NAM: Monday Economic Report

In the minutes of the May 2–3 Federal Open Market Committee meeting, members noted that while “aggregate spending in the first quarter had been weaker than [expected], they viewed the slowing as likely to be transitory.” With that in mind, the Federal Reserve is likely to raise short-term interest rates at its June 13–14 meeting. On Friday, the Bureau of Economic Analysis reported that the U.S. economy grew1.2 percent in the first quarter in newly revised figures. This improved slightly from the earlier estimate of 0.7 percent growth, but nonetheless, it continued to represent a slow start to the year. Yet, I anticipate a strong rebound in the second quarter. My current forecast is for at least 3.0 percent growth in real GDP in the second quarter, with the economy expanding 2.2 percent for 2017 as a whole.

Data continued to reflect some easing in manufacturing activity, even as the longer-term trend has been favorable. For instance, new durable goods orders declined 0.7 percent in April, ending four straight months of gains. New orders have edged up just 0.9 percent since April 2016, but excluding transportation, the year-over-year gain was 4.9 percent. The bottom line is that new orders for core capital goods (or nondefense capital goods excluding aircraft) remained flat in April after six consecutive months of growth. This figure is often seen as a proxy for capital spending in the U.S. economy. On a year-over-year basis, core capital goods have risen 2.9 percent since April 2016.

Turning to survey data, the IHS Markit Flash U.S. Manufacturing PMI eased in May to its slowest growth rate since September. Nonetheless, we continue to see modest growth overall in the sector nationally, even with slower accelerations across-the-board. Looking ahead 12 months, manufacturers in the United States continue to be optimistic about future output. Meanwhile, the Kansas City Federal Reserve Bank reported that manufacturing activity expanded for the sixth straight month even as it pulled back once again from March’s six-year high. New orders were slightly higher, but growth in output contracted for the first time since August. In contrast, manufacturing activity in the Richmond Federal Reserve Bank’s district stalled in May, pulling back for the second straight month from March’s seven-year high to an ever-so-slight expansion. Respondents in both regions remained mostly upbeat in their outlook even with the softer current figures.

One of the brighter spots globally of late has been Europe. The IHS Markit Flash Eurozone Manufacturing PMI inched up to its fastest pace since April 2011. This suggests that manufacturers in Europe have mostly brushed off political uncertainties, with economic growth on the continent continuing to trend in the right direction. Activity in Germany mirrored the larger Eurozone headline number, with its manufacturing PMI figure also rising to a 73-month high. At the same time, French manufacturers cited modest expansions in activity in May, even as it decelerated somewhat from April’s six-year high. The larger story for France, however, is that manufacturing has expanded for eight straight months—a sign that the sector is beginning to turn around.

Returning to the United States, existing and new home sales were both lower in April. Even with softer demand for the month, however, inventories of existing homes remain low, even as sales have risen 1.6 percent year-over-year. This has led to higher median prices, which have risen 6.0 percent since April 2016. At the same time, new home sales dropped to a four-month low but have generally moved higher as an overall trend. Even with decelerated activity in the latest data, new home sales have averaged 604,250 year to date in 2017, a notable improvement from the 536,000 average during the first four months of 2016.

Furthermore, the University of Michigan and Thomson Reuters reported that consumer confidence edged marginally higher in May. After notching its best reading since the 13-year high recorded in January, the Index of Consumer Sentiment, which remains elevated, has dipped somewhat. With that said, confidence has remained sharply divided along partisan lines since the election.

There will be a number of important data releases out this week. The Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers’ Index has expanded for eight straight months, and manufacturers will be looking for continued modest growth for new orders and production in May. However, the ISM report might show some easing in activity, much like other surveys. The Dallas Federal Reserve Bank’s survey will also be released this week, which might show a similar trend. Beyond sentiment releases, the other big headline will be the latest jobs numbers. Manufacturing employment should extend its streak to six consecutive months of job growth, building on the improved outlook of late. Other highlights this week include new data on construction spending, consumer confidence, international trade and personal income, spending and productivity.

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