NAM: Monday Economic Report

Last week was marked by more volatility in equities, with financial markets processing both technology news and trade actions. With that said, the Federal Reserve noted continued strength in the underlying economy, particularly in labor markets, in the statement accompanying its March 20–21 Federal Open Market Committee (FOMC) meeting. According to the latest economic projections, participants expect faster growth moving forward, especially after passage of tax reform and continued signs of strength in the global economy. In December, the Federal Reserve forecasted 2.5, 2.1 and 2.0 percent growth for 2018, 2019 and 2020, respectively. That outlook for real GDP growth has risen to 2.7, 2.4 and 2.0 percent in the latest survey. The FOMC also anticipates that the unemployment rate will fall to 3.8 percent in 2018 and 3.6 percent in 2019. The December projections called for 3.9 percent in both years.

As expected, the FOMC ended its March 20–21 meeting by hiking short-term rates by 25 basis points. This was the first FOMC meeting Jay Powell chaired, and the Federal Reserve is likely to increase the federal funds rate at least two (and maybe three) more times in 2018. Participants’ economic projections were consistent with two more rate hikes this year, with the midpoint of the federal funds rate rising from 1.625 percent now to 2.1 percent by the end of the year. It is worth noting that the Federal Reserve’s current outlook for the next two years is more aggressive than it was in December. Respondents now see the federal funds rate increasing to 2.9 percent and 3.4 percent by year’s end in 2019 and 2020, respectively, up from 2.7 percent and 3.1 percent three months ago. As always, the actual pace of rate hikes will hinge on incoming data.

Data on manufacturing activity also continued to be encouraging. The IHS Markit Flash U.S. Manufacturing PMI rose to 55.7 in March, the best reading in three years. One of the key drivers of that higher headline number was employment, with hiring continuing to expand strongly amid tightness in the overall labor market. In addition, manufacturers felt very optimistic about future output, with that index rising to the highest point since February 2015. On the downside, raw material prices picked up in the latest survey, with costs expanding at rates not seen since September 2011. In a similar way, manufacturers in the Kansas City Federal Reserve Bank’s district also noted strong expansions in its March survey, with the employment index rising to a new all-time high in the survey’s 17-year history. The average workweek also widened to the best reading in seven years. This mirrored other regional sentiment surveys, which have found mostly optimistic assessments about both current and future growth, but with accelerating input costs.

Moreover, new durable goods orders rebounded, up 3.1 percent in February after falling 3.5 percent in January. Much of that volatility stemmed from shifts in aircraft and parts sales, which can have large swings from month to month. Stronger motor vehicles and parts orders (up 1.6 percent) also buoyed the increase in February, and with solid gains in aircraft and automobiles, transportation equipment orders jumped 7.1 percent for the month. New durable goods orders have trended strongly higher across the past 12 months, soaring 6.9 percent since February 2017. One of the more important measures in this release is new orders for core capital goods (or nondefense capital goods excluding aircraft), which can often be seen as a proxy for capital spending in the U.S. economy. In February, new orders for core capital goods increased 1.8 percent, but like the headline number above, the year-over-year pace was a very healthy 8.0 percent.

Consumer spending has been a bright spot in the economy, and preliminary data from the University of Michigan’s confidence measure jumped to the highest level since January 2004. However, retail sales were weaker than desired in January, starting the new year off on a disappointing note. With that in mind, upcoming reports this week on personal income and spending data will be watched closely for signs that Americans are once again opening their pocketbooks. Even with some easing in January, personal spending has risen by a healthy 4.5 percent year-over-year. Other highlights this week include updates on manufacturing surveys from the Dallas and Richmond Federal Reserve Banks and data for consumer sentiment, the second revision for real GDP growth, international trade in goods and the Chicago Federal Reserve’s National Activity Index.

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