NAM: Monday Economic Report

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Last week, President Donald Trump met with manufacturing CEOs at the White House to discuss policies that will make the sector more competitive globally. A number of NAM members were present at this meeting, including our Board Chair David Farr, chairman and CEO of Emerson. The focus on pro-growth policies by the new administration—even with lingering uncertaintie—has helped to lift both consumer and business confidence to multiyear records. In addition, the Dow Jones Industrial Average has risen 4.9 percent since Inauguration Day (or 13.5 percent since Election Day), up to yet another all-time high. (Treasury Secretary Steven Mnuchin asserted on Thursday that rising stock prices might be a good “report card” on the prospects for growth in the U.S. economy.)

For now, manufacturers are cautiously optimistic in their economic outlook. Along those lines, the Kansas City Federal Reserve Bank reported that manufacturing activity expanded in February at its fastest rate since June 2011. As such, manufacturing conditions have continued to improve after notable challenges over the past two years from global headwinds and reduced commodity prices, especially for crude oil. Moreover, the forward-looking composite index edged up from 27 to 29, its highest reading in the survey’s 16-year history. This mirrored progress in other regional and national surveys. For instance, the Markit Flash U.S. Manufacturing PMI remained elevated in February despite dipping from its highest level since March 2015 in the latest data, with decent growth in new orders, output and employment. Moreover, improvements in manufacturing were not limited to the United States, with encouraging news emanating from Europe as well. The Markit Flash Eurozone Manufacturing PMI rose to its fastest rate since April 2011.

Meanwhile, there was also encouraging news about the housing market last week. Existing home salesincreased 3.3 percent in January, rising to its highest annual level since February 2007. National Association of Realtors Chief Economist Lawrence Yun attributed the robust growth in 2016 to “strong hiring and improved consumer confidence at the end of last year,” but he also noted reduced stockpiles of homes for sale and rising prices. Likewise, new single-family home sales increased 3.7 percent in January, with year-over-year growth of 5.5 percent. Still, the current pace of 555,000 new homes sold at the annual rate was not far from the 559,083 average rate in 2016, and unlike existing homes trends, inventories of new homes for sale have widened in recent months.

For its part, the Federal Reserve seems poised to raise short-term interest rates again in the coming months, according to the minutes of its January 31–February 1 meeting. The Federal Open Market Committee (FOMC) noted recent progress in the U.S. economy, including a strengthened labor market, household spending and overall sentiment. Specific to the outlook for rate hikes, the minutes state:

“…many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations or if the risks of overshooting the Committee’s maximum-employment and inflation objectives increased.”

With that said, FOMC participants also referred to a desire for a “gradual pace of rate increases over time,” which would suggest some moderation as it seeks to normalize rates. Currently, financial markets anticipate two to three short-term rate increases in 2017, with the next 25-basis-point increase occurring at the March 14–15 meeting.

This week, we will get additional clues about the current state of the manufacturing sector with a number of new releases, including surveys from the Dallas and Richmond Federal Reserve Banks and the Institute for Supply Management. We are hopeful each will show continued expansions in activity in February, building on strong gains in January. Beyond sentiment reports, however, we will also be looking for signs of progress in “real” data, with preliminary January figures released for durable goods and the international trade of goods out on Monday and Tuesday, respectively. Beyond those figures, there will be a revision released for fourth-quarter GDP, perhaps improving on the 1.9 percent growth rate seen in advanced data. In that release, net exports were the largest drag on growth in the fourth quarter. Other highlights this week include new data on construction spending, consumer confidence and personal income and spending.

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