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Economic Watch: Manufacturing, Housing Post Big Rebounds

January 22, 2016

By Evan Lockridge

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U.S. manufacturers started the year with a rebound in output and new business growth, according to preliminary results of a survey released Friday. A separate report shows sales of existing homes were the best since before the Great Recession.

The Flash U.S. Manufacturing Purchasing Managers’ Index moved up to 52.7 in January, from December’s 38-month low of 51.2. Headline PMI signaled a moderate improvement in overall business conditions, but the latest reading was the second-lowest since October 2013, according to financial information services provider Markit Economics, which puts out the index.

A reading above 50 indicates the manufacturing sector is expanding, while below 50 is a sign of contraction.

A moderation in manufacturing jobs growth, the lowest in four months, was the main factor acting as a drag on the headline index at the start of 2016, according to the report.

“January data signaled a solid upturn in production volumes, with the rate of growth accelerating for the first time since last October,” the report said. “Moreover, the pace of expansion was comfortably above the 26-month low recorded in December. Survey respondents mainly commented on higher output levels in response to positive new business trends and expectations of improving domestic demand over the months ahead.”

The report also said the volume of new work strengthened in January, after coming close to stagnation at the end of 2015. The latest increase in new orders was the fastest for three months. However, new export sales continued to rise at only a marginal pace, which manufacturers generally linked to the strong dollar.

Companies that reported an overall upturn in new work mostly cited improving domestic economic conditions. The main exception to the wider trend was among manufacturers facing cutbacks in new orders from clients in the oil and gas sector. Meanwhile, manufacturers indicated a slight slowdown in job creation across the sector in January. The latest rise in payroll numbers was the weakest since September 2015.

“Producers appear to have shrugged off worries about China, helped by export orders showing signs of reviving," said Chris Williamson, chief economist at Markit. "It looks like weak demand from China is being offset by improved demand for U.S produced goods in other markets.

"It’s clearly too early to declare that recent slowdown fears are overplayed, but the sector’s resilience in the face of recent financial market volatility is an encouraging omen for growth and employment in the wider economy, especially as sectors such as transport and business services typically move in the same cycle as manufacturing.”

Meantime, a wider economic gauge, also released Friday, showed a small drop in the outlook for overall economy for the first time in three months, but its measure of current conditions ticked slightly higher.

The private research group The Conference Board said its Leading Economic Index for the U.S. dropped 0.2% in December to 123.7, following a 0.5% increase in both November and October.

The measure is a gauge of expected conditions in the next three to six months, based on 10 different components. Five of those components fell in December.

“The U.S. LEI fell slightly in December, led by a drop in housing permits and weak new orders in manufacturing,” said Ataman Ozyildirim, director of business cycles and growth research at The Conference Board. “However, the index continues to suggest moderate growth in the near-term despite the economy losing some momentum at the end of 2015. While the LEI’s growth rate has been on the decline, it’s too early to interpret this as a substantial rise in the risk of recession.”

In contrast, The Conference Board’s Coincident Economic Index for the U.S., a measure of current economic activity, increased 0.1% in December following a 0.1% gain in November, and a 0.2% improvement increase in October.

Existing Home Sales Roar Back to Life

A third economic report on Friday showed existing-home sales snapped back solidly in December, according to the National Association of Realtors, capping off the best year since 2006.

Led by the South and West, all four major regions saw large increases in December.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, jumped 14.7% following November’s drop of 10.5% to a seasonally adjusted annual rate of 5.46 million. After last month's turnaround, the largest monthly increase ever recorded, sales are now 7.7% above a year ago.

"While the carryover of November's delayed transactions into December [which NAR blamed on new federal home closing rules] contributed greatly to the sharp increase, the overall pace taken together indicates sales these last two months maintained the healthy level of activity seen in most of 2015," said Lawrence Yun, NAR chief economist "Additionally, the prospect of higher mortgage rates in coming months and warm November and December weather allowed more homes to close before the end of the year."

He said although some growth is expected in 2016, the housing market will struggle to replicate last year's pace due to insufficient supply levels. The overall pace of sales this year will be constricted by tepid economic expansion, rising mortgage rates and decreasing demand for buying in oil-producing metro areas.

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