NAM: Monday Economic Report

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There were mixed reports on the consumer last week. Real GDP grew an annualized 1.4 percent in the first quarter in newly revised figures, with nonresidential fixed investment being one of the larger bright spots but with inventory spending serving as the largest drag on growth. Consumer spending rose 1.1 percent at the annual rate in the first quarter, improving from earlier estimates but still reflecting reduced purchases of durable goods, especially motor vehicles and parts. We would expect a strong rebound in second quarter data, likely around 3.0 percent. The U.S. economy should expand by 2.3 percent for 2017 as a whole.

Overall, we have seen personal spending pull back from more robust growth at the end of 2016, but Americans have begun to open their pocketbooks once more, albeit still cautiously. Personal consumption expenditures (PCEs) have risen 4.2 percent over the past 12 months. One year ago, the year-over-year rate was 3.5 percent, illustrating the pickup in spending since then, and yet, the current year-over-year pace is down from 5.2 percent in March and 4.5 percent in April. Mirroring those trends, the saving rate rose from 5.1 percent in April to 5.5 percent in May, with the increase in income outpacing spending growth. That was the highest saving rate since September. In addition, personal incomes have also continued to increase at a decent clip, up 3.5 percent since May 2016.

Meanwhile, there were divergent views on consumer confidence in the two surveys out last week. On the positive side, the Conference Board reported that consumers were more confident in June after their sentiment fell back a little in April and May from March’s 16-year high. Respondents were more upbeat in their assessments about employment and income expectations, with more Americans saying that business conditions were “good” and fewer suggesting that conditions were “bad.” At the same time, the competing survey from the University of Michigan and Thomson Reuters also indicated a favorable long-term trend but noted that consumer confidence declined in June to its lowest point since November. Sentiment reached a 13-year high in January but has pulled back since then. As noted in prior surveys, there continue to be wide disparities in opinions based on partisan affiliation in the University of Michigan data. Despite some easing in confidence since earlier in the year, the latest figures are consistent with 2.3 percent growth in personal spending in 2017.

Likewise, the manufacturing releases out last week also provided mixed news. Surveys from the Dallasand Richmond Federal Reserve Banks both reflected continued expansions in their respective districts, with business leaders remaining quite upbeat about activity over the next six months. With that said, both regions cited progress from one year ago but some easing in activity from earlier in the year. Moreover, new durable goods orders fell for the second straight month in May, but with transportation equipment excluded, these orders edged slightly higher. The difference was a large decline in defense and nondefense aircraft and parts orders, which can often be volatile from month to month. Despite the softer-than-desired data in May, new durable goods orders have trended generally in the right direction across the past 12 months, growing modestly. New durable goods have risen 2.7 percent since May 2016, but excluding transportation, the year-over-year gain was a more robust 5.5 percent.

The Richmond Federal Reserve survey regularly asks about the prices paid for raw materials, and in the June report, it noted that input prices have declined from 1.96 percent at the annual rate in April to 1.31 percent in June. This deceleration in inflationary pressures was also seen in the forward-looking figures, with raw materials expected to grow 1.66 percent at the annual rate six months from now, down from 1.81 percent in April. This trend was also seen in the latest PCE deflator data—the measure most closely watched by Federal Reserve policymakers. The PCE deflator decreased for the second time in the past three months in May, largely on reduced energy costs. Since May 2016, the PCE deflator has increased 1.4 percent, its lowest year-over-year rate since November. Similarly, excluding food and energy, core inflation was 1.4 percent. After seeing pricing pressures accelerate strongly earlier this year—with the PCE deflator peaking at 2.2 percent year-over-year in February—inflation has pulled back since then.

The Institute for Supply Management’s Manufacturing Purchasing Managers’ Index for June will be released this morning. The May figures continued to reflect relative strength in new orders and production, even as sentiment has pulled back from highs earlier in the year. It is hoped the June survey will build on the expansions seen since last autumn. In addition, jobs will once again be in focus this week. After disappointing employment numbers in May, manufacturers will be looking for a rebound in job growth in the latest figures. Other highlights this week include new data on construction spending and factory orders and shipments as well as international trade.

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