• AIM Team

NAM: Monday Economic Report

Real GDP grew 2.9 percent at the annual rate in the fourth quarter, boosted by strength in consumer and business spending but weighed down by inventory spending and net exports. According to new data from the Bureau of Economic Analysis, manufacturing added 0.60 percentage points to top-line growth in the fourth quarter. Manufacturing value-added output rose to $2.300 trillion in the fourth quarter, a new all-time high. Adjusting for inflation, a new all-time high also occurred for real value-added output in manufacturing, which increased to $1.984 trillion in the fourth quarter and is in chained 2009 dollars (to adjust for inflation). Overall, manufacturing accounted for 11.6 percent of real GDP in the fourth quarter, up from 11.5 percent in the prior report.

More recently, manufacturing production edged up 0.1 percent in March, extending ever so slightly the robust gain of 1.5 percent in February. The data continue to show healthy growth for manufacturers, especially relative to one year ago. Indeed, manufacturing production has risen 3.0 percent over the past 12 months, up from 2.5 percent last month and the best year-over-year rate since June 2012. With that said, manufacturing capacity utilization inched down from 76.0 percent in February—a reading not seen since August 2015—to 75.9 percent in March. At the same time, total industrial production rose 0.5 percent in March. Over the past 12 months, industrial production has risen 4.3 percent, pulling back marginally from the 4.4 percent pace in February, which was the best since January 2011. In addition, capacity utilization ticked up to 78.0 percent in March, the strongest rate in three years.

The data also remained encouraging at the regional level, with healthy expansions in manufacturing activity recorded in the New York and Philadelphia Federal Reserve Bank districts in April. Manufacturing leaders continued to be positive about activity over the next six months, with signs of continued tightening in the labor market, both for hiring and regarding the length of the average workweek. At the same time, pricing pressures were highly elevated once again, at or near growth rates not seen since at least 2012. Businesses clearly expect raw material price growth to continue over the coming months, mirroring the pickup seen in other input cost data. Meanwhile, 52.9 percent of respondents in the Philadelphia Federal Reserve survey said that capital expenditures would be higher in 2018 than in 2017, with 19.1 percent expecting capital spending to be lower.

Turning to residential construction, housing starts increased 1.9 percent in March, up to an annualized 1,319,000. This was not far from January’s robust level (1,339,000), which was the fastest pace since August 2007. More importantly, it was only the second time since August 2007—before the start of the Great Recession—that new residential construction activity has exceeded 1.3 million units. With that said, the jump in activity in March stemmed largely from an increase in multifamily starts, which can often be highly volatile from month to month. March’s multifamily start rate registered the best reading since December 2016. In contrast, single-family housing starts pulled lower, with weather likely a factor. On the promising side, housing permits remained solid, up to 1,354,000 units in March and not far from January’s rate (1,377,000), which was the fastest permit rate since August 2007. This bodes well for future new residential construction activity, and along those lines, builders continue to remain optimistic about future sales, even with some easing in April’s survey findings.

Finally, retail spending improved in March, up 0.6 percent and rising for the first time since November. Strong motor vehicle and parts sales—up 2.0 percent in March—helped to buoy the headline number, especially contributing to the declines in the four prior months. Excluding automobiles, retail sales increased 0.2 percent in the latest data, inching up for the third consecutive month. The larger narrative remains encouraging, with consumers being a bright spot over the past year. Indeed, retail sales have risen 4.5 percent year-over-year in March, up from 4.1 percent in February. While this was lower than the robust rate of 5.9 percent in November, it continues to represent solid growth in consumer spending overall.

The Bureau of Economic Analysis will provide the first read on real GDP growth for the first quarter of 2018 on April 27, with a consensus estimate of around 2.5 percent. Beyond GDP data, there will be several reports on the health of the manufacturing sector, including preliminary durable goods orders and shipments figures and new survey data from IHS Markit and the Kansas City and Richmond Federal Reserve Banks. Other highlights this week include updates on consumer confidence, employment costs, 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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