NAM: Monday Economic Report

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If anyone is looking for further signs that the U.S. economy appears to be turning a corner, look no further than the fact that many of the indicators released last week hit multiyear highs. In addition, the Federal Reserve has sent a strong signal that it sees accelerating growth in the economy. As expected, the Federal Open Market Committee (FOMC) voted to raise short-term interest rates by 25 basis points, upping them just three months after the last action. In doing so, the Federal Reserve noted better economic data and increased pricing pressures. The Federal Reserve will continue its process toward normalized rates, and according to the latest economic projections, participants still see three rate hikes—or two more after this one—in 2017. Of course, future Federal Reserve moves will hinge on incoming data, and more aggressive action might be necessary if the U.S. economy and/or inflation accelerate beyond current expectations.

Data released last week show that pricing pressures have accelerated. The consumer price indexincreased 2.8 percent year-over-year in February, up from 0.9 percent in July and a pace not seen since February 2012. Likewise, producer prices for final demand goods and services have increased 2.2 percent since February 2016, its highest year-over-year rate since May 2014. Core consumer and producer prices, which exclude food and energy, have also trended higher in recent months, with year-over-year growth rates of 2.2 percent and 1.7 percent, respectively. While inflation is picking up, the FOMC predicts that prices “will stabilize around 2 percent over the medium term.” Nonetheless, it wants to stay ahead of such pressures while inflation is still at acceptable ranges.

For its part, manufacturing production expanded for the sixth consecutive month, up 0.5 percent in February. Moreover, output in the sector has increased 1.2 percent over the past 12 months, the fastest pace since April 2015. To put the recent progress in perspective, the year-over-year rate was -0.5 percent just six months ago. Likewise, there was more encouraging news from March surveys released by the New York and Philadelphia Federal Reserve Banks. While both measures pulled back from robust gains in February, they noted continued strengthening in new orders, shipments, employment and the average workweek. Manufacturing business leaders remain very upbeat about the next six months, with the Philadelphia Federal Reserve’s forward-looking composite index up to a 31-month high in March. We would hope that stronger activity will lead to more robust hiring. In that regard, manufacturing job openings in January ticked higher and remained elevated, even as net hiring was weaker than desired.

In a similar manner, the Small Business Optimism Index was not far from its 12-year high, averaging 105.7 over the past three months. It was 94.1 as recently as September, illustrating improving perceptions since then, largely on predictions of more pro-growth policies post-election. Homebuilders have also become more upbeat in the past few months, with the Housing Market Index rising to its highest level since June 2005. This includes healthy assessments about single-family home sales over the next six months. Along those lines, new housing starts rose 3.0 percent in February, and it has now exceeded 1.2 million for the fourth time in the past five months—a psychological threshold that we appear to have finally sustained. In addition, single-family housing starts jumped from 819,000 to 872,000, a pace not seen since October 2007. On a year-over-year basis, new residential construction has risen 6.2 percent.

Beyond businesses, consumers have also been more positive recently. The University of Michigan and Thomson Reuters reported that the Index of Consumer Sentiment in March remained not far from January’s best reading in 13 years, according to preliminary data. (They also note that confidence data has remained sharply divided along partisan lines since the election.) With improved assessments of the economy, including the strongest reading of current conditions since 2000, it should not be a surprise that Americans have been more willing to open their pocketbooks. While retail sales eased in February, it was the sixth consecutive monthly increase in retail spending. At this point last year, Americans were much more cautious in their willingness to make purchases. Along those lines, over the past 12 months, retail sales have jumped 5.7 percent, off just slightly from January’s 6.0 percent year-over-year pace, which was the highest since March 2012.

This week, the NAM’s Manufacturers’ Outlook Survey will be released, providing a glimpse at what manufacturing leaders are thinking about activity in the first quarter. There will also be new surveys from the Kansas City Federal Reserve Bank and from Markit for the United States and the Eurozone. Other highlights this week include the latest figures for durable goods orders and shipments, existing and new home sales and state employment.

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