NAM: Monday Economic Report

Americans have been more willing to open their pocketbooks this year than at this time last year. Along those lines, retail sales have risen 4.5 percent over the past 12 months, up from 2.8 percent year-over-year in April 2016. Yet, consumers have been more cautious so far in 2017 than we might prefer, with weak retail spending in February and March, helping to drag down real GDP growth in the first quarter. With that in mind, it was good news that retail sales picked up in April, rising 0.4 percent. We hope this is a sign that consumer spending will once again return to being a bright spot in the U.S. economy, lifting second quarter real GDP.

Businesses and consumers continue to be positive about the economy. For instance, the Index of Consumer Sentiment from the University of Michigan and Thomson Reuters ticked higher in preliminary data, continuing to indicate a mostly upbeat public overall, albeit one that has remained sharply divided along partisan lines since the election. In addition, the Small Business Optimism Index edged slightly lower in April but remained near the 12-year high in January. To illustrate this point, the percentage of respondents suggesting the next three months would be a “good time to expand” increased from 22 in March to 24 in April, down from 25 percent in January but well above the 8 percent who said the same thing in April 2016.

Perceptions about the economy often turn on pocketbook issues, and in that light, Americans are likely encouraged by stronger employment data in recent months. Indeed, there were 394,000 job openings in the manufacturing sector in March, up from 364,000 in February. This matched the reading from July 2016, and both were the fastest rate since April 2006. This suggests that manufacturing leaders are accelerating their hiring intentions in light of recent improvements in the economic outlook, including better figures for demand and production. Job openings should be a good proxy of future hiring, and as such, it bodes well for improved employment data moving forward. In fact, we are already seeing some of this progress. Total hires in manufacturing rose from 296,000 in February to 322,000 in March, the highest rate since April 2008. Nonetheless, net hiring (or hires minus separations) fell to 4,000 in March—a level that we hope accelerates moving forward.

Meanwhile, consumer and producer prices moved higher in April, with higher energy costs contributing to the increases in both measures. Looking at the year-over-year pace, producer prices for final demand goods and services have increased 2.5 percent since April 2016, the fastest pace since February 2012. That represents a notable acceleration in inflationary pressures after being unchanged in August. Meanwhile, core producer prices, which exclude food, energy and trade services, grew 2.1 percent year-over-year in April, up slightly from 1.8 percent in March. On the other hand, consumer prices eased a bit on a year-over-year basis, down from 2.4 percent in March to 2.2 percent in April, and core consumer inflation fell below 2.0 percent for the first time since October 2015. Still, the Consumer Price Index has also accelerated, as the year-over-year pace was 1.1 percent in April 2016. We continue to expect the Federal Reserve to raise short-term interest rates at its June 13–14 meeting despite its belief that inflation remains modest and under control for now.

While manufacturing has trended generally in the right direction over much of the past few months, production in the sector declined in March, largely from softness in the automotive segment. Analysts will be looking for signs of a rebound in the April industrial production numbers, released on Tuesday, with further clues about the health of manufacturers in new data on factory orders and shipments and in surveys from the New York and Philadelphia Federal Reserve Banks. Other highlights this week include updates on housing starts and permits, leading indicators and state employment.

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