NAM: Monday Economic Report

Regional sentiment surveys continue to show strong growth in manufacturing activity, with respondents continuing to be upbeat about activity over the next six months. Last week, the DallasKansas City, Missouri, and Richmond, Virginia, Federal Reserve Banks each released their June surveys, building on earlier reports from the New York and Philadelphia districts. Even with some softening in some measures, the data were largely consistent, with healthy expansions seen for new orders, shipments, production, employment and capital spending seen for the month. On the downside, raw material costs remain elevated, with measures of input cost growth at rates not seen in at least five years, depending on the survey. Along those lines, these figures are consistent with other measures of inflation, including data from the latest National Association of Manufacturers (NAM) survey, which have shown accelerating pricing pressures of late at multi-year highs. Indeed, the personal consumption expenditure (PCE) deflator jumped to 2.3 percent year-over-year growth in May, with core inflation at 2.0 percent. Both measures show the fastest paces since early 2012.

Despite the optimistic outlook, there have also been some signs of softness in the sector. For instance, new durable goods orders fell 0.6 percent in May to $248.8 billion, extending the 1.0 percent decline in April and off once again from March’s all-time high reading ($252.8 billion). The bulk of the decrease in the latest figures stemmed from a sharp drop in transportation equipment orders, which were down 1.0 percent in May, led by sharp declines in sales for both nondefense aircraft and motor vehicles. With transportation equipment excluded, new durable goods orders were off by 0.3 percent in May, and new orders for core capital goods (or nondefense capital goods excluding aircraft) were down 0.2 percent. The latter measure is often seen as a proxy for capital spending in the U.S. economy.

More positively, new durable goods orders have trended higher over the course of the past year, jumping 9.2 percent since May 2017, or 7.8 percent with transportation equipment excluded. Likewise, new orders for core capital goods were up a healthy 6.1 percent year-over-year. Meanwhile, advance statistics suggest that the goods trade deficit fell 3.7 percent, down from $67.34 billion in April to $64.85 billion in May, its lowest level since December 2016. In the preliminary May data, the increase in goods exports was enough to offset the rise in goods imports.

Meanwhile, personal spending increased by 0.2 percent in May, slowing from the 0.5 percent gain in April. Americans consumed more durable and nondurable goods in May, up 0.15 percent and 0.6 percent, respectively. Even with some cooling in the latest data, consumer spending has remained a bright spot in the economy, with personal consumption expenditures up 4.6 percent over the past 12 months. In addition, goods spending for durable and nondurable goods also increased at healthy rates over the past 12 months, up 4.1 percent and 6.0 percent year-over-year, respectively. At the same time, personal income rose 0.4 percent in May, with 4.0 percent growth year-over-year. With some easing in spending, the savings rate ticked up from 3.0 percent in April to 3.2 percent in May. The savings rate had fallen to 2.4 percent in December, its lowest rate since September 2005, but it has trended higher since then.

Stronger consumer spending is welcome, especially given the more-sluggish purchasing seen in the first quarter data. Last week, the Bureau of Economic Analysis said that the U.S. economy grew by an annualized 2.0 percent in the first quarter of 2018, inching down from prior estimates of 2.2 percent and 2.3 percent growth. The downward revisions stemmed largely from consumer spending, inventory investments and net exports. Personal consumption expenditures were up a paltry 0.9 percent in the first quarter, its slowest rate in nearly four years and pulled lower by declining spending on durable goods, particularly for motor vehicles. Similarly, the housing market was sluggish, with residential fixed investment off 1.1 percent in the first quarter, declining for the third time in the past four months, and spending on inventories were flat.

Even with this revision, real GDP expanded at its fastest first quarter pace in three years, and forecasts for second quarter growth suggest a rebound, with my forecast at 3.5 percent. Since the end of the Great Recession, the U.S. economy has expanded 2.2 percent on average, with 2.3 percent growth in 2017. Moving forward, real GDP should grow by roughly 3.0 percent in 2018, which would be the strongest growth rate since 2005. Passage of tax reform and other pro-growth measures should help to stimulate economic activity, allowing us to reach that goal.

Along those lines, nonresidential fixed investment stood out in the data, jumping 10.4 percent at the annual rate in the first quarter, the best pace since the third quarter of 2014. This growth was likely boosted by tax reform and the strengthened global economy, and nonresidential fixed investment was revised up from 9.2 percent growth in the previous estimate. Businesses spent more on structures (up an annualized 16.2 percent) and intellectual property products (up 13.2 percent), both of which recorded the best reading in at least three years, with solid growth for equipment spending (up 5.8 percent). Nonresidential fixed investment also contributed 1.28 percentage points to top-line growth, making it the bright spot.

Manufacturers have added roughly 25,000 workers per month over the past eight months, and they have told us that attracting and retaining qualified workers is their top challenge. In addition, the unemployment rate fell to 3.8 percent in May, the lowest since December 2000, and it is expected to drop to 3.5 percent by year’s end. With that mind, the June jobs numbers—out on Friday—will be closely watched to see if there is any softening on the employment front. Meanwhile, the Institute for Supply Management is expected to continue to report expanding growth in new orders, production and hiring in its latest manufacturing survey, but perhaps with some easing in June from May’s reading. Other highlights this week include updates on construction spending, factory orders and shipments, and international trade.