NAM: Monday Economic Report

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We have seen a steady stream of good economic numbers in the past few weeks, and the data that came out last week was no exception. First and foremost, strong consumer spending helped push real GDPgrowth higher, to a revised 3.2 percent in the third quarter. Original estimates set the growth at 2.9 percent, with both figures marking the fastest quarterly growth rate in two years. Overall, this report was good news. With the U.S. economy expanding by only 1.1 percent at the annual rate in the first half of 2016, the third quarter numbers were entirely welcome, especially for consumer spending and net exports. Business investment remains a concern, but will hopefully recover moving forward with improvement confidence. In the end, real GDP will grow by 1.6 percent in 2016, but I expect stronger activity next year, with the current forecast being 2.5 percent growth.

Consumer confidence soared in November to its highest level since July 2007, according to the Conference Board, bouncing back from a pre-election lull in the October report. This mirrored a similar post-election rise in sentiment seen in the competing survey from the University of Michigan and Thomson Reuters. This should serve as good news for retailers — and by extension, manufacturers — for the holidays. Indeed, personal spending rose for the second straight month in October, albeit slower than in September, with 4.2 percent growth year-over-year. That suggests that Americans have been more willing to open their pocketbooks in recent months relative to a more-cautious approach seen earlier in the year. At the same time, consumers have benefited from rising personal income, up 0.6 percent in October, its fastest pace of growth since April. Over the past 12 months, personal incomes have risen 3.9 percent, a nine-month high and definite progress from the 3.4 percent pace seen in August.

Meanwhile, the indicators for manufacturing were mixed. On the positive side, the Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers’ Index (PMI) rebounded once again in November, growing at a five-month high. The composite index rose from 51.9 in October to 53.2 in November, expanding for the third straight month. This is encouraging for a sector that has seen subpar growth over much of the past two years on global headwinds and economic anxieties. Indeed, manufacturing production (up from 54.6 to 56.0) in November expanded at its fastest clip since July 2015, with new orders (up from 52.1 to 53.0) also accelerating slightly. Exports (down from 52.5 to 52.0) and employment (down from 52.9 to 52.3) slowed a little for the month but remained positive, with hiring expanding for only the third time this year so far. In a similar manner, the Dallas Federal Reserve Bank reported that manufacturing activity expanded in November at its fastest rate since July 2014, representing notable improvement after contracting for 22 straight months.

Turning to the labor market, the unemployment rate fell to 4.6 percent, its lowest level since August 2007. At the same time, nonfarm payrolls rose by 178,000, which was on par with the consensus estimate of around 180,000. This should help cement a Federal Reserve rate hike at its upcoming meeting on December 13 and 14. Despite these positives, manufacturers have continued to struggle, as evidenced by the loss of 4,000 workers in November, with 60,000 fewer workers on net year-to-date. Employment in the sector has now declined for four straight months. Moving forward, manufacturing leaders are cautiously optimistic about demand and production for 2017, and we would expect that this increase in activity would lead to additional hiring.

Beyond jobs, manufacturers were also cautious about construction spending in October, with activity pulling back for the second straight month. The value of construction put in place in the sector declined 2.4 percent from September to October. While manufacturing construction has trended higher in the past several years, largely from increased investment in the chemical sector, activity has stalled more recently as manufacturing grapples with sluggish growth and economic and political anxieties. Along those lines, construction activity in the manufacturing sector has pulled sharply lower since achieving the all-time high in September 2015. As with hiring, we would expect construction investment to improve as we move into 2017, especially given strengthening demand and better confidence figures.

Given the economic headwinds seen globally over the past few years, we will be looking for signs of progress on the export front this week. For its part, net exports were a bright spot in the most recent GDP data for the third quarter, making the U.S. trade report from the Census Bureau one of the economic highlights of the week. Other indicators to watch include the most recent figures for consumer confidence, consumer credit, factory orders and shipments, and job openings and labor productivity.

Chad Moutray, Ph.D., CBE
Chief Economist
National Association of Manufacturers