders for durable goods with transportation equipment excluded were unchanged in March. New durable goods orders have trended strongly higher across the past 12 months, soaring 9.5 percent since March 2017, or 6.7 percent year-over-year with transportation equipment excluded.

At the same time, surveys of manufacturing activity provided mixed results last week, while remaining encouraging overall. On the positive side, the IHS Markit Flash U.S. Manufacturing PMI rose to 56.5 in April, the strongest expansion pace since September 2014. New orders, output and exports all rose in April, with demand growth at a three-year high. Yet, raw material prices picked up in April, with input costs expanding at rates not seen since June 2011—a trend seen in other data as well. At the regional level, the Kansas City Federal Reserve Bank reported that manufacturing activity expanded in April at the fastest monthly pace since the survey was created in July 2001, with robust growth in new orders, production and shipments. Employment remained one of the bright spots in the latest survey, with the index still at the all-time high reading notched in the prior release.

In contrast, the Richmond Federal Reserve Bank reported that manufacturing activity in its district contracted in April for the first time since September 2016. The composite index for general business assessment dropped from 15 in March to -3 in April, with many of the key measures also weakening in the latest survey. Nonetheless, manufacturers in the region continued to invest in their businesses, which should be interpreted as a sign of confidence moving forward. Along those lines, faster growth in April occurred for employment, wages and capital expenditures. Indeed, the capital spending index reached its highest point since the question was added in December 2010, which was encouraging. More importantly, respondents in both regional Federal Reserve surveys remained upbeat about the next six months. Looking abroad, Europe, which had been one of the bright spots in recent months, also experienced softness. The IHS Markit Flash Eurozone Manufacturing PMI declined for the fourth straight month, down from 56.6 in March to 56.0 in April, the weakest reading since February 2017.

Overall, stronger economic growth and continued tightening in the labor market have helped to push up wages and benefits, as one might expect. Private manufacturing compensation rose 0.7 percent in the first quarter, or 2.9 percent over the past 12 months. It was the fastest year-over-year pace of growth in manufacturing compensation since the second quarter of 2011, and to put that figure in perspective, the year-over-year rate registered 2.2 percent in the first quarter of 2017. Breaking that down further, private manufacturing wages and salaries also rose 0.7 percent in the first quarter, with benefits jumping 0.8 percent. Private-sector manufacturing workers earned 2.6 percent more over the past 12 months in wages and salaries, with benefit costs up 3.3 percent year-over-year.

Despite this, consumer confidence data showed mixed results in the latest releases. The Conference Board reported that the Consumer Confidence Index edged higher in April, up to 128.7, after pulling back slightly in March from February’s 18-year high (130.0). In general, Americans remain upbeat about the economy, with the index continuing to be at elevated levels. Yet, many of the underlying survey questions softened in April, including those about the strength of the economy and regarding labor market and income expectations. Meanwhile, the Index of Consumer Sentiment from the University of Michigan and Thomson Reuters dropped from 101.4 in March—the highest level since January 2004—to 98.8 in April. The press release cites policy uncertainties as a concern for many respondents, especially regarding trade policy. Despite the easing in April’s headline index, Americans continue to be more optimistic over the long term, and these figures are largely consistent with 2.7 percent growth in consumer spending over the next 12 months.

Updates coming out this week include the latest Institute for Supply Management’s Manufacturing PMI report and job growth figures for April. There will also be a new manufacturing survey from the Dallas Federal Reserve Bank, and the Census Bureau will release data on factory orders and shipments. On the hiring front, manufacturers have added an average of 27,167 workers per month over the past six months, and the expectation is for healthy job gains in April as well. Indeed, the labor market remains tight, with workforce recruitment and retention a top challenge for business leaders nationally.

The Federal Open Market Committee will meet May 1–2. After raising short-term rates at the conclusion of its March meeting, participants are not expected to make any changes to monetary policy this week. Instead, the consensus is for another rate hike at the June 12–13 meeting. Other highlights this week include new data on construction spending, international trade, labor productivity and personal income and spending.

Chad Moutray, Ph.D., CBE

Chief Economist

National Association of Manufacturers