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NAM: Monday Economic Report

The Federal Reserve reported that manufacturing production rebounded in February, up 1.2 percent, after edging down 0.2 percent in January. That was the fastest monthly pace of growth since October, and overall, the data continue to show healthy growth for manufacturers, with strength last year carrying over into this year. Indeed, manufacturing production has risen 2.5 percent over the past 12 months, up from 1.6 percent last month and the best year-over-year rate since July 2014. Similarly, manufacturing capacity utilization jumped from 76.0 percent in January to 76.9 percent in February, a reading not seen since April 2008. At the same time, total industrial production jumped 1.1 percent in February, or 4.4 percent year-over-year, the highest rate since March 2011. The data were supported by strength in the New York and Philadelphia Federal Reserve Bank districts in their March manufacturing surveys, with respondents quite positive about current activity and in their economic outlook.

The labor market has tightened significantly as a result of strength in the manufacturing sector and larger macroeconomy. For instance, there were 427,000 manufacturing job openings in January, up strongly from 374,000 in December. That was the best number since September’s reading (445,000), which was the strongest since January 2001. The manufacturing sector hired 360,000 workers in January, just shy of the 364,000 employees hired in August, which was the strongest rate since November 2007. Net hiring (or hires minus separations) registered 8,000 in January but has averaged a rather healthy 14,500 over the past 12 months. Meanwhile, job openings for nonfarm payroll businesses soared to 6,312,000 in January, a new all-time high.

Positive economic news—especially in the jobs market—has helped to lift consumer confidence. The Index of Consumer Sentiment from the University of Michigan and Thomson Reuters jumped to 102.0 in March, the highest level since January 2004. The press release notes that those individuals with higher incomes felt less upbeat in the most recent survey—likely from volatility in equity markets and the impact that has on personal finances—but that was not enough to drag down the headline index. Indeed, Americans felt more positive about current economic conditions (up from 114.9 to 122.8), with that measure soaring to a new all-time high.

Despite robust consumer assessments about the economy, retail spending declined 0.1 percent in February for the third straight month, starting the new year off on a disappointing note. Motor vehicle and parts sales fell 0.9 percent in February, decreasing for the fourth consecutive month and one of the larger drags in the latest report. Along those lines, retail spending excluding automobiles increased 0.2 percent in February. Nonetheless, the larger narrative remains encouraging, with consumers being a bright spot over the past year. Indeed, retail sales have risen 4.0 percent year-over-year in February, suggesting a decent pace overall even if it represented a deceleration from the more robust rate of 5.9 percent in November. Excluding motor vehicles and parts, the pace was somewhat stronger, with retail sales up 4.4 percent over the past 12 months.

Turning to the housing market, new housing starts declined 7.0 percent from an annualized 1,329,000 units in January—the fastest pace since August 2007—to 1,236,000 units in February. Yet, there were some positives to note in the latest report. First, for the fifth straight month, housing starts exceeded 1.2 million units at the annual rate, which suggests that we might finally have breached and sustained that threshold of activity, which is promising. Second, single-family housing starts rose to 902,000 units in February. It was only the second time since September 2007 that single-family construction activity has risen above 900,000 units, following the rate of 946,000 units in November. The softness in the February housing starts data came from the multifamily segment, which is highly volatile from month to month.

Housing permits also weakened, down from an annualized 1,377,000 units in January—also the best reading since August 2007—to 1,298,000 units in February. Much like the starts figures, this was the fifth consecutive month with permitting above 1.2 million units, and the trend continues to be a mostly heartening one. On a year-over-year basis, housing permits have risen 6.5 percent, up from 1,219,000 in February 2017. With that in mind, the permits data—while somewhat reduced in February—continue to signal strength in the housing market in the coming months, as this measure is a good proxy for future construction activity. In that way, it mirrored solid assessments from homebuilders, who remain very upbeat about single-family sales in their outlook.

Finally, the beforementioned regional Federal Reserve Bank surveys both reported that input costs were elevated, with measures for raw material prices at their highest level in at least five years. Along those lines, consumer and producer prices both increased 0.2 percent in February. Reduced energy costs in February helped to ease pricing pressures after solid gains in January. Overall, however, prices have picked up somewhat, even if some modest acceleration should be expected given the low levels of inflation over much of the past two years. The consumer price index has risen 2.3 percent over the past 12 months, the fastest year-over-year pace since March 2017, and producer prices for final demand goods and services have increased 2.9 percent year-over-year. Core inflation, which excludes food and energy costs, was 1.9 percent year-over-year for consumers and 2.7 percent for producers.

The Federal Open Market Committee (FOMC) meets on March 20 and 21; it is expected to raise short-term interest rates for the first time this year. The Federal Reserve will be reacting to stronger economic growth and an ever-tighter labor market in its move toward normalizing monetary policy, with the FOMC anticipated to increase the federal funds rate at least three (and maybe four) times in 2018. It is also continuing to reduce the size of the Federal Reserve’s balance sheet, a process that has been ongoing since last fall.

The Census Bureau will release preliminary numbers for durable goods orders and shipments for February this week, which were softer than desired in January but have been quite robust over the past 12 months. In addition, new surveys from IHS Markit and the Kansas City Federal Reserve Bank will provide new clues about manufacturing activity. Other highlights this week include new data on existing and new home sales, leading indicators and state employment.

Chad Moutray, Ph.D., CBE

Chief Economist

National Association of Manufacturers

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