NAM: Monday Economic Report

The Federal Reserve reported that manufacturing production rose 0.5 percent in April, bouncing back from being unchanged in March. Overall, the data continue to show healthy growth for manufacturers. Along those lines, the manufacturing production index has risen from 102.2 in April 2017 to 104.1 in the latest data. Likewise, capacity utilization in the sector has grown from 75.1 percent one year ago to 75.8 percent, the highest rate since August 2015. The year-over-year pace also remains encouraging, even with some easing in the most recent month, down from 2.5 percent growth over the past 12 months in March to 1.8 percent in April. Yet, that deceleration could say more about the data from last year than the most recent figures.

At the same time, total industrial production rose 0.7 percent in April for the second straight month. In addition to manufacturing, mining and utilities production increased 1.1 percent and 1.9 percent in April, respectively. Over the past 12 months, industrial production has risen 3.5 percent, pulling back marginally from the 3.7 percent pace in March, which was the best since November 2014. Mining and utilities output has risen 10.6 percent and 6.0 percent year-over-year, respectively. In addition, capacity utilization ticked up from 77.6 percent in March to 78.0 percent in April, the strongest rate since March 2015.

Beyond the national figures, manufacturing activity also strengthened in regional surveys from the New York and Philadelphia Federal Reserve Banks in May, with respondents still very upbeat in their outlook for the next six months. Yet, these surveys also continued to reflect accelerating input costs at highly elevated levels, at or near paces not seen since 2011. That is a trend that has been echoed in other recent data about a pickup in inflationary pressures, and one that is expected to linger over the coming months. In a series of special questions on the Philadelphia Federal Reserve’s latest survey, respondents predict 3.0 percent growth in goods prices and employee compensation (wages and benefits) over the next year, with consumer prices rising 2.5 percent over that time frame.

In addition to manufacturing, the housing market was also in focus last week. Housing starts fell 3.7 percent in April, but activity remained encouraging overall. New residential construction declined from an annualized 1,336,000 units in March—the fastest pace since July 2007—to 1,287,000 units in April. More importantly, the data continue to reflect upward movement, hovering around 1.3 million units so far this year. Along those lines, new housing starts have averaged 1,311,750 at the annual rate through the first four months of 2018, up by roughly 1 million from the annual average of 1,214,500 over the same time frame in 2017. Indeed, starts have risen 10.5 percent over the past 12 months, up from 1,165,000 units in April 2017.

Moreover, housing permits have exceeded 1.3 million units at the annual rate for seven consecutive months despite slipping somewhat in the April data to 1,352,000 units. Since permits are a good proxy of future activity, this is heartening. Likewise, homebuilders remain very positive about increased activity in the coming months. The National Association of Home Builders and Wells Fargo reported that the Housing Market Index rose from 68 in April to 70 in May. Since reaching 74 in December, which was the best reading since July 1999, optimism among homebuilders has slipped somewhat, but the measure has registered 70 or more in five of the past six months, which would suggest that builders remain very upbeat in their overall outlook. With that said, builders have cited reduced housing inventories, rising raw material costs and worker shortages as their top concerns.

Meanwhile, retail spending rose 0.3 percent in April, extending the robust 0.8 percent gain in March. It was the second consecutive increase in retail sales following three months of softness. Excluding automobile sales, which edged up just 0.1 percent, retail spending also increased 0.3 percent for the month. The larger narrative remains encouraging, with consumers being a bright spot over the past year. Indeed, retail sales have risen 4.7 percent year-over-year in April. While this was lower than the healthy rate of 5.9 percent in November (or even the 4.9 percent year-over-year pace in March), it continues to represent solid growth in consumer spending overall. With robust consumer confidence and healthy gains in manufacturing sales, the Conference Board’s Leading Economic Index rose 0.4 percent in April for the second consecutive month, continuing to signal solid growth moving forward.

With a strengthened economy, tight labor market and increased pricing pressures, it is widely expected that the Federal Open Market Committee will raise short-term rates for the second time this year at its June 12–13 meeting. This week, the Federal Reserve will release the minutes of its May 1–2 meeting, and observers will be looking for clues in that writeup about the pace of future increases—not just for next month, but moving forward for the rest of the year. In addition, there will be May surveys on national manufacturing activity from IHS Markit and regionally from the Kansas City and Richmond Federal Reserve districts. Other economic highlights this week include new data on consumer confidence, durable goods orders and shipments and existing and new home sales.

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