NAM: Monday Economic Report

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After a burst of post-election enthusiasm, several reports out last week reminded us that the economy continues to have some challenges, despite recent progress. For instance, new manufacturing production data, down 0.1 percent in November, were disappointing following two months of gains. Moreover, output in the sector has risen just 0.1 percent on a year-over-year basis, suggesting essentially stagnant growth over the past 12 months. Meanwhile, total industrial production declined 0.4 percent in November, falling for the third time in the past four months. In addition to manufacturing, utilities production was also lower, down 4.4 percent, whereas mining output increased for the second straight month, up 1.1 percent. On a positive note, we would expect manufacturing production growth to accelerate moving forward, especially if more upbeat sentiment surveys (see below) prove accurate. I anticipate manufacturing output to increase roughly 1.5 percent in 2017.

There were similarly discouraging numbers in the housing and retail markets. While Americans have generally been more willing to open their pocketbooks in recent months, retail sales pulled back in November from the strong gain in October. Retail spending rose 0.1 percent in November, off from the consensus estimate of 0.3 percent and down from the 0.6 percent gain in October. This was softer than desired, largely due to weakness in the motor vehicle and parts segment, which declined 0.5 percent for the month. Excluding automobiles, retail sales increased 0.2 percent. Nonetheless, retail sales have risen 3.8 percent over the past 12 months, representing a healthy pace overall. Turning to residential construction, new housing starts declined 18.7 percent in November, falling from its fastest pace in more than nine years in October. The decline in November, however, stemmed mostly from a drop of activity in the highly volatile multifamily segment. While also easing in this report, single-family starts have been more encouraging, up 5.3 percent year-over-year.

As noted earlier, consumers and businesses have been very optimistic since the election, and this has been reflected in a number of surveys. Last week, this included homebuilders, who sent the Housing Market Index up to the highest level of confidence since July 2005, and small business owners, who pushed the Small Business Optimism Index to a 23-month high. The NAM Manufacturers’ Outlook Survey echoed these gains, with respondents cautiously upbeat about better business conditions and stronger growth. Indeed, 77.8 percent of manufacturers are either somewhat or very positive about their own company’s outlook in the latest survey, up from 61.0 percent in September. This was the highest level since the March 2015 survey and ended the five-quarter streak with this headline measure being below its historical average of 73.1 percent. Moreover, manufacturers completing the latest survey anticipated 3.0 percent growth in sales over the next year, up from 1.9 percent in September.

Other manufacturing surveys were also quite heartening. Regional data from the New York and Philadelphia Federal Reserve Banks both indicated strong gains in December. In both reports, more than 55 percent of survey respondents expected new orders and shipments to increase over the next six months. Meanwhile, the Markit Flash U.S. Manufacturing PMI rose to a 21-month high, mirroring assessments about growth in new orders, which also expanded at the fastest pace over that time frame. It was a similar story at year’s end in Europe. The Markit Flash Eurozone Manufacturing PMI increased to a level not seen since April 2011. As such, the continent’s economy continues to move in the right direction, with activity accelerating at a decent rate. In addition, manufacturers in France and Germany were also more upbeat, with French manufacturing activity expanding at its fastest pace in 67 months, an impressive accomplishment given that the data were in contraction territory as recently as September.

Of course, the bigger headlines last week came from financial markets—with the Dow Jones Industrial Average flirting with 20,000 for the first time ever—and the Federal Reserve. Along those lines, the Federal Open Market Committee (FOMC) opted to raise short-term rates for the first time in 2016 at the conclusion of its December 13–14 meeting. The target of the federal funds rate was increased by 25 basis points, with the range now between 0.50 and 0.75 percent. This move was widely expected. Moving into 2017, FOMC participants appear to be more hawkish than three months ago, with economic projections appearing to forecast three rate hikes next year. That is up from a median prediction of two rate hikes at the September meeting. Beyond next year, Federal Reserve participants also see three increases in both 2018 and 2019. The Federal Reserve does not anticipate core inflation exceeding 2 percent over that time frame. Both consumer and producer prices picked up in November, but inflationary pressures remain mostly modest overall.

This week will be another busy one leading up to the holiday. There will be new surveys on consumer confidence and on manufacturing sentiment from the Kansas City Federal Reserve Bank as well as the latest figures on durable goods orders. In addition, we will get another revision for third-quarter real GDP growth, which should not shift much from the current annual rate of 3.2 percent. Other numbers to watch include new data on leading indicators, new home sales and personal income and spending.

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