NAM: Monday Economic Update

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The Institute for Supply Management’s Manufacturing Purchasing Managers’ Index continued to grow rather strongly, accelerating to its fastest pace since November 2014. The composite index rose from 54.5 in December to 56.0 in January, marking the fifth straight monthly expansion in the headline number. New orders and production grew strongly in January. Similarly, the Dallas Federal Reserve Bank reported that manufacturing activity expanded in January at its fastest rate since April 2010, with leaders very positive about the next six months. Indeed, the forward-looking outlook measure jumped to a level not seen in more than 12 years.

With rising sentiment as the backdrop, manufacturing employment rose for the second straight month in January, beginning the new year on an encouraging note. The sector added 5,000 workers in January, building off of a gain of 11,000 workers in December. Average weekly earnings in manufacturing have risen 3.2 percent over the past year, up to $1,075.49. We hope this is a sign that manufacturers are starting to accelerate their hiring in light of a stronger demand and production outlook, and it stands in contrast to the more cautious approach throughout much of the past year. Along those lines, there were 46,000 fewer manufacturing workers today than one year ago, as global headwinds and economic uncertainties continued to take their toll on manufacturing activity.

In the larger economy, nonfarm payrolls increased by 227,000 in January, which was better than the consensus estimate of around 175,000. It was the strongest monthly gain since September, with the latest figure representing a pickup from the 186,833 monthly average in 2016. Meanwhile, the unemployment rate inched up from 4.7 percent in December to 4.8 percent in January. The increase stemmed largely from a higher participation rate, which ticked up from 62.7 percent to 62.9 percent. That suggests that more Americans are seeking employment—another signal of possible renewed health in the U.S. economy.

More encouraging jobs growth should put additional pressure on the Federal Reserve as it weighs the timing of its next move. While the Federal Open Market Committee chose not to raise short-term rates at its most recent meeting earlier last week, it will likely take a hard look at doing so at its March 14–15meeting, especially if economic data continue to reflect building strength in output and employment and if pricing pressures continue to pick up (albeit at still acceptable levels for now).

Nonetheless, other economic indicators out last week were mixed. On the positive side, while consumer confidence pulled back slightly in January after soaring to a 15-year high in December in the aftermath of the election, it remained elevated. In a similar vein, personal spending accelerated at year’s end, rising 0.5 percent in December. This was its fastest monthly pace since September, boosted by strong growth in durable goods purchasing, which increased 1.4 percent in December. In general, Americans have been more willing to open their pocketbooks in recent months relative to a more cautious approach earlier last year. Along those lines, personal consumption expenditures grew 4.5 percent year-over-year in December, up from 2.9 percent in March and its highest level in two years. With the pickup in spending, the saving rate edged lower, down from 5.6 percent in November to 5.4 percent in December, its lowest rate since March 2014.

On the other hand, we also continue to get reminders of ongoing challenges in the manufacturing sector. For instance, private manufacturing construction spending remained weak in December, falling to a two-year low. While manufacturing construction has largely trended higher over the past few years, activity has stalled more recently as the sector has grappled with sluggish growth and economic and political anxieties. Over the past 12 months, manufacturing construction spending has fallen 5.9 percent. In addition, manufacturing labor productivity has averaged just 0.3 percent from 2013 to 2016. In comparison, output per worker in the sector averaged a more robust 5.2 percent annually from 2002 to 2008. Over the longer term, manufacturers have benefited from being leaner, but the recent sluggishness in productivity and output growth has meant that unit labor costs have risen 11.3 percent since the end of 2011. More positively, output per worker in manufacturing rebounded in the fourth quarter, up 0.7 percent.

After a busy few weeks for economic indicators, there will be only a handful of reports out this week. One of the highlights will be new data on job openings, which have remained somewhat elevated in recent months even as net hiring has been quite soft. This could suggest better employment growth moving forward if demand and production accelerate. Other reports this week include new figures for consumer sentiment, consumer credit, international trade and wholesale trade.

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