NAM: Monday Economic Report
There were more encouraging signs for manufacturers last week in the economic data. For instance, the Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers’ Index rose to 60.8 in February, the highest level since May 2004. Given the strength of that headline figure, it should not be a surprise that many of the underlying data points are near or exceed 60, including new orders, production, employment and exports. Regarding the latter number, exports once again expanded at their best rate since April 2011, with international sales helping to fuel stronger overall demand. Regional surveys from the Dallas and Richmond Federal Reserve Banks also reported robust expansions in manufacturing activity in their districts in February. Texas manufacturing sentiment was the highest since December 2005, and the Richmond Fed’s headline index was just shy of November’s all-time high. These surveys cited optimism in the outlook for the next six months.
New durable goods orders have generally trended in the right direction over the course of the past 12 months. In fact, new durable goods orders have soared 6.8 percent since December 2016. Nonetheless, new durable goods orders fell 3.7 percent in January following two months of solid gains in both November and December. The decline in the latest data stemmed largely from significant decreases in defense and nondefense aircraft and parts sales, which can be highly volatile from month to month. Excluding transportation equipment, new durable goods orders edged down 0.3 percent in January, falling (ever-so-slightly) for the first time since June. As such, broader activity in the durable goods sector started 2018 on a soft note.
At the same time, the sentiment surveys out last week also continued to note accelerating input costs, with indices for raw material prices soaring to multiyear highs. In the Richmond Fed report, respondents said that they expect raw material prices to grow by 2.69 percent at the annual rate six months from now, up from 2.33 percent in the prior survey. That is the highest expected growth rate for inflation since May 2013.
In addition, the personal consumption expenditure (PCE) deflator—which is the preferred measure used by the Federal Reserve—increased by 0.4 percent in January, its strongest monthly gain since September. Despite the large gains in prices in January, overall inflation remains quite modest and largely under control, at least for now. After seeing pricing pressures accelerate strongly earlier in 2017—with the PCE deflator peaking at 2.2 percent year-over-year in February—inflation has pulled back since then. Since December 2016, the PCE deflator has risen by 1.7 percent, unchanged from the previous report. In addition, core PCE inflation was up 1.5 percent year-over-year in January for the third straight month, well below the Fed’s goal of 2 percent.
The stronger economic outlook has also helped to boost private manufacturing construction spending, which was up 1.2 percent in January, rising for the fourth straight month. The value of construction put in place in the sector increased to $64.50 billion in January. Since falling to $61.18 billion in September, private manufacturing construction has started to trend higher, which would be consistent with the recent uptick in economic activity and a stronger overall outlook. With that said, construction in the sector has drifted lower since achieving the all-time high of $82.13 billion in May 2015. Along those lines, manufacturing construction has declined by 9.7 percent year-over-year. For now, though, the good news is that the sector appears to have turned a corner, moving in the right direction.
Consumers have been one of the bright spots in the U.S. economy, and there were also promising headlines on that front. Personal income increased by 0.4 percent for the second straight month in January, with 3.8 percent growth over the past 12 months. For manufacturers, total wages and salaries were $847.8 billion in January, up 4.0 percent year-over-year. At the same time, personal spending eased from a very robust 0.7 percent increase in December to 0.4 percent growth in January. Despite the slower figure, the data continue to be consistent with strong gains in personal consumption. Over the past 12 months, personal spending has risen by 4.4 percent. The savings rate rose from 2.5 percent in December, its lowest rate since September 2005, to 3.2 percent in January. Despite the uptick in the savings rate, it has largely trended lower since peaking at 4.1 percent in February 2017.
Meanwhile, the housing market data were soft in January, with weather likely a factor. Along those lines, new home sales fell sharply for the second straight month, down 7.6 percent and 7.8 percent in December and January, respectively. New single-family residential sales declined from 696,000 units at the annual rate in November, its fastest pace since October 2007, to 643,000 in December to 593,000 in January. This was a disappointing reading, with sales starting the new year on a weak note. Sales were lower in every region of the country. On a year-over-year basis, new single-family home sales were off 1.0 percent from 599,000 units in January 2017. We would anticipate faster growth moving forward, so hopefully this pullback is short-lived.
The labor market has tightened considerably over the past year, with the inability to attract and retain workers being the top concern in the most recent NAM Manufacturers’ Outlook Survey. (A new survey is currently in the field; if you have not already done so, please take a few minutes to answer the survey questions here.) This week, we will get new data on employment. Manufacturers have added roughly 15,700 workers per month over the past 13 months on average, and the expectation is that the sector will build on those gains in February. Other highlights this week include updates on consumer credit, factory orders and shipments, international trade, and labor productivity.
Chad Moutray, Ph.D., CBE Chief Economist National Association of Manufacturers