NAM: Monday Economic Report

The Federal Open Market Committee (FOMC) increased short-term rates for the third time this year, as expected, at the conclusion of its September 25–26 meeting. The committee boosted the target federal funds rate by 25 basis points, with a new range of 2.00 to 2.25 percent. In doing so, the Federal Reserve cited strength in the overall economy, especially in the labor market and for consumer and business spending. While pricing pressures have accelerated somewhat, core inflation remains near the Federal Reserve’s stated target of 2 percent—at least for now. Future increases will hinge on incoming data, but there is an expectation that the FOMC will hike interest rates one more time this year, likely at its December 18–19 meeting.

Along those lines, the Federal Reserve also released the latest economic projections, which help to inform its monetary policy decisions. According to that document, participants see one more rate increase this year, with three rate hikes in 2019 and one more in 2020. The forecasts also reflect a better outlook for this year, with FOMC members predicting 3.1 percent and 2.5 percent growth in 2018 and 2019, respectively, up from 2.8 percent and 2.4 percent three months ago. At the same time, the unemployment rate is seen falling to 3.7 percent by year’s end (instead of 3.6 percent), with 3.5 percent unemployment in each of the next two years. Core inflation is predicted to hover around the 2 percent goal.

In other news, the U.S. economy grew an annualized 4.2 percent in the second quarter in the latest revision of real GDP growth, unchanged from the prior estimate. Consumer and business spending and net exports remained bright spots. Nonresidential fixed investment has likely been sparked by pro-growth policies, including tax reform and regulatory changes, with the business outlook at record levels. Overall, it remained the best reading since the third quarter of 2014 and increased from 2.2 percent growth in the first quarter. 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 percent in 2018, which would be the strongest growth rate since 2005. In terms for the forecast, the third quarter data are currently consistent with roughly 3.5 percent growth at the annual rate.

Meanwhile, personal spending increased 0.3 percent in August, extending the 0.4 percent gains in both June and July. Overall, consumer spending has remained a bright spot in the economy, with personal consumption expenditures (PCEs) soaring 5.3 percent over the past 12 months. At the same time, personal incomes rose 0.3 percent for the second straight month. Since August 2017, personal incomes have risen 4.7 percent, with the year-over-year rate slipping marginally from 4.8 percent in July. For manufacturers, total wages and salaries edged up from $893.1 billion in July to $893.6 billion in August. Over the past 12 months, manufacturing wages and salaries have increased a very robust 5.0 percent, up from $850.7 billion in August 2017. The saving rate remained at 6.6 percent, which was down from 7.4 percent in February, illustrating the pickup in spending since then.

Notably on the consumer front, the Conference Board reported that the Consumer Confidence Index rose to the highest point since 2000 in the latest survey. Americans continue to be mostly optimistic about the economy, especially in their outlook for jobs. With that in mind, the percentage of respondents saying business conditions were “good” increased from 40.5 percent to 41.4 percent, with the percentage suggesting business conditions were “bad” inching down from 9.3 percent to 9.1 percent. Regarding the labor market findings, the percentage of respondents feeling jobs were “plentiful” increased from 42.3 percent to 45.7 percent, which was significantly greater than those feeling jobs were “hard to get,” which ticked up from 12.1 percent to 13.2 percent. Similarly, the University of Michigan and Thomson Reuters reported that the Index of Consumer Sentiment rebounded in September after softening in August.

Looking specifically about the manufacturing sector, new durable goods orders rose 4.5 percent in August after falling 1.2 percent in July, continuing a seesawing of the data across the past six months. New orders increased from $248.5 billion in July to $259.6 billion in August, a new all-time high. With that said, the bulk of that increase stemmed from a large jump in aircraft orders, which can often be highly volatile from month to month. Excluding transportation, new durable goods orders edged up 0.1 percent in August. With that said, the longer-term trend line remains encouraging. New durable goods orders have been solid across the past year, up a very healthy 11.8 percent since August 2017, or a 7.4 percent gain with transportation equipment excluded. Likewise, new orders for core capital goods (or nondefense capital goods excluding aircraft)—a proxy for capital spending in the U.S. economy—have increased a robust 7.5 percent year-over-year despite a decline of 0.5 percent in August.

Manufacturing activity continued to expand solidly in the Dallas and Richmond Federal Reserve Bank districts, with the composite index for general business assessment in the latter jumping to the highest point in the survey’s nearly 25-year history. In contrast, the Kansas City Federal Reserve reported slowing growth in much of the underlying data. On the positive side, all of the regional data reflected optimism about new orders, shipments, employment and capital spending over the next six months, which is encouraging. Pricing pressures remain elevated, but there was also a pullback from the more rapid rates of growth in input costs seen in recent months.

In that way, the survey data are supported by the latest PCE deflator figures, which rose 0.1 percent in August for the third consecutive month. At the same time, core inflation, which excludes food and energy, was unchanged. More importantly, the PCE deflator has risen 2.2 percent over the past 12 months in August, pulling back a little from the 2.3 percent pace in July, which was the fastest year-over-year rate since March 2012. Excluding food and energy, core PCE inflation remained 2.0 percent year-over-year in August. As such, core inflation is at the Federal Reserve’s stated target, reflecting an appreciation of pricing pressures across the past year but also indicating some moderation over the past month, consistent with other indicators.

Manufacturing strength and jobs will once again be the focus of economic news this week. This morning, the Institute for Supply Management® (ISM®) will release its September survey, with manufacturers saying that activity expanded at the best rate since May 2004 in the August release. New orders, production and hiring have been robust—a trend likely to continue. Along those lines, the sector has added more than 21,000 workers over the past 12 months despite some softness in the August data, and job openings remain at all-time high levels. The jobs data, which will be released on Friday, are expected to reflect ongoing job market strength. Other highlights this week include updates on construction spending, factory orders and shipments and international trade.

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