NAM: Monday Economic Report

In the latest Manufacturers’ Outlook Survey, 93.5 percent of respondents feel positive about their own company’s outlook, the second-highest reading in the survey’s 20-year history following the all-time high of 94.6 percent in December. Optimism has been at historically high levels over the past five quarters, averaging 92.1 percent. Sentiment is sharply higher than two years ago, with an average of 64.3 percent in 2016. Manufacturers continue to be upbeat following Washington’s passage of the comprehensive tax cuts package and its less burdensome approach toward regulatory policy—pro-growth stances that will help manufacturers compete in the global marketplace. (For more on this, see my testimony last week to the Joint Economic Committee.)

Beyond the headline numbers, the underlying data also reflect record-breaking strength in many areas. This includes sales, which are expected to grow 5.7 percent over the next 12 months, the fastest pace since the fourth quarter of 1997. In addition, the rates of growth for capital spending (3.9 percent), employment (2.9 percent) and inventories (1.7 percent) over the year are at new all-time highs in the first quarter survey. With ever-tighter labor markets, wages for full-time employees are predicted to rise 2.6 percent over the next 12 months, the highest rate in 17 years. For the second straight survey, the inability to attract and retain a quality workforce registered as the top business challenge for manufacturers, cited by 74.7 percent of respondents.

Those manufacturers completing the survey predict 3.0 percent growth in product prices over the next 12 months, jumping from a 1.9 percent gain in December. This was the fastest growth rate for prices since the second quarter of 2011, or in nearly seven years. The recent acceleration in prices is consistent with other data, including the latest consumer and producer price reports, even as overall cost pressures remain modest for now. Moreover, 64.6 percent of manufacturers cited rising raw material costs as a primary challenge in the NAM’s survey, making it third on the list after workforce issues and health care costs. On the latter, respondents anticipate 7.7 percent growth in health insurance premiums over the next 12 months.

Meanwhile, the National Federation of Independent Business (NFIB) reported that the Small Business Optimism Index pulled back in March from February’s level, which was the second-highest reading since July 1983. The headline index declined from 107.6 in February to 104.7 in March. Even with some easing in the latest survey, the robust data seen for much of the past year would suggest a healthy outlook overall in the economy. Along those lines, the labor market remained strong. The percentage of respondents with positions they are unable to fill right now edged up from 34 percent to 35 percent. In addition, respondents cited the quality of labor as the top “single most important problem” (21 percent), illustrating the tightness of the job market for small businesses. Taxes fell to the lowest level since 1982 (13 percent), according to the NFIB, in the aftermath of tax reform, with regulatory burdens being second on the list in March (14 percent).

Regarding the labor market, hiring in the manufacturing sector rose in February to its best reading since November 2007. The manufacturing sector hired 380,000 workers in February, reflecting stronger activity for both durable and nondurable goods businesses. At the same time, total separations—including layoffs, quits and retirements—rose to 352,000. As a result, net hiring (or hires minus separations) increased to 28,000 in February. More importantly, net hiring has averaged a rather healthy 16,417 over the past 12 months, with a robust average of 25,142 over the past seven months. At the same time, there were 426,000 manufacturing job openings in February, the strongest reading since September (445,000), which was a pace not seen since January 2001.

This week there will be new data on industrial production, which it is hoped will show that strong gains made over the past year are continuing. In February, manufacturing production jumped 1.2 percent, with 2.5 percent growth over the past 12 months, the best year-over-year rate since July 2014. Similarly, manufacturing capacity soared to 76.9 in February, a reading not seen since April 2008. There will also be updated assessments of activity in the New York and Philadelphia Federal Reserve Banks’ districts, which are anticipated to reflect continued progress and an upbeat outlook for the next six months. Other highlights this week include the latest figures for GDP by industry, housing starts and permits, leading indicators, retail sales and state employment.

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