NAM: Monday Economic Report

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In March, the Manufacturers’ Outlook Survey from the NAM rose to an all-time high in the survey’s 20-year history, with 93.3 percent of respondents positive about their own company outlook. Three months later, manufacturers remain very upbeat. In the latest report, 89.5 percent were either somewhat or very positive about their own company outlook. This pullback in confidence mirrors easing in other sentiment surveys, even as they continue to present an encouraging assessment of overall conditions. In this case, the percentage of manufacturers, positive in their outlook, has averaged 91.4 percent over the first and second quarters of 2017, the highest consecutive two-quarter average in the survey’s history.

Recent improvements in sentiment have corresponded with stronger manufacturing activity—another sign that the sector is trending in the right direction. This is especially the case with hiring and capital spending plans, both of which are a good proxy of a firm’s willingness to invest for the future. For instance, respondents predict that full-time employment will grow an average of 2.7 percent over the next 12 months, the fastest pace in the survey’s history, up from 2.3 percent in the prior survey. Similarly, firms forecast 3.2 percent growth in capital spending over the next 12 months, a six-year high and up from 2.1 percent in March. Much of this optimism stems from strong sales growth, which changed little in this survey. Respondents predict sales growth of 4.8 percent (on average) over the next 12 months, off slightly from the 4.9 percent expected growth in the prior release, which was the fastest pace in six years.

Turning to regional analysis for the sector, manufacturing activity continued to expand in both the New York and Philadelphia Federal Reserve Bank districts, even as both surveys slowed somewhat in July. Each report found modest growth in new orders, shipments and employment for the month, and encouragingly, manufacturers remain upbeat about the next six months. Nearly 47 percent and 53.2 percent of respondents predicted higher sales moving forward in the New York and Philly Fed releases, respectively, with the latter survey expecting a sharp increase in capital spending over the coming months. Beyond those measures, business leaders also anticipate decelerating—but still elevated—pricing pressures for raw materials in the second half of this year.

In addition, new housing starts rebounded in June after a soft spring. New residential construction rose from an annualized 1,122,000 units in May, an eight-month low, to 1,215,000 in June. Since reaching 1,288,000 units in February, housing starts have pulled back; however, this is the first time activity has exceeded 1.2 million since then, which is promising. In a similar way, homebuilder optimism remains strong despite slipping once again, with respondents to that survey predicting healthy gains in activity over the next six months (see below). I forecast a growth of 1.28 million starts by year’s end. On a year-over-year basis, housing starts rose 2.1 percent from June 2016’s pace of 1,190,000, with single-family starts jumping 10.3 percent over the past 12 months. Housing permits also increased strongly, up 7.4 percent from 1,168,000 units at the annual rate in May to 1,254,000 in June. It was the best reading since March.

Manufacturers will get the first read on real GDP growth for the second quarter on Friday. After GDP grew just 1.4 percent in the first quarter, we anticipate that the second quarter data are likely to show the U.S. economy expanding at about 3 percent. Meanwhile, according to new data from the Bureau of Economic Analysis, real value-added manufacturing output bounced back in the first quarter, up 4.7 percent after falling by 2.9 percent in the fourth quarter. As a result, manufacturers contributed 0.54 percentage points to headline growth in the first quarter, a notable improvement from the 0.39 percentage point drag seen in the fourth quarter. Indeed, it was the largest industrial contributor to real GDP growth in the release. Overall, manufacturing value-added output rose from $2.194 trillion in the fourth quarter to $2.209 trillion in the first quarter, a new all-time high. The bottom line is that manufacturing accounted for 11.6 percent of real GDP in the first quarter, unchanged from the fourth quarter but down from 11.8 percent one year ago.

Several releases this week will highlight the current health of the manufacturing sector, including regional surveys from the Kansas City and Richmond Federal Reserve Banks and national data for the United States and Eurozone from IHS Markit. The Census Bureau will report on durable goods orders and shipments. These data points will hopefully show continued progress, with Europe seeking to build on its strongest growth in more than six years. The Federal Open Market Committee will meet next week, but it is not expected to raise short-term interest rates until its September meeting. Other highlights next week include new figures for consumer sentiment, employment costs, existing and new home sales and international trade in goods.

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