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Economic Watch: Manufacturing Rebounding, Overall Growth Moderate

June 23, 2016

By Evan Lockridge

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The nation’s manufacturing is continuing to show signs of renewed life following a downturn, which separate reports show overall moderate economic growth with existing home sales booming.

The preliminary June Flash U.S. Manufacturing Purchasing Managers’ Index from the financial information services provider Markit moved up to a reading of 51.4 from a final May reading of 50.7, hitting a three-month high amid renewed upturn in output levels. A reading above 50 indicates expansion while below 50 is contraction.

Relatively weak PMI readings during April and May meant that the average for the second quarter of 2016 was the lowest seen since third quarter 2009. However, the latest reading pointed to a recovery in growth momentum following the six-and-a-half year low recorded in May, according to Markit. Higher output levels provided a boost to the headline index in June, alongside faster growth of new orders and employment.

“The flash PMI for June brought welcome news of improved performance of manufacturing, but the sector still looks to have acted as a drag on the economy in the second quarter, leaving the economy reliant on the service sector and consumers in particular to drive growth,” said Chris Williamson, chief economist at Markit.

According to the report, manufacturers indicated a modest rise in production volumes during June, which survey respondents mainly linked to signs of a rebound in customer demand and a corresponding upturn in new work. The latest increase in new business was the strongest since March, although subdued in comparison to the post-economic crisis average. New orders from abroad expanded at the fastest pace for almost two years, suggesting an additional boost to growth from greater export sales in June.

“Any improvement could be largely traced to better export sales, in turn linked to the weakening of the dollar compared to earlier in the year,” Williamson says. “Domestic demand was again worryingly weak, especially from business customers, meaning overall growth of order books remained subdued.”

Despite stronger new business growth, a number of manufacturers noted that heightened economic uncertainty had led to delayed decision-making and greater risk aversion among clients in June. Moreover, concerns about the business outlook contributed to tighter inventory management across the manufacturing sector.

The report follows the more closely watched Institute for Supply Management’s gauge for May U.S. manufacturing that was released the first of June, showing the manufacturing sector expanded for the third straight month following five straight months of contraction. ISM’s report for this month isn’t due out until July 1.

Unemployment Claims Push Leading Indicators Down

A separate report from the private research group The Conference Board on where the economy is headed in the next three to six months moved slightly lower, but it was mainly due to a single factor.

Its Index of Leading Economic Indicators for the U.S. declined 0.2% in May following a 0.6% increase in April and a 0.1% increase in March, meaning the economy is still expected to expand at a moderate pace of between 2% to 2.5% this year, according to many forecasts. Government readings on second quarter economic growth are not due out until late July, but many analysts are expecting the annual rate to be better than the first quarter annual rate of just 0.8% growth.

The May decline was primarily due to a sharp increase in initial claims for unemployment insurance, according to Ataman Ozyildirim, director of business cycles and growth research at The Conference Board. "While the LEI suggests the economy will continue growing at a moderate pace in the near term, volatility in financial markets and a moderating outlook in labor markets could pose downside risks to growth.”

Despite the increase in jobless claims, the Wall Street Journal reports this volatile measure remains at historic lows and has been generally falling since mid-2009.

The group’s Coincident Economic Index for the U.S., which measures current economic activity, was unchanged in May following a 0.2% increase in April and no change in March. A measure of economic activity in previous months, the Lagging Economic Index for the U.S., increased 0.3% in May following a 0.2% increase in April and a 0.6% increase in March.

Existing Home Sales Surge to Near 10-Year High

Existing-home sales sprang ahead in May to their highest pace in almost a decade, with the uptick in demand coming as lagging supply levels pushing the median sales price to an all-time high, according to the National Association of Realtors.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, grew 1.8% to a seasonally adjusted annual rate of 5.53 million in May from a downwardly revised 5.43 million in April. With last month's gain, sales are now up 4.5% from May and are at their highest annual pace since February 2007.

Lawrence Yun, NAR chief economist, says existing sales continue to hum along, rising in May for the third consecutive month.

"This spring's sustained period of ultra-low mortgage rates has certainly been a worthy incentive to buy a home, but the primary driver in the increase in sales is more homeowners realizing the equity they've accumulated in recent years and finally deciding to trade up or downsize," he said. "With first-time buyers still struggling to enter the market, repeat buyers using the proceeds from the sale of their previous home as their down payment are making up the bulk of home purchases right now."

Surpassing the peak median sales price set last June, the median existing-home price for all housing types in May was $239,700, up 4.7% from May 2015. May's price increase marks the 51st consecutive month of year-over-year gains.

Single-family home sales, the lion’s share of the market increased 1.9% to a seasonally adjusted annual rate of 4.9 million in May and are now 4.7% higher than the pace from a year ago.

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