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Economic Watch: Manufacturing, Leading Indicators Spark Optimism

July 22, 2016

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A new preliminary report shows U.S. manufacturing rising this month at its fastest pace since November 2015, following a post-Great Recession low in May, according to the financial information services provider Markit.

Its Flash U.S. Manufacturing Purchasing Managers’ Index (PMI) rose to 52.9 in July following a final reading of 51.3 in June, its best reading since October. The numbers point to what the report says are “a solid improvement in overall business conditions.” A reading above 50 indicates expansion while below 50 shows contraction.

The hike was led by a robust expansion of incoming new work and the fastest upturn in production volumes for eight months. Job creation also strengthened in July, with the latest increase in payroll numbers the fastest seen over the past 12 months.

Faster rises in output, new orders and employment were the key positive influences in July, while sustained inventory cutbacks acted as a drag on the PMI.

“July saw manufacturers battle against a strong dollar, the ongoing energy sector downturn and political uncertainty ahead of the presidential election, yet still achieved the best growth seen since last year,” said Chris Williamson, chief economist at Markit. “It remains too early to say if this is the start of a stronger upturn, but this is a welcome and encouraging sign of revival after the second quarter, in which the PMI signaled the sector’s worst performance for over six years.”

Survey respondents commented on strong sales growth, the launch of new products and generally favorable domestic economic conditions while some firms noted that weak demand from the energy sector, according to the report.

The report comes ahead of final numbers for July from Markit that will be released next month as well as the more closely watched manufacturing gauge from the Institute of Supply Management. ISM reported in June manufacturing expanded for the fourth consecutive month, hitting its highest level in 16 months.

Leading Economic Indictors Also Rebound

A separate report also shows a potential pickup for the relatively slow-growing U.S. economy.

The private research group The Conference Board said on Thursday it’s Leading Economic Index for the U.S. – a gauge of expectations three to six months ahead – increased 0.3% in June, following a 0.2% decline in May and a 0.5% increase in April.

“Improvements in initial claims for unemployment insurance, building permits, and financial indicators were the primary drivers,” said Ataman Ozyildirim, director of business cycles and growth research at The Conference Board. “While the LEI continues to point to moderating economic growth in the U.S. through the end of 2016, the expansion still appears resilient enough to weather volatility in financial markets and a moderating outlook in labor markets.”

The index is made up of 10 components, including stock prices, manufacturing levels, home construction and other items.

The Conference Board’s Coincident Economic Index, which measures current economic activity for the U.S., increased 0.3% in June following no change in May and a 0.2% increase in April. Its Lagging Economic Index, which measures economic activity of previous months, for the U.S. declined 0.1% in June following a 0.4% increase in May and a 0.2% increase in April.

Home Buying, Building Remain Strong

Reports on the U.S. housing sector show increasing activity in what many analysts already consider one of the brightest spots in the U.S. economy.

According the National Association of Realtors, existing-home sales maintained their upward trajectory in June and increased for the fourth consecutive month.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, climbed 1.1% to a seasonally adjusted annual rate of 5.57 million in June from a downwardly revised rate 5.51 million in May.

After last month's gain, sales are now up 3% from June 2015 and remain at their highest annual pace since February 2007.

"Existing sales rose again last month as more traditional buyers and fewer investors were able to close on a home, despite many competitive areas with unrelenting supply and demand imbalances,” said Lawrence Yun, NAR chief economist. "Sustained job growth as well as this year's descent in mortgage rates is undoubtedly driving the appetite for home purchases.

"Looking ahead, it's unclear if this current sales pace can further accelerate as record high stock prices, near-record low mortgage rates and solid job gains face off against a dearth of homes available for sale and lofty home prices that keep advancing."

Single-family home sales, which make up the largest share of the market by far, increased 0.8% to a seasonally adjusted annual rate of 4.92 million in June from 4.88 million in May, and are now 3.1% higher than the 4.77 million pace a year ago.

A separate report from the Commerce Department shows June housing starts increased 4.8%, beating a consensus estimate of a 0.9% gain by economists, hitting an annual rate of 1.189 million. This follows a downward revised 1.7% drop the month before. Despite the June improvement, the level is down 2% from a year earlier.

The number of building permits issued in June, an indicator of future home building activity, increased 1.5% above the downwardly revised May rate but is down a steep 13.6% from a year earlier.

“New home construction activity continues to move forward, albeit slowly, rising more than expected at the end of the second quarter as month-to-month volatility in the data remains robust,” said Lindsey Piegza, chief economist at Stifel Fixed Income. “A welcome contributor to top-line growth, residential construction activity appears to be one of the silver linings in an otherwise lackluster economy.”

According to Piegza, with record low interest rates and modest income gains, American’s appetite for new homes remains solid, keeping the pace of sales moving forward, as well as the pace of construction activity to meet demand.

“Of course, longer-term, in order to maintain positive spending activity on large ticket items such as a home purchase, consumers will need to experience more than just ‘modest” improvements in the U.S. labor market,” Piegza said. “But for now, even continued moderate activity … we’ll take it.”

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