NAM Manufacturer’s Outlook Survey
The latest NAM Manufacturers’ Outlook Survey reflected continued optimism in the sector, with the headline index rising to unprecedented heights. Indeed, 94.6% of respondents said they are positive about their own company’s outlook, the highest in the survey’s 20-year history. Optimism has been at historically high levels throughout the year, averaging 91.8% in the four quarters of 2017, up from a 64.3% average in 2016. Manufacturers have reported a robust turnaround in activity over the past 12 months, and they are very upbeat in their assessment of demand and output moving forward. Both sales and capital spending are anticipated to increase over the next 12 months at the fastest rates since mid-2011, and employment continues to trend strongly upward.
In addition, the data indicate continued strength in the labor market. Full-time employment is expected to rise 2.6% over the next year, up from 2.2% in the previous survey. This is just shy of the 2.7% pace recorded in June, which was the fastest rate in the survey’s history. Nearly 62% of manufacturers anticipate an increase in employment over the next year, with 22.8% predicting a jump of at least 5%. Along those lines, the inability to attract and retain a quality workforce topped the list of primary business challenges, with 72.9% of respondents citing this as their biggest concern. This was closely followed by rising health care and insurance costs at 72.3%.
Manufacturers are optimistic about the chance that long-sought-after comprehensive business tax reform will be enacted into law. Just more than three-quarters of respondents said they supported the current tax proposals being debated in Congress, with 16.4% unsure. In general, the survey results and comments indicate that a simpler, modern tax code would help manufacturers be more competitive in the global marketplace. Nearly 63% said comprehensive business tax reform would encourage their company to increase capital spending, and more than half would expand their business (57.9%) and hire more workers (53.8%), while a significant proportion would increase employee wages and benefits (48.8%) and invest more in the community (34.7%).
Beyond the NAM survey, manufacturing production rose for the third straight month in November, up 0.2%. This extended a 1.4% gain in October, which jumped significantly on rebounds related to recent hurricanes. The data have seesawed from month to month since the spring, but it is hoped the sector can build from recent momentum. Indeed, manufacturing production has risen 2.4% over the past 12 months, matching the rate in October, with both being the best year-over-year pace since July 2014. In a similar manner, manufacturing capacity utilization inched up from 76.3% in October to 76.4% in November, a reading not seen since May 2008.
Meanwhile, similar to manufacturing, total industrial production, which also includes mining and utilities, also increased 0.2% in November, or 3.4% over the past 12 months, its best year-over-year pace in three years. Moreover, the IHS Markit Flash U.S. Manufacturing PMI increased from 53.9 in November to 55.0 in December, its highest point since January. Looking ahead, the index for future output jumped to its best reading since January 2016 (up from 70.8 to 71.1), with respondents very optimistic about production for the next six months. From a regional perspective, manufacturing activity in the New York Federal Reserve Bank’s district eased a little in December but remained strong overall, with respondents also upbeat in their outlook.
Turning to the global economy, manufacturing activity in Europe expanded at the fastest pace since the survey was founded in June 1997, with the IHS Markit Flash Eurozone Manufacturing PMI rising from 60.1 in November to 60.6 in December. As such, this is yet another signal that the economy on the continent is trending in the right direction after sluggishness in recent years. New orders, output and employment each accelerated in December, with hiring and production growth also at record highs. The pace of new orders registered the best reading since April 2000. In addition to data for Europe as a whole, IHS Markit also released preliminary figures for France (up from 57.7 to 59.3) and Germany (up from 62.5 to 63.3). German manufacturing activity expanded at its best rate since the survey began in April 1996, and the data in France saw the strongest growth since September 2000.
At this all-important holiday spending season, data on consumer sales are closely watched, and they have been encouraging. Retail spending grew at a robust 0.8% pace in November, extending the 2.0% and 0.5% rates in September and October, respectively. Overall, the data show that consumers are accelerating their purchases after slowing down somewhat during the summer. On a year-over-year basis, retail sales have risen 5.8% since November 2016, up from 4.9% in the previous report. With that said, sales of motor vehicles and parts—one of the largest retail segments—declined 0.2% in November. Excluding automobiles, retail sales increased 1.0% in November, with year-over-year growth of 5.7%.
Meanwhile, the Federal Open Market Committee (FOMC) voted to raise short-term interest rates at the conclusion of its December 12th and 13th meeting. It was the third increase in the federal funds rate, and only the fourth hike since the financial crisis. Specifically, the Federal Reserve increased rates by another 25 basis points, with a new target range of 1.25 to 1.50%. In making this decision, participants noted that “the labor market has continued to strengthen and that economic activity has been rising at a solid rate.” It also cited low inflationary pressures, even with rising energy costs pushing up both consumer and producer price data in November. It is widely anticipated the FOMC will increase rates three times in 2018, at least according to the latest economic projections. Such increases, of course, would depend on continued improvements in economic activity, especially as the Federal Reserve remains “data dependent.”
The housing market, which has underperformed for much of this year, will be the focus of attention this week. While builders remain upbeat about sales moving forward, the sector has been hampered by workforce shortages and rising costs, among other challenges. Housing starts and permits were both markedly higher in October, and that trend is likely to continue in new November data. New and existing home sales will also be reported. In addition, there will be a rush of other indicators this week as agencies push out their releases before the holidays. Those include a second revision for third-quarter real GDP and manufacturing surveys from the Kansas City and Philadelphia Federal Reserve Banks, as well as data releases on consumer confidence, leading indicators, the National Activity Index, personal income and spending and state employment.
Written by: Chad Moutray, Ph.D., CBE, and Chief Economist for National Association of Manufacturers.