NAM: Monday Economic Report

New durable goods orders fell 1.7 percent in July, but most of the decrease stemmed from a decline in aircraft orders, which can be volatile from month to month. The June data were skewed higher by sales made at the Paris Air Show, for instance. Excluding transportation, new durable orders edged up 0.2 percent in July. Encouragingly, new orders for core capital goods (or nondefense capital goods excluding aircraft) jumped 1.4 percent, its strongest monthly gain since April. The latter measure is often seen as a proxy for capital spending in the U.S. economy. In addition, new durable goods orders have been solid over the course of the past year, up 9.2 percent since July 2017, or a healthy 8.0 percent gain with transportation equipment excluded. The shipments data were equally promising, and a sign of just how much progress the sector has seen over the past year.

With that said, many of the recent manufacturing sentiment surveys reflect weaker growth in activity. The IHS Markit Flash U.S. Manufacturing PMI dropped to 54.5 in August, its weakest reading since November but still expanding modestly. New orders, output, future output and employment each eased slightly in their growth rates in August, but exports rebounded a bit after contracting for two straight months. Input prices stabilized somewhat, but the raw material costs index has exceeded 60 for seven consecutive months, indicating highly elevated growth in raw material costs for much of this year. In a similar way, manufacturing activity decelerated for the third straight month in the Kansas City Federal Reserve Bank’s district, expanding at its slowest pace of the year. Shipments strengthened in August, but other underlying indicators pulled back in their expansion rates. Even with some easing in optimism in the latest survey, manufacturers remained upbeat about the next six months.

This trend was also seen overseas. The IHS Markit Flash Eurozone Manufacturing PMI expanded at its slowest pace since November 2016, with growth continuing to decelerate since reaching an all-time high in December. There were marginal improvements in both new orders and output, but some easing noted for exports, employment and future output. It was the lowest level for future output growth since October 2015, albeit with healthy production gains still expected for the next six months. At the same time, raw material costs continued to be a challenge despite some softening in that index, with input prices expanding at a robust pace. In addition to data on Europe as a whole, manufacturing activity in both France and Germanyalso reported some slippage in overall confidence. On the other hand, new orders and output strengthened a little in France.

Beyond manufacturing, the housing market was also in focus. After seeing soft data on housing starts the prior week, there was further disappointment in the latest existing and new home sales figures. Existing home sales fell 0.7 percent to 5.34 million units at the annual rate in July, slipping for the fourth straight month and off 1.5 percent year-over-year. At the same time, new single-family residential sales decreased to an annualized 627,000 units in July, an 11-month low. Affordability and workforce issues have challenged the sector recently. Lawrence Yun, the National Association of Realtors’ chief economist noted, “Too many would-be buyers are either being priced out, or are deciding to postpone their search until more homes in their price range come onto the market.” In July, weather might have also been a factor, particularly in the Northeast, which experienced several major storms.

The American consumer has been one of the bright spots in the economy, with retail sales springing back to life in the summer months after a slow start to the year. This week, there will be new figures for personal income and spending for July. Along with updated confidence figures, these reports should provide additional clues about the current thinking of the consumer. In preliminary sentiment data released earlier in the month, trade uncertainties and rising prices were concerns. There will also be the latest numbers on the personal consumption expenditures (PCE) deflator, which is the preferred inflation measure of the Federal Reserve. In addition, there will be a revised figure for real GDP, which grew by a robust 4.1 percent in the preliminary reading. Other highlights this week include manufacturing surveys from the Dallas and Richmond Federal Reserve Banks and a preliminary estimate on the international trade in goods.

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