NAM: Monday Economic Report

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The Federal Reserve reported that manufacturing production rebounded in December after pulling lower in November, with output in the sector up 0.2 percent in the latest release. Manufacturers have struggled to increase demand over the past couple years, with a strong dollar and global headwinds dampening overall activity, but recent data have started to reflect a turnaround in sentiment. In that regard, manufacturing production grew 0.2 percent year-over-year in December, its first positive reading since June but still indicating essentially stagnant growth over the past 12 months. Similarly, manufacturing capacity utilization edged up from 74.7 percent to 74.8 percent, which, despite some progress, remained below the 75.2 percent utilization rate observed one year ago. At the same time, total industrial production jumped 0.8 percent in December, boosted by a spike in utilities output. It marks the largest monthly gain since March 2014.

The better manufacturing data have also extended into the new year, with continued expansions seen in the New York and Philadelphia Federal Reserve Bank districts. In the case of the Philadelphia Fed survey, new orders and the headline composite index both grew at their fastest monthly pace in January since November 2014. Similarly, those leaders completing the Empire State Manufacturing Survey were very optimistic about activity in the next six months, with the forward-looking composite index at a five-year high. In a special question on the Philadelphia Fed Manufacturing Business Outlook Survey, 62.5 percent of respondents anticipate higher production in the first quarter of 2017 relative to levels seen in the fourth quarter of 2016. With that said, one-quarter of respondents predicted declining production, which remained sizable. It also suggests there is still room for improvement in the broader sector despite recent progress.

Meanwhile, the housing market data provided mixed levels of comfort in December but remained mostly encouraging. New housing starts rose 11.3 percent in December, largely on a rebound in the multifamily segment. New residential construction activity rose from an annualized 1,102,000 in November to 1,226,000 in December. These data have been highly volatile, especially in the second half of 2016 and mostly from multifamily activity. While multifamily starts have risen 9.1 percent over the past 12 months, housing starts for multifamily units fell from an average of 395,333 in 2015 to 384,500 in 2016. On the other hand, single-family starting activity eased from 828,000 units in November to 795,000 in December. Yet, despite a slower December, the single-family segment has trended higher over the longer term, up 3.9 percent from 765,000 in December 2015.

New residential construction activity exceeded 1.2 million in December for the third time in 2016—a psychological threshold that we have struggled to maintain each time. Still, the longer-term trend has also been positive—similar to what we see for single-family starts—with housing starts up 5.7 percent year-over-year and the 2015 and 2016 averages being 1,108,167 and 1,167,833 units, respectively. That more-upbeat assessment can also be seen in the housing permits figures, despite a slight pullback in the latest release. Permitting for new residential units declined from 1,212,000 units at the annual rate in November to 1,210,000 in December. It was the fourth straight month with permitting data exceeding 1.2 million, which was reassuring, particularly since permits serve as a proxy for future activity. For their part, homebuilders also continued to be confident about increased single-family sales over the next six months, albeit with some easing in the Housing Market Index in January.

Finally, the latest Federal Reserve Beige Book noted stronger expansions in the U.S. economy, including tightening labor markets and intensifying pricing pressures. Along those lines, consumer prices rose 0.3 percent in December, up for the fifth straight month. The increase in the latest release stemmed largely from higher energy costs, up 1.5 percent, with gasoline prices up 3.0 percent. Overall, the consumer price index increased 2.1 percent year-over-year in October, up from 0.9 percent in July and the highest level since May 2014. Excluding food and energy costs, consumer prices have increased 2.2 percent over the past 12 months, which was the average for 2016. Even though core consumer price inflation has exceeded the Federal Reserve’s stated goal of 2 percent for 14 consecutive months, overall price pressures remain modest and under control for now.

This week, we will get a number of economic indicators on the health of the U.S. economy and regarding manufacturers. The largest focus will come on Friday with the release of fourth quarter GDP data, which are expected to show 2.2 percent growth. For 2016 as a whole, the U.S. economy will likely have grown by 1.6 percent. (For more detail on manufacturing’s contribution to real GDP in the third quarter, see below.) In addition, the Census Bureau will provide new figures on durable goods orders and shipments for December, and new surveys on U.S. and European manufacturing activity will be released by Markit this week and about regional performance from the Kansas City and Richmond Federal Reserve Banks. Other highlights to watch are the most recent updates on consumer confidence, employment costs, existing and new home sales, leading indicators and state employment.

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