NAM: Monday Economic Report

unnamed.jpg

The U.S. economy grew by an annualized 2.6 percent in the second quarter, according to preliminary data, with real GDP up 1.9 percent at the annual rate in the first half of 2017. Looking at the underlying data, consumer and business spending were the bright spots, with net exports also making a positive contribution for the second straight quarter. Personal consumption expenditures rose by 2.8 percent in the second quarter, boosted by increased spending for both durable and nondurable goods products. In addition, nonresidential fixed investment increased by 5.2 percent in the second quarter. Most promisingly, equipment spending soared in the latest data to its fastest pace since the third quarter of 2015, up 8.2 percent, with 4.9 percent growth in structures spending. Nonetheless, other components of gross private domestic investment were weaker than desired, including residential investment and inventories.

For the year as a whole, I am currently predicting real GDP growth of 2.2 percent, with 2.6 percent growth for the current third quarter. This is not far from the 2.1 percent average growth rate seen since the Great Recession, but I continue to believe that there is upward potential in the forecast, especially for 2018, if pro-growth policies are enacted.

Turning to manufacturing, new durable goods orders leapt 6.5 percent, up from $230.7 billion in May to $245.6 billion in June, rebounding from declines in both April and May. This was the highest level since July 2014’s all-time high of $290.7 billion. Nonetheless, the bulk of that increase stemmed from a jump in nondefense aircraft and parts orders (up from $11.0 billion in May to $25.3 billion in June), likely centering around the International Paris Air Show. Excluding transportation equipment, new durable goods orders were up by 0.2 percent in June, extending the 0.6 percent gain seen in May. New durable goods orders have generally trended in the right direction over the course of the past 12 months. New durable goods have soared 16.1 percent since June 2016, but excluding transportation, the year-over-year gain was a still quite healthy 6.8 percent.

Sentiment surveys in the sector continued to reflect expansions and general optimism about the coming months, mirroring the upbeat outlook seen in the recent NAM survey. For instance, the IHS Markit Flash U.S. Manufacturing PMI rose to its highest point since March, up from 52.0 in June to 53.2 in July. Hopefully, this is a sign that the springtime lull has stabilized, with U.S. manufacturers reporting better growth in new orders and output in the latest survey than in recent months. Similarly, surveys from the Kansas City and Richmond Federal Reserve Banks note modest growth in both of their districts once again in July, even with some easing in activity in the Kansas City region. Encouragingly, the hiring figure in the Richmond data was the highest reading in the survey’s history.

Meanwhile, after soaring to new multiyear highs in each of the last few reports, the IHS Markit Flash Eurozone Manufacturing PMI declined from 57.4 in June, a level not seen since April 2011, to 56.8 in July, a three-month low. Despite the somewhat slower growth in this latest survey, the underlying trend remains positive, with European manufacturers continuing to expand at decent rates. New orders and output decelerated in July but mostly reflected strong growth, with exports and employment remaining promising. In a similar way, the future output index indicated healthy expectations for the next six months, albeit with some easing. The forward-looking index had been at its highest point since it was introduced in mid-2012 in June, and the current data are not far from that level. Helping to buoy the Eurozone data was France, where activity in the manufacturing sector was at its fastest pace since April 2011. German activity was also not far from its six-year high.

Beyond those data points, consumer confidence data were mixed last week. On the positive side, the Consumer Confidence Index from the Conference Board rebounded in July after a springtime lull, and it was just a few points shy of the 16-year high experienced in March. Americans were more upbeat about both the current and future economic environment in that report, with more Americans feeling that business conditions were “good” and optimistic about the job market. In contrast, the Index of Consumer Sentiment from the University of Michigan and Thomson Reuters slipped in July to its lowest reading since the election, mainly from a weakening in expectations moving forward, 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.

Finally, the residential market also had mixed news in the latest figures—beyond the drag seen in the second quarter real GDP data described above. Existing home sales have been highly volatile year-to-date, up one month only to be followed by a decline the next. Following that pattern, existing home salesdropped 1.8 percent in June after rising by 1.1 percent in May. Despite inventories rising in June, National Association of Realtors Chief Economist Lawrence Yun continued to note a shortage of listings in many key markets. Not surprisingly, this is helping to push median prices higher. At the same time, new home sales increased 0.8 percent in June, extending the 4.8 percent gain in May. Even with the second straight monthly advance in the headline number, new home sales remain off from March’s nine-and-a-half-year high.

There were signs of ongoing progress in June, both for the manufacturing sector and in the labor market. This week, analysts will be looking for those gains to continue in new July data from the Institute for Supply Management’s Manufacturing Purchasing Managers’ Index and in the latest jobs numbers. Manufacturers have added 41,000 net new workers year to date—an improvement from last year’s weaknesses that has been boosted by stronger demand and production, both domestically and globally. In addition, the Dallas Federal Reserve Bank will release its latest manufacturing survey, and the Census Bureau will highlight factory orders and shipments. There will also be updates on construction spending, international trade and personal income and spending.

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