NAM: Monday Economic Report

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The Federal Reserve reported that manufacturing production rebounded in June, up 0.2 percent, after falling in two of the three prior months. Overall, springtime production in the sector was choppier than expected, especially given the more robust outlook in other data sources. Yet, even with some disappointment in recent months, the longer-term trend for output among manufacturers has been quite positive. Across the past 12 months, manufacturing production has risen 1.2 percent. It was the eighth consecutive positive year-over-year reading for manufacturing output and progress from the 0.2 percent year-over-year gain in June 2016. In addition, total industrial production jumped 0.4 percent in June, up from 0.1 percent in May and rising for the fifth straight month. Industrial production has risen 2.0 percent year-over-year, matching the pace in May, with both being the best readings since January 2015.

Meanwhile, there were mixed messages about consumer behavior last week. On the one hand, U.S. consumer credit outstanding rose 5.8 percent at the annual rate in May, boosted by an 8.7 percent jump in revolving credit, which includes credit cards and credit lines. This suggests that Americans were more willing to take on credit card debt in May, recovering from the more cautious approach to credit in the prior release.

With that said, consumer confidence fell in July, according to preliminary data from the University of Michigan and Thomson Reuters. The Index of Consumer Sentiment dropped from 95.1 in June to 93.1 in July, its lowest reading since the election. Americans were more upbeat about current conditions, with that measure at its highest point in 12 years. Yet, the decline in July stemmed from a weakening in expectations for the future, largely on political anxieties. As noted in past reports, there remained significant differences in perceptions based on political affiliation, with the steepest declines in this latest survey from Republicans, who are frustrated about the lack of movement on the policy front. In a similar way, the Small Business Optimism Index slipped in June, largely on those same frustrations, even as sentiment remained quite elevated and not far from January’s 12-year high.

With that in mind, retail sales figures once again disappointed in June, falling for the second straight month. Spending at retailers decreased 0.2 percent in June, extending the 0.1 percent decline in May and below consensus estimates for a slight gain. (On the positive side, the May number was revised higher, as it was originally down 0.3 percent.) Americans had been more willing to open their pocketbooks, especially relative to the caution seen at the beginning of 2016. This culminated in 5.6 percent year-over-year growth in January, its fastest pace since March 2012, but the year-over-year rate has eased since then. Since June 2016, retail spending has increased a more modest 2.8 percent. Excluding autos, the year-over-year pace was 2.4 percent.

More positively, the rate of hiring in the manufacturing sector in May grew to its fastest pace since November 2007. According to the latest Job Openings and Labor Turnover Survey data, manufacturers hired 332,000 workers in May, up from 314,000 in April. Expressed as a percentage of the total manufacturing workforce, that meant the hiring rate in the sector jumped from 2.5 percent to 2.7 percent, or nearly a 10-year high. Hiring has trended upward across the past nine months since it bottomed out at 268,000 in August. Nonetheless, manufacturing job openings pulled back for the second straight month, even as the data continues to reflect slow-but-steady progress from last year. We would expect stronger job openings data moving forward, especially given recent improvements in the economic outlook for the sector, and this should lead to continued growth in hiring.

Beyond those data points, some of the larger economic headlines last week came from Federal Reserve Chair Janet Yellen’s semiannual testimony to Congress. She cited recent progress in the economy, noting the Federal Open Market Committee’s desire to continue to “gradually reduce the amount of monetary accommodation” in the economy. The Federal Reserve is widely expected to raise short-term rates one more time this year and to begin reducing the size of its balance sheet, perhaps doing both as soon as the September 19–20 meeting.

Participants at those meetings have been given more breathing room by decelerating pricing pressures over the past few months, both at the consumer and producer levels. Reduced energy prices have helped, particularly in the June data. The consumer price index increased 1.6 percent year-over-year in June, its lowest rate since October, and producer prices for final demand goods and services have increased 2.0 percent since May 2016, continuing to ease from April’s 2.5 percent year-over-year pace, which was the fastest rate since February 2012.

The housing market has been softer than desired for much of this year, even as homebuilders continue to report a positive outlook for sales moving forward. This week will bring new data on housing starts and permits, which it is hoped will show a rebound from softness during the springtime. In addition, there will be new reports on manufacturing activity from the New York and Philadelphia Federal Reserve Banks. Other highlights this week include the latest figures for GDP by industry, leading indicators and state employment.

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