NAM: Monday Economic Report

There were continuing signs of strength in the U.S. manufacturing sector in the latest data. For instance, the IHS Markit Flash U.S. Manufacturing PMI inched up to 56.6 in May, its strongest expansion pace since September 2014. Employment and future output helped to lift the overall headline index in the United States, with the latter recording its best reading since February 2015. This bodes well for production growth over the coming months. Moreover, manufacturing activity remained robust in the latest surveys from the Kansas City and Richmond Federal Reserve Banks, as well, with the composite index of general business conditions in the Kansas City Fed’s district expanding at its fastest pace since the survey was created in July 2001. More importantly, the economic outlook of respondents to these surveys for the next six months continued to reflect a lot of optimism for future demand, shipments, employment and capital spending activity.

Meanwhile, new durable goods orders fell by 1.7 percent in April to $248.5 billion, pulling back from March’s all-time high reading ($252.7 billion). Much of the decline can be attributed to a sharp reduction in nondefense aircraft and parts orders, which can be highly volatile from month to month. With transportation equipment excluded, new durable goods orders would have risen 0.9 percent in April, up to its highest point ($161.4 billion) since July 2008. New durable goods orders have trended strongly higher over the course of the past 12 months, jumping 7.8 percent since April 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 April, new orders for core capital goods rose by 1.0 percent, and like the headline number above, the year-over-year pace was a very healthy 5.9 percent. As such, the new durable goods orders were quite promising despite some slippage in the headline number.

At the same time, it was not all good news. The above-mentioned surveys also continued to reflect accelerating pricing pressures. In the Richmond Fed’s report, for example, those completing the survey said that the prices paid for raw materials increased by 2.63 percent at the annual rate in May, its fastest pace since October 2012 and up from 2.43 percent in April. There were some signs of moderation in those releases, however, with some easing in expected inflation rates from prior months. With that in mind, it is widely anticipated that the Federal Reserve will increase the federal funds rate by 25 basis points at the June 12–13 Federal Open Market Committee (FOMC) meeting. The minutes of its May meeting note the continued strengthening in the U.S. economy, especially in the labor market and the pickup in prices, particularly for raw materials. Participants expect pricing pressures to moderate over the longer-term, however.

Beyond pricing, there has been some softening in manufacturing activity in some markets, including in Europe, where growth eased to a 15-month low in May even with a still-modest expansion. The IHS Markit Flash Eurozone Manufacturing PMI slipped for the fifth straight month, down to 55.5 in May, its weakest reading since February 2017 and led by a deceleration in Germany. On the positive side, though, manufacturers in Europe remain mostly upbeat about production over the next six months, and the global economy remains reassuring overall.

This week, the focus once again will be on jobs. Manufacturers have added nearly 27,000 workers per month since October, or 1.2 million additional employees since March 2010, and firms continue to cite challenges in attracting talent as a top concern. The unemployment rate has fallen to 3.9 percent, the lowest point since December 2000 and essentially at or near what economists deem as “full employment.” Look for continued strength in job creation for the sector in new May figures, out on Friday. Other highlights will include manufacturing surveys from the Dallas Federal Reserve Bank and the Institute for Supply Management and updated data on construction spending, consumer confidence, gross domestic product and personal income and spending. 

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