NAM: Monday Economic Report

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Consumers and small business owners have expressed rising confidence levels about the economy in recent data, with the data jumping significantly since the election. Time will tell if the strong bump in enthusiasm—largely spurred by a belief that a Trump administration will usher in pro-growth measures—can be sustained or will eventually wane a bit, but for now, sentiment has reached multiyear highs for a number of measures. For instance, the Small Business Optimism Index from the National Federation of Independent Business soared in December to its highest reading in 12 years. The percentage of respondents suggesting that the next three months would be a “good time to expand” leapt from 11 percent to 23 percent, its fastest pace since the Great Recession. In addition, the percentage expecting sales to increase over the next three months rocketed from 1 percent in October to 31 percent in December, the largest level since October 2005.

Despite easing slightly in preliminary January data, the Index of Consumer Sentiment from the University of Michigan and Thomson Reuters hovered near its best reading in nearly 13 years. This trend mirrored rising post-election optimism in the competing survey from the Conference Board, which rose to its highest level since August 2001 in December. These reports were largely consistent with accelerating retail sales figures for December, up 0.6 percent for the month and 1.5 percent in the fourth quarter. Indeed, Americans have been more eager to open their pocketbooks at year’s end after being rather cautious in their purchases earlier in the year, including an increased willingness to use their credit cards. Over the past 12 months, retail sales have risen 4.1 percent. That represents a healthy rebound from the 1.7 percent pace in March. December’s increase was boosted by healthy gains for motor vehicles and parts dealers, up 2.4 percent, among other categories.

Meanwhile, manufacturing employment fell in 2016, with 45,000 fewer workers in the sector across the year. The latest Job Openings and Labor Turnover Survey report mirrored that softness, with net hiring in the sector flat for November. Note that the data source has a slight time lag, coming after news that manufacturers added 17,000 workers in December. The Institute for Supply Management’s survey also reflected more optimism about manufacturing activity, including stronger hiring growth. In addition, manufacturing job openings have remained relatively elevated, despite some easing in recent months after peaking at an all-time high in April. This gives us encouragement for faster hiring growth moving forward.

Finally, producer prices for final demand goods accelerated in the latest report, up 0.7 percent in December. Overall, producer prices for final demand goods and services have increased 1.6 percent since December 2015, its highest year-over-year rate in 26 months and a notable pickup in inflationary pressures after being unchanged in August. Despite the uptick in inflation, pricing pressures remain largely in check, at least for now. Core inflation on a year-over-year basis has remained below the Federal Reserve’s stated goal of 2 percent for 31 straight months (since May 2014). Prices are likely to accelerate somewhat moving forward, likely exceeding the 2 percent threshold in the coming months. Nonetheless, it should remain in an acceptable range for the Federal Open Market Committee, which continues to balance the need for accommodation in its monetary policy with a desire to normalize rates on the basis of economic progress.

We will get a better sense of the current state of manufacturing activity this week with the release of December’s industrial production figures. Manufacturing production has been essentially stagnant on a year-over-year basis, but since the election, sentiment surveys have had a more upbeat assessment of demand and output growth. Surveys from the New York and Philadelphia Federal Reserve Banks will also provide some context about regional data for January. Other highlights for the week include the latest figures for consumer prices, housing starts and permits and real GDP by industry.

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