NAM: Monday Economic Report

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Manufacturing activity continued to accelerate, rising to multiyear highs and buoyed by expectations that demand and output will benefit from possible pro-growth policies emanating from Washington. For instance, the Institute for Supply Management’s Manufacturing PMI rose from 56.0 in January to 57.7 in February, its fastest rate since August 2014. New orders and production both had healthy gains for the month, with sales growth at levels not seen since December 2013. In addition, exports also picked up slightly, which was refreshing given the struggles with increasing international sales over the past few years. While employment growth slowed a little, hiring remained positive for the fifth consecutive month. In addition, pricing pressures picked up, and inventories expanded for the first time since 2015.

Beyond the national numbers, the regional trends have also been encouraging, including the surveys from the Dallas and Richmond Federal Reserve Banks last week. In Texas, manufacturing activity in February expanded at a pace not seen since April 2006. The recent gains in business confidence can largely be attributed to better energy commodity prices and from a post-election boost in overall sentiment. At the same time, sample comments also suggest a number of anxieties, including a strong U.S. dollar, uncertainties about trade policy moving forward and continuing challenges in attracting qualified labor. Similar trends were seen in the mid-Atlantic region. In fact, in the Richmond Federal Reserve’s report, new orders grew at their fastest rate since April 2010, which should bode well for activity moving forward, particularly if it can be sustained. Both surveys found respondents very positive about the next six months.

With that said, there has often been a split in recent months between sentiment survey optimism and “real” data about the economy. Indeed, the sizable gains seen in confidence reports have not carried through to government-produced indicators, which have continued to remind us about the challenges in the sector over the past two years. Along those lines, new durable goods orders rose 1.8 percent in January, up for the first time in three months, but excluding transportation equipment sales, new orders fell 0.2 percent for the month. Large jumps in defense and nondefense aircraft and parts orders, which can be highly volatile from month to month, skewed the January data. Over the past 12 months, new durable goods orders declined 0.6 percent; however, this figure grew 2.4 percent year-over-year when excluding transportation equipment.

In addition, private manufacturing construction spending picked up slightly in January after falling to a two-year low in December. 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. Along those lines, construction activity in the manufacturing sector has pulled sharply lower since achieving the all-time high in September 2015. Over the past 12 months, manufacturing construction spending has fallen 6.8 percent.

Meanwhile, the latest revision to GDP data, which found the U.S. economy grew 1.9 percent in the fourth quarter, noted a significant drag from net exports. This appears to have continued into the new year. According to advance statistics, the goods trade deficit jumped from $64.36 billion in December to $69.22 billion in January in preliminary data. If that number holds, it would be the highest goods trade deficit since March 2015. The GDP release, however, did find that consumer spending was stronger than estimated originally, with Americans more willing to open their pocketbooks than this time last year. Yet, personal spending slowed in January after the strong gains in December. More positively, however, personal spending grew 4.7 percent year-over-year in January, its highest level since November 2014. That strong growth was consistent with a lower saving rate, which fell from 6.2 percent in January 2016 to 5.5 percent today. The pickup in spending mirrored better assessments on the economy, with the Conference Board’sconsumer confidence measure rising to its highest level since July 2001.

The focus this week will be jobs. On Friday, we will get national employment numbers for February from the Bureau of Labor Statistics, with manufacturers hoping to build on the job gains in both December and January. Look for nonfarm payrolls to increase around 180,000 in February. Other economic highlights this week include the latest figures for consumer credit, factory orders and shipments, international trade and productivity.

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