Economic Watch: Manufacturing Still Expanding, New Home Sales Drop

A first look at business conditions in the U.S. manufacturing sector for August showed it continued to improve, though at a slightly weaker pace, while a separate report shows the volatility of the new home market.

The Flash U.S. Manufacturing Purchasing Managers’ Index, a survey of industry purchasing executives from the financial information services provider IHS Markit, dropped to 52.5 from a final July reading of 53.3, but remained above the neutral value of 50.

Weaker increases in both output and new orders were key factors weighing on the headline manufacturing PMI.

Production volumes expanded at the slowest rate in 14 months in August, while new business growth weakened from July’s four-month high. Consequently, purchasing activity rose at a softer pace, while firms registered slower increases in inventory levels.

This latest data signaled a further pickup in the rate of input price inflation at U.S. goods producers. According to panelists, higher prices for raw materials, such as metals, oil and electrical components, contributed to higher production costs.

The U.S. economic growth story remained a tale of two sectors in August, according to Rob Dobson, director at IHS Markit.

“The overall rate of expansion accelerated to a 27-month record, driven higher by strong and improved growth of business activity in the vast services economy,” he said. “In contrast, the performance of manufacturing remained sluggish in comparison, with production volumes rising to the weakest extent in over a year.”

Despite this, Dobson said the acceleration means gross domestic product growth is still gaining momentum during the third quarter.

“With new order inflows also strengthening and job creation equaling its best pace in the year-to-date, economic growth should remain on course to outperform relative to the second quarter,” he said. “The principal weak spot in the economy placing downside risk on that outcome remains exports."

New Home Sales Hit Seven-Month Low

A separate report from the Commerce Department showed new home sales in the U.S. dropped during July.

The 9.8% decline from the month before pushed the adjusted annual rate down to a seven-month low of 571,000, less than analysts were expecting, while the June level was revised upward.

Compared to a year ago, July sales fell 8.9%. Howver, new home sales in the first seven months of the year are 9.2% higher than they were at this point in 2016.

It is well-known how volatile this report is, and it cannot be taken at face value, according to Jennifer Lee, senior economist at BMO Capital Markets Economic Research.

“And don’t forget those hurdles that builders continue to face – shortages of labor, shortages of lots, costlier inputs,” she said. “There was also a joist recall, used in the basements of some homes being built, that slowed deliveries. All in, remember all of the supporting factors still at large: low joblessness, economic growth, and high consumer confidence."

Builders remain optimistic about sales of new single-family homes, even more so than in July, according to a survey released earlier in the week by the National Association of Homebuilders.

“The fact that builder confidence has returned to the healthy levels we saw this spring is consistent with our forecast for a gradual strengthening in the housing market,” said NAHB Chief Economist Robert Dietz. “GDP growth improved in the second quarter, which helped sustain housing demand. However, builders continue to face supply-side challenges, such as lot and labor shortages and rising building material costs.”