NAM: Monday Economic Report

12-12-report

With the holiday season approaching, financial markets continue to gift us with new all-time highs, boosted by cautious optimism in the outlook and healthy gains in a number of economic indicators. The Dow Jones Industrial Average has now risen roughly 13 percent so far in 2016, with a 7.4 percent gain since the election. Global equity markets have also jumped notably in recent weeks.

As noted in previous reports, the boost in economic assessments has flowed from a belief that there will be meaningful tax and regulatory reforms, along with a significant infrastructure package, among other pro-growth initiatives. (For more information on such ideas, see the NAM’s new “Competing to Win” white papers.) At the same time, markets are also assuming that increased spending will translate into more debt, and as a result, the bond market has weakened significantly, pushing up interest rates. To illustrate this, the average yield of a 10-year Treasury bond has grown from 1.88 percent on November 8 to 2.41 percent on December 9, its highest level since July 2015. The average 30-year fixed-rate mortgageinterest rate was 4.13 percent last week as well, up from 3.54 percent on November 3 and the highest rate in more than two years, according to Freddie Mac.

Consumers have also been more confident, according to the University of Michigan and Thomson Reuters, with sentiment jumping to its highest level in nearly two years in December. Moreover, the confidence index was just shy of the post-recession peak reached in January 2015. With improved perceptions, Americans have opened their pocketbooks in recent months, with consumer spending being one of the bright spots in the U.S. economy. That is good news for retailers—and by extension, for manufacturers—this holiday season. Yet, despite that positive trend, the Federal Reserve reported some slowing in a willingness to take on more credit, with consumer credit outstanding easing from 5.0 percent growth in September to a 2.9 percent increase in October. This might have been some pre-election jitters, however, as credit has increased 6.1 percent over the past 12 months.

Meanwhile, new factory orders rose 2.7 percent in October, the fourth straight monthly gain and the fastest pace of monthly growth since June 2015. Yet, the jump in October came largely from a big boost in aircraft sales, with transportation equipment orders up 12.0 percent. Excluding transportation, new orders for manufactured goods increased 0.8 percent. Over the longer term, new factory orders have started to stabilize on a year-over-year basis, up 1.3 percent since October 2015 and improving from a negative year-over-year position in August. Nonetheless, new orders for manufactured goods excluding transportation have risen just 0.5 percent over the past 12 months. This suggests still-soft demand in the broader manufacturing sector, even as this was the first positive year-over-year reading since October 2014.

With that said, there were also signs of lingering challenges in the manufacturing sector. For instance, net hiring turned negative again in October, ending four straight monthly gains, and manufacturing job openings also pulled back in October, even as they remain relatively elevated in general. We hope hiring will improve moving forward with a better demand and production outlook. Of course, better economic conditions might hinge on growing international demand, and in that regard, manufacturers continue to struggle. Using non-seasonally adjusted data, U.S.-manufactured goods exports were off 6.5 percent year to date through October, falling for the second straight year. For its part, the U.S. trade deficit also widened in October after falling to a 19-month low in September on reduced goods exports and higher goods imports.

The Federal Reserve is set to raise short-term interest rates for the first time in 2016 at the conclusion of its Federal Open Market Committee meeting December 13–14. That move, while expected, will dominate financial market headlines next week. For manufacturers, there will be a number of releases helping us gauge the current state of play, starting with new industrial production data on Wednesday. Look for continued stabilization in manufacturing output, even as year-over-year growth remains quite soft. In addition to production data this week, there will also be regional surveys from the New York and Philadelphia Federal Reserve Banks and flash data from Markit for manufacturing activity in the Eurozone and United States.

In a busy week for economic data, other highlights include the latest figures on consumer and producer prices, housing starts and permits, retail sales, small business optimism and state employment.

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