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NAM: Monday Economic Report

The Federal Reserve reported that manufacturing production was unchanged in January for the second straight month. As such, output in the sector essentially has paused at the beginning of 2018, but we anticipate that this breather will be short-lived. Indeed, we expect manufacturing production to rise by 2.1 percent in 2018, up from 1.7 percent in 2017. In terms of the latest data, manufacturing production rose by 1.8 percent since January 2017, slowing from the more robust 2.3 percent pace seen in November, which likely represented a rebound in the aftermath of several hurricanes. Much like the headline number, manufacturing capacity utilization was flat in January’s report, unchanged at 76.2 percent.

On a regional basis, manufacturing activity in the New York and Philadelphia Federal Reserve Bank districts both reflected strong expansions in activity in February. New orders and employment were higher in both surveys, even as some of the other key measures eased a bit. More importantly, manufacturing respondents remain very upbeat in their outlook for the next six months, with that optimism at its highest level since January 2011 in the Empire State Manufacturing Survey. At the same time, more than 60 percent of those completing the survey in the Philly Fed’s region see new orders and shipments rising in the next six months, and at least 44 percent anticipate additional hiring and capital spending. If there are any concerns in the data, they are with input costs, which continued to increase in both regional reports, each to multiyear highs, mirroring accelerations in other data.

Along those lines, consumer and producer prices both jumped in January, primarily on higher energy costs. For manufacturers, producer prices for final demand goods jumped 0.7 percent in January, its fastest pace in two months. Led by sharply higher energy costs, which were up 3.4 percent in January, this increase was largely consistent with recent observations in the spot price for West Texas intermediate (WTI) crude oil, which increased from an average of $57.88 in December to $63.70 in January, its highest monthly average since November 2014. Excluding food and energy, producer prices for final demand goods were up by 0.2 percent in this report, increasing for the sixth consecutive month. Nonetheless, core producer prices continue to be modest at 2.4 percent. Similarly, consumer prices have risen 2.1 percent year-over-year, with core inflation up 1.8 percent since January 2017.

Meanwhile, housing permits soared in January to their best pace since June 2007. New residential housing permits increased from 1,300,000 units at the annual rate in December to 1,396,000 units in January, a post-recessionary high. This should bode well for the housing market in the coming months, with stronger permitting activity pointing to healthy construction data moving forward. In that way, this report mirrored a similarly upbeat assessment from homebuilders, who anticipate single-family home sales rising briskly at rates not seen since June 2005. On a year-over-year basis, housing permits have risen 7.4 percent, up from 1,300,000 units in January 2017. New housing starts were also encouraging, up from an annualized 1,209,000 units in December to 1,326,000 in January, its highest level since August 2007. Housing starts have increased 7.3 percent over the past 12 months, up from 1,236,000 units one year ago.

Finally, the consumer data were mixed last week. On the positive side, the University of Michigan and Thomson Reuters reported that the Index of Consumer Sentiment rose from 95.7 in January to 99.9 in February, its highest level since October’s robust reading (100.7), which was the highest point since January 2004. The increase in February came “despite lower and much more volatile stock prices,” according to Richard Curtin, the Survey of Consumers Chief Economist. Overall, these data are consistent with 2.9 percent growth in real consumer spending in 2018.

Yet, retail spending declined by 0.3 percent in January, which was disappointing, especially given the consensus expectation for a 0.2 percent increase. Moreover, retail sales were unchanged in December, a notable revision from the prior estimate of a 0.4 percent gain. As a result of these latest figures, it is clear that consumer spending has been softer in the past two months than we would prefer. Yet, the larger narrative remains an encouraging one, with consumers being a bright spot over the past year. Indeed, retail sales have risen 3.7 percent year-over-year in January, suggesting a decent pace overall even if it represented a deceleration from the more-robust rate of 5.2 percent in December. Excluding automobiles, the pace was even stronger, with retail sales up 4.2 percent over the past 12 months.

The international economy has improved significantly over the past year, with manufacturing activity in many key export markets expanding at multiyear highs. This is especially true in Europe, which experienced an all-time high in the 20-year history of the IHS Markit Eurozone Manufacturing PMI survey in December. This week, there will be new survey data from IHS Markit, both for the Eurozone and the United States. Notably, the U.S. data in January also improved, as the headline measure had the best reading since March 2015. Other highlights to look for this week include manufacturing survey data from the Kansas City Federal Reserve Bank and updates on existing home sales and leading indicators.

Chad Moutray, Ph.D., CBE

Chief Economist

National Association of Manufacturers

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