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MONDAY ECONOMIC REPORT


Essential Takes on Leading Economic Indicators
By Chad Moutray, Ph.D., CBE – April 22, 2019 – SHARE Facebook Twitter Twitter

Manufacturing Output Rose to Another All-Time High in Fourth Quarter 2018

The Weekly Toplines
  • Manufacturers produced $2.385 trillion in value-added output in the fourth quarter, an all-time high, with the sector accounting for 11.4 percent of real GDP. Adjusting for inflation (in chained 2012 dollars), real value-added output in manufacturing also set a new record. Overall, manufacturing contributed 0.32 percentage points to real GDP growth in the quarter.

  • Manufacturing production was unchanged in March, following declines in both January and February. As such, output in the sector in the first quarter of 2019 has been disappointing, with softer global growth taking a toll. In March, production increased in 10 of the 19 major manufacturing sectors.

  • With softer-than-desired data recently, manufacturing production grew just 1.0 percent over the past 12 months, down from 2.6 percent year-over-year in December. At the same time, manufacturing capacity utilization has dropped from 77.3 percent in December, the best reading since March 2008, to 76.4 percent in the latest data, a 10-month low.

  • Yet, there have also been signs of a rebound in the regional data. Manufacturing activity continued to expand modestly in the New York and Philadelphia Federal Reserve Bank surveys, improving from declines in prior months and with a favorable outlook for the next six months. In addition, raw material costs, which were a major challenge last year, have decelerated notably in both districts.

  • The U.S. trade deficit pulled back further from the 10-year high of $59.90 billion in December to $51.13 billion in January and $49.38 billion in February, its lowest point since June 2018. More importantly, U.S.-manufactured goods exports rose 1.65 percent in the first two months of 2019 relative to the same time frame in 2018, extending the solid growth last year overall.

  • The IHS Markit Eurozone Manufacturing PMI contracted for the third straight month but improved slightly after declining at the fastest pace since April 2013 in March. Manufacturers in France and Germany also reported declining activity in April.

  • We will get new housing starts data this week, with reduced mortgage rates expected to boost demand and affordability. For their part, home builders continued to be optimistic about single-family housing sales for the next six months, even as respondents continued to cite challenges with higher construction costs and worker shortages.

  • Initial unemployment insurance claims fell from 197,000 for the week ending on April 6 to 192,000 for the week ending on April 13. This was the lowest level since September 6, 1969—yet another sign that employment data remain at historic lows.

Unemployment Claims Graph
Economic Indicators

Last Week's Indicators:
(Summaries Appear Below)

Monday, April 15
New York Fed Manufacturing Survey

Tuesday, April 16
Industrial Production
NAHB Housing Market Index

Wednesday, April 17
International Trade Report

Thursday, April 18
Conference Board Leading Indicators
IHS Markit Flash Manufacturing PMI
Philadelphia Fed Manufacturing Survey
Retail Sales

Friday, April 19
Gross Domestic Product by Industry
Housing Starts and Permits
State Employment Report

This Week's Indicators:

Monday, April 22
Chicago Fed National Activity Index
Existing Home Sales

Tuesday, April 23
New Home Sales
Richmond Fed Manufacturing Survey

Wednesday, April 24
Business Employment Dynamics

Thursday, April 25
Durable Goods Orders and Shipments
Kansas City Fed Manufacturing Survey

Friday, April 26
Gross Domestic Product
University of Michigan Consumer Sentiment (Revised)

Deeper Dive
  • Conference Board Leading Indicators: The Leading Economic Index increased 0.4 percent in March, up from a gain of 0.1 percent in February and the best monthly reading since September. As such, this is a sign the U.S. economy is possibly rebounding from recent weaknesses, which should bode well for growth over the next six months. The bright spots in the March report included consumer confidence, lending conditions, new orders for manufactured goods, stock prices and unemployment claims. Meanwhile, the Coincident Economic Index edged up 0.1 percent in March. Industrial production was a weakness (see below), but the other components (industrial production, manufacturing and trade sales, nonfarm payrolls and personal income) provided a positive contribution to the CEI for the month.

  • Gross Domestic Product by Industry: Real GDP grew 2.2 percent at the annual rate in the fourth quarter. According to new data from the Bureau of Economic Analysis, manufacturing added 0.32 percentage points to top-line growth in the fourth quarter. Overall, manufacturing gross output increased from $6.343 trillion in the third quarter to $6.360 trillion, a new all-time high led by growth in durable goods.

    Those findings closely mirrored the value-added data for manufacturing, which rose from $2.353 trillion in the third quarter to $2.385 trillion in the fourth quarter, also a new all-time high. For the year, manufacturing value added rose 7.1 percent from $2.180 trillion in 2017 to $2.335 trillion in 2018. The bottom line is that manufacturing accounted for 11.4 percent of real GDP in the fourth quarter, unchanged from the prior two reports.

    Adjusting for inflation, a new all-time high also occurred for real value-added output in manufacturing, up from $2.140 trillion in the third quarter to $2.155 trillion in the fourth quarter, with increases for both durable and nondurable goods. Those figures are in chained 2012 dollars. For the year, real manufacturing value added rose 4.5 percent from $2.042 trillion in 2017 to $2.134 trillion in 2018.

  • IHS Markit Flash Manufacturing PMI: Manufacturing activity in the United States continued to grow at the weakest pace since June 2017, with the headline index remaining unchanged at 52.4 in April, according to preliminary data. The underlying data were mixed in April. New orders and output improved, expanding modestly, but exports and hiring slowed somewhat. Looking ahead six months, manufacturers completing the survey remained upbeat in their outlook for production, even as the measure for future output slipped from 68.3 to 64.1. Pricing pressures continued to decelerate, with raw material costs expanding at the weakest pace since August 2017.

    Separately, IHS Markit also released survey results for the Eurozone, with manufacturing activity contracting for the third straight month in April but improving slightly after declining at the fastest pace since April 2013 in March. The IHS Markit Flash Eurozone Manufacturing PMI rose from 47.5 in March to 47.8 in April. Although Germany saw its activity contract for the fourth consecutive month, like the Eurozone data, the pace of decline lessened somewhat in April. In addition, French manufacturers reported contracting activity in April for the third time in the past five months on reduced sales, exports and production.

  • Industrial Production: Manufacturing production was unchanged in March, following declines in both January and February. As such, output in the sector in the first quarter of 2019 has been disappointing, with softer global growth taking a toll. In March, while durable goods production edged down by 0.1 percent, production among nondurable goods firms was up 0.1 percent. Production increased in 10 of the 19 major sectors. The largest decreases occurred in the furniture and related products, motor vehicles and parts, plastics and rubber products, printing and support and wood products sectors. In contrast, the following sectors saw stronger output: aerospace and miscellaneous transportation equipment, computer and electronic products, petroleum and coal products, primary metals and textile and product mills, among others.

    With softer-than-desired data recently, manufacturing production grew just 1.0 percent over the past 12 months, down from 2.6 percent year-over-year in December. Durable goods production has risen 2.4 percent since March 2018, with nondurable goods production up just 0.2 percent year-over-year. At the same time, manufacturing capacity utilization has dropped from 77.3 percent in December, the best reading since March 2008, to 76.4 percent in the latest data, a 10-month low.

    Meanwhile, total industrial production edged down by 0.1 percent in March, pulling back from a similar gain in February. Utilities production was up by 0.2 percent in March, with mining output down 0.8 percent. Over the past 12 months, industrial production has risen 2.8 percent, a decent pace overall but down from a very robust 5.4 percent in September. Total capacity utilization declined from 79.0 percent in February to 78.8 percent in March. 

  • International Trade Report: The U.S. trade deficit pulled back further from the 10-year high of $59.90 billion in December to $51.13 billion in January and $49.38 billion in February, its lowest point since June 2018. In general, these data have been highly volatile over the past year, with wide swings from month to month. In February, goods exports increased from $137.45 billion to $139.55 billion, buoyed by strength in civilian aircraft and passenger car exports. This was enough to counteract a gain in goods imports from $210.67 billion to $211.56 billion. Goods imports were led by solid growth in cell phone imports, but the Census Bureau noted that the volume of crude oil imports (172.4 million barrels) was the lowest since March 2012. In addition, the service sector trade surplus rose from $22.09 billion to $22.63 billion, an eight-month high.

    Encouragingly, there continues to be promising news on the export of manufactured products. In 2018, U.S.-manufactured goods exports rose 5.6 percent to just shy of $1.4 trillion, using new seasonally adjusted data from TradeStats Express. As such, last year’s export pace was not far from the all-time high recorded in 2014, which was just more than $1.4 trillion. For the first two months of 2019, U.S.-manufactured goods exports totaled $178.11 billion using non-seasonally adjusted data, up 1.65 percent from $175.22 billion for the same time frame in 2018.

  • NAHB Housing Market Index: The National Association of Home Builders and Wells Fargo reported that confidence ticked slightly higher in April, with respondents continuing to be optimistic about activity over the next six months. The Housing Market Index rose from 62 in March to 63 in April, its best reading since October (68). Builders were optimistic that reduced mortgage rates will help boost demand and increase overall affordability. Although builders’ views of expected single-family sales over the next six months edged down slightly from 72 to 71, they continued to signal expectations for robust growth over the coming months. With that said, respondents also continued to cite challenges posed by higher construction costs and worker shortages.

  • New York Fed Manufacturing Survey: Manufacturers in the New York Federal Reserve Bank’s district reported that activity improved in April, with modest growth overall. The headline index increased from 3.7 in March to 10.1 in April, its best reading so far in 2019, with slightly better growth in new orders and shipments. The labor market data were mixed, with hiring slowing a little but the average employee workweek expanding slightly once again. More importantly, respondents to the Empire State Manufacturing Survey remained positive in their outlook for the next six months, albeit with a notable pullback in optimism. Roughly 43 percent of those completing the survey said they expect higher sales and shipments over the next six months. Their responses also indicated the outlook for employment and capital spending is promising, despite some softening in expectations. On the downside, raw material costs continued to be highly elevated, with 42.0 percent of respondents anticipating higher input prices over the next six months.

  • Philadelphia Fed Manufacturing Survey: Manufacturing activity continued to expand in April, albeit with some softening from March’s pace. The composite index of general business activity declined from 13.7 in March to 8.5 in April, led by slowing in new orders and employment. On the other hand, shipments picked up, and activity remained healthy overall. Along those lines, manufacturers in the district remained optimistic in their outlook for the next six months, even with a slight pullback in several of the key measures. At least 42 percent of respondents said they expect new orders and shipments to rise in the coming months, with more than one-third anticipating increased capital spending and one-quarter seeing more hiring.

    In addition, the index for expected input costs dropped from 47.3 in March to 26.0 in April, its lowest reading since May 2016. In March, 54.5 percent of respondents said they anticipate increased prices paid for input costs, and that fell to 30.3 percent in April. This deceleration in input costs is welcome news, as accelerating raw material prices have been a significant concern for manufacturers, including those in our survey.

  • Retail Sales: Consumer spending jumped 1.6 percent in March, a nice turnaround after declining by 0.2 percent in February. Americans spent more on clothing, furniture, gasoline, groceries and motor vehicles, as well as at nonstore retailers and bars and restaurants. Gasoline station sales were boosted by higher prices. More importantly, the increase in purchasing was broad-based. Excluding automobiles and gasoline, core consumer spending was up 0.9 percent in March, bouncing back from a 0.7 percent decrease in February.

    These data suggest that consumers have once again opened their pocketbooks after being more cautious than desired from December to February. Over the past 12 months, retail sales have risen 3.6 percent, up from just 2.2 percent in February. Yet, the year-over-year rate registered 4.6 percent as recently as October, illustrating that there is still room for improvement, even with a solid gain in March.

  • State Employment Report: California created the most net new manufacturing jobs in March, adding 4,700 workers. Florida (up 3,100), Massachusetts (up 1,700) and Illinois (up 1,400) also topped the list of manufacturing employment gains in March. In addition, Texas saw the greatest job gains in the sector over the past 12 months, with manufacturing employment in the state up 30,200 since March 2018. Other states with the fastest manufacturing job growth year-over-year included California (up 13,800), Florida (up 11,800), Washington (up 10,000), Michigan (up 9,300), South Carolina (up 9,200) and Illinois (up 9,000). Meanwhile, North Dakota and Vermont had the lowest unemployment rates in the nation in March at 2.3 percent.

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Questions or comments? Email NAM Chief Economist Chad Moutray at [email protected].