Fleet Management

Economic Watch: Reports Show 2018 Started Near Last Year's Higher Pace

February 01, 2018

By Evan Lockridge

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A measure of the U.S. manufacturing secotor released Thursday is just one in a raft of economic reports released this week that showed 2018 began with a similar pace to that seen when 2017 wrapped up.

According to the Institute for Supply Management on Thursday, growth in the manufacturing sector slowed just a bit in January as its measure registered 59.1%. That's a decrease of 0.2 of a percentage point from the seasonally adjusted December reading of 59.3%.

Despite the decline, the January figure is still above the 57.4% average reading for 2017. A reading over 50% indicates expansion while below 50% signals contraction.

Also, the New Orders Index registered 65.4%, a decrease of 2 percentage points from the seasonally adjusted December reading. And the Production Index registered 64.5%, a 0.7 of a percentage point decrease from the month before.

Comments from this survey of the nation’s purchasing executives reflect expanding business conditions, with new orders and production maintaining high levels of expansion, employment expanding at a slower rate, order backlogs expanding at a faster rate, and export orders and imports continuing to grow faster in January. Of the 18 manufacturing industries surveyed, 14 of them reported growth.

The one downside in the report, as analysts at Econoday noted, is employment in manufacturing.

“Employment is the weak link in the January report, slowing nearly 4 points to what however is still 54.2% to indicate a solid monthly net increase in the sample's staffing,” Econoday said. “This report has been sending loud signals of sharp acceleration for the last year, and acceleration is now beginning to take hold in government data, at least in some of the data most notably factory orders and shipments. If the factory sector does indeed begin to overheat, we can look back at this report…as offering the first signals.”

A separate report on manufacturing was a bit different, as the IHS Markit manufacturing index showed operating conditions across the sector continued to improve in January, with the latest survey data indicating the strongest upturn since March 2015. Moreover, production levels and new orders grew at the quickest rates in twelve months.

2017 Construction Spending Rises above Previous Year

Also released on Thursday were numbers from the Commerce Department that showed the value of construction spending last year rose 3.8% from the previous year, totaling nearly $1.19 trillion.

The value of private construction in 2017 was $950.7 billion, 5.8% above 2016, while residential construction in 2017 was $515.9 billion, 10.6% higher than the year before. Nonresidential construction increased 0.6% in 2017 from 2016.

Overall, December construction also posted gains from the month before and from the same time in 2017, moving up 0.7% and 2.6%, respectively.

Econoday said the real strength of this report was the housing sector but it “needs to accelerate even further to feed supply to what has been a housing sector starved of new homes and condos.”

Private Sector Firms Add More than 200,000 Jobs in January

This news follows a few headlines made earlier this week involving employment, consumer confidence, and the Federal Reserve.

Payroll processor ADP reported private sector employment increased by 234,000 jobs from December to January. This is just slightly less than the downwardly revised 242,000 jobs that were added the month before-- and iit marks the fourth straight month private sector job gains have surpassed the 200,000 mark.

“We’ve kicked off the year with another month of unyielding job gains,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute. “Service providers were firing on all cylinders, posting their strongest gain in more than a year. We also saw robust hiring from midsize and large companies, while job growth in smaller firms slowed slightly.”

Mark Zandi, chief economist of Moody’s Analytics, said, “Given the strong January job gain, 2018 is on track to be the eighth consecutive year in which the economy creates over 2 million jobs. If it falls short, it is likely because businesses can’t find workers to fill all the open job positions.”

The report was released before the monthly federal report on unemployment, which is expected on Friday.

Consumer Confidence Rebounds after Unexpected Drop

Meantime, a separate report from earlier in the week showed consumer confidence rebounded, according to the private research group The Conference Board.

Its Consumer Confidence Index now stands at 125.4, up from 123.1 in December when it posted a surprising decline. That had followed a rise to 129.5 in November, the highest level since November 2000.

The Present Situation Index decreased slightly in January, from 156.5 to 155.3, while the Expectations Index increased from 100.8 last month to 105.5 this month.

“Consumers’ assessment of current conditions decreased slightly, but remains at historically strong levels. Expectations improved, though consumers were somewhat ambivalent about their income prospects over the coming months, perhaps the result of some uncertainty regarding the impact of the tax plan,” said said Lynn Franco, director of economic indicators at The Conference Board. Overall, however, consumers remain quite confident that the solid pace of growth seen in late 2017 will continue into 2018.”

Federal Reserve Keeps Interest Rates Unchanged

Lastly, a meeting by the Federal Reserve on Wednesday, and the final one for Fed Chair Janet Yellen, revealed it opted to hold the federal funds rate steady at a range of 1.25% to 1.50%. The benchmark rate is what banks charge each other for overnight loans and influences what consumers and businesses pay for interest on loans.

Yellen is stepping down and Jerome H. Powell, President Trump’s pick, takes over the reins of the central bank on Monday.

According to Josh Nye, economist at RBC Economic Research, conditions are certainly strong enough to warrant higher interest rates, but in keeping with the gradual, predictable policy changes under her tenure, Yellen and company opted to hold steady and simply set the table for a move in March, exactly what markets have been expecting.

“We too like the odds of a hike at the upcoming meeting and think a once-a-quarter pace of rate increases will continue thereafter," he said. “Our call for four rate hikes this year is slightly ahead of both market expectations and the Fed’s latest dot plot. In our view, any pause in tightening risks falling behind the curve at a time when tax cuts are set to push the economy into excess demand and risk stoking inflation.”

However, Stifel Chief Economist Lindsey Piegza had another take on the central bank’s decision to keep interest rates unchanged.

“The Fed appears to be either posturing for a more aggressive stance in rate hikes in honest anticipation of rising inflation based on model expectations rather than reality, which will ultimately prove unobtainable without realized gains in prices or the Fed is positioning itself for additional rate increases in anticipation of rising inflation independent of realized gains,” she said.

According to Piegza, the latter, however, seems more of a play from the Yellen playbook – changing monetary policy in anticipation of rising inflation, which has failed to materialize for the past near-decade.

“Powell, on the other hand, seems more willing to wait for realized improvement. This leads us to lean towards the first option whereby the Fed is more than anything signaling an intention to raise rates numerous times in the coming months should inflation 'move up' as expected," said Piezga. "In other words, the hawkish implications that many analysts may read in today’s statement are actually not that hawkish at all, but a simple reinforcement of the Fed’s mantra of data dependency.”

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