NAM: Economic Report

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Manufacturing production expanded for the fourth consecutive month. Output in the sector was up 0.2 percent in January, extending the 0.2 percent gain seen in December. The recent improvements suggest that manufacturers are beginning to recover from notable weaknesses over the past two years, with a strong dollar and global headwinds dampening overall activity. In that regard, manufacturing production grew just 0.3 percent year-over-year in January, highlighting the significant challenges seen over the past 12 months in growing production. Similarly, manufacturing capacity utilization edged up from 75.0 percent to 75.1 percent, which, despite some progress, remained below the 75.5 percent utilization rate observed one year ago. Meanwhile, total industrial production returned to negative territory, down 0.3 percent in January, after jumping 0.6 percent in December, largely from swings in utilities production.

Sentiment surveys have also continued to be encouraging, including the most recent reports from the New York and Philadelphia Federal Reserve Banks. In the latter release, the headline index in February soared to its highest level since November 1983, and in both surveys, new orders and shipments expanded strongly. Hiring growth had lagged behind in recent Empire State Manufacturing Surveys, but in the current data, employment and the average workweek shifted into positive territory. Hopefully, we will continue seeing stronger labor market data in the coming months, particularly if demand remains strong. Along those lines, regional surveys reflect a mostly upbeat manufacturing sector regarding the next six months, with more than half of respondents predicting higher sales and shipments moving forward. In addition, the Small Business Optimism Index from the National Federation of Independent Business rose to levels not seen since December 2004.

Turning to residential construction, home builders made healthy assessments about single-family home sales over the next six months, as the Housing Market Index remained quite elevated despite easing for the second straight month. This survey mirrored slightly weaker housing starts data, down 2.6 percent in January, which nonetheless continued to indicate relative health in the market. Housing starts have risen 10.5 percent over the past 12 months, which was quite encouraging. Indeed, much of the recent volatility has come from the multifamily segment; whereas, single-family housing starts have more consistently drifted higher, even with a slight lull in both November and December. Moreover, permitting for new residential units increased to a 14-month high. It was also the fifth straight month with permits exceeding 1.2 million units, which was reassuring.

Meanwhile, retail sales rose 0.4 percent in January, extending the 1.0 percent gain seen in December. Americans have been more willing to open their pocketbooks after being more cautious with their purchases at this time last year. Over the past 12 months, retail sales have jumped 5.6 percent, a healthy rebound from a year-over-year pace of just 2.2 percent in August. Motor vehicles and parts sales have been a relative bright spot of late, but a 1.4 percent decline in auto sales held back the January data slightly. To be fair, this drop was likely a response to a larger-than-normal jump in December in motor vehicle purchases, up 3.2 percent. Excluding automobiles, retail sales rose 0.8 percent in January, with year-over-year growth of 5.3 percent.

One of the larger economic headlines last week came from Federal Reserve Board Chair Janet Yellen’s testimony to Congress on February 14–15. Her comments about “waiting too long to remove accommodation” were widely perceived as “hawkish,” perhaps telegraphing a possible short-term rate hike at the upcoming March 14–15 Federal Open Market Committee (FOMC) meeting. Yet, she also cited economic uncertainties, providing some wiggle room if the FOMC opts to wait until the May 2–3 or June 13–14 meetings before acting. For its part, inflationary pressures appear to be accelerating, even as they remain mostly modest for now. Core consumer prices have increased 2.3 percent over the past 12 months; whereas, producer prices for final demand goods and services have increased 1.7 percent since January 2016, its highest year-over-year rate since August 2014. In January, a fair share of the boost in prices came from increased energy costs, both for consumers and producers.

We will get additional clues about the health of the manufacturing sector this week, including new surveys from IHS Markit and the Kansas City Federal Reserve Bank. We are hopeful that the Markit reports will show continued improvements in sentiment in both the United States and Eurozone in February, building on multiyear highs in the January data. Other highlights include the latest figures for consumer confidence, existing and new home sales, and the Chicago Federal Reserve’s National Activity Index.

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