NAM: Monday Economic Report

Much of the economic data released last week provided mixed news, even as these indicators continue to suggest overall progress. For manufacturers, two regional surveys showed movement in the opposite direction in the May data. At one end of the spectrum, the Philadelphia Federal Reserve Bank reported that manufacturing activity expanded robustly in May on strong growth in new orders and with the average employee workweek expanding at a level not seen since October 1987. This stood in contrast to the rather disappointing Empire State Manufacturing Survey in May, which had activity falling for the first time since October. The contraction in the New York Federal Reserve Bank’s headline number stemmed largely from reduced demand for the month, with several other measures also slowing. Nonetheless, respondents to both surveys remained quite upbeat in their assessments of the next six months, even with some easing in perceptions in the latest figures. In both surveys, for instance, at least half of the respondents believed new orders would rise in the coming months.

Encouragingly, manufacturing production rose 1.0 percent, led by a significant recovery in motor vehicles and parts production, up 5.0 percent, among others. It was the sixth time in the past seven months that manufacturing production has increased. While the sector continues to have some lingering challenges, this report is yet another sign that the sector has turned a corner and is moving in the right direction. Indeed, manufacturing production has increased 1.7 percent over the past 12 months, its strongest year-over-year pace since January 2015. Similarly, manufacturing capacity utilization jumped from 75.2 percent to 75.9 percent, a level not seen since December 2014. At the same time, total industrial production also increased 1.0 percent in April, its fastest monthly gain in just more than three years.

Meanwhile, the housing market offered mixed news in the latest data as well. New housing starts were disappointing in April, down for the second straight month. New residential construction fell from an annualized 1,203,000 in March to 1,172,000 in April, its first reading below 1.2 million units since November. Housing starts had been expected to rebound from March’s weather-influenced lull, with a consensus expectation of 1.25 million units. Indeed, we did see a rebound in housing starts in both the Midwest and West, but the decline in March stemmed largely from a drop in activity in the Northeast and South. In terms of unit size, the highly volatile multifamily segment eased for the second consecutive month, down from 371,000 in March to 337,000 in April. In contrast, single-family activity inched up from 832,000 to 835,000, but that figure remained down from February’s 877,000-unit pace.

Despite the discouraging starts figures, housing permits remained relatively strong, exceeding 1.2 million for the eighth consecutive month, even with some easing in April. Accordingly, we should expect better housing starts data moving forward. Over the past 12 months, housing permits have risen 5.7 percent since April 2016, with single-family and multifamily activity up 6.2 percent and 4.8 percent, respectively. With that in mind, the National Association of Home Builders (NAHB) and Wells Fargo reported that the Housing Market Index bounced back, with the index rising from 68 in April to 70 in May, or just slightly lower than March’s reading of 71, which was the highest level since June 2005. NAHB Chief Economist Robert Dietz added, “Especially as existing home inventory remains tight, we can expect increased demand for new construction moving forward.” At the same time, the report noted ongoing challenges with increasing costs and labor shortages.

This week will bring more clues about the health of the manufacturing sector; global surveys from Markit and regional reports from the Kansas City and Richmond Federal Reserve Banks will be released. The Census Bureau will provide additional insights through advance data releases on durable goods orders and shipments and on international trade in goods. It is hoped that both of these indicators will build on recent progress. Other highlights this week include the latest numbers for consumer sentiment, GDP and existing and new home sales.

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