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Economic Watch: Manufacturing Declines, GDP Expectations Lowered

August 24, 2016

By Evan Lockridge

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A preliminary look at the nation’s manufacturing sector shows it continues to expand following a recent downturn. Separate reports show expectations of long-term economic growth have been moved lower and the housing market is suffering from low inventory levels.

U.S. goods producers saw a further upturn in overall business conditions during August, though the rate of improvement was softer than seen in July, according to a first reading for the month from the Flash U.S. Manufacturing Purchasing Managers’ Index (PMI) provided by the financial information services provider IHS Markit.

It registered 52.1 in August, down from July’s nine-month high of 52.9. The August reading pointed to a moderate rate of improvement that was weaker the post-Great Recession average. While output continued to rise markedly, total new work rose at a slower pace and employment expanded at the weakest rate in four months.

U.S. manufacturers signaled increased output for the third month running in August. The rate of expansion remained solid overall, having edged up slightly from July to a nine-month high. Anecdotal evidence suggested that new product launches, stronger underlying demand and new marketing strategies supported production growth in August.

“Taking the July and August readings together suggests that manufacturing is enjoying its best growth so far this year."

“The August drop in the PMI is a disappointment but less worrying when looked at in the context of July’s better-than-expected reading,” says Chris Williamson, chief business economist at IHS Markit. “Taking the July and August readings together suggests that manufacturing is enjoying its best growth so far this year in the third quarter, and should help drive stronger gross domestic product (GDP) growth.”

With August seeing the largest rise in exports for almost two years, Williamson said, the improved trade performance should also help drive faster economic growth.

“However, a slowdown in overall order book growth is a warning light that domestic demand has waned in August, and the pull-back in hiring suggests manufacturers have become increasingly cautious about the outlook,” Williamson says.

Long-term Economic Growth

A separate report, however, throws a bit of cold water on expectations of faster economic growth, according to a new report from the non-partisan Congressional Budget Office.

While it calls for better GDP growth this year and continuing through 2017 before moderating in 2018, CBO now projects that growth to be slower throughout the 2016–2026 period than the agency projected in January.

“Weaker-than-expected economic growth indicated by data released since January, recent developments in the global economy, and a reexamination of projected productivity growth contributed to that downward revision,” the report says.

The U.S. GDP rose at an annual rate of 1% in the first half 2016, but CBO expects that the economy will expand more rapidly in the coming months, with GDP growing by 2% over the whole of 2016 and by 2.4% in 2017, “mainly because the major forces restraining the growth of investment, such as a decline in oil prices, have begun to subside.”

Economic growth is expected to slow in 2018 and fall below but remain close to the growth of potential GDP in 2019 and 2020.

In CBO’s estimation, the faster growth over the next two years will spur hiring, increase employment and wages, and put upward pressure on inflation and interest rates. In the latter part of the 10-year projection period, however, output will be constrained by a relatively slow increase in the nation’s supply of labor.

Sales of Existing Homes Down, New Homes Suprisingly Up

Slowed by frustratingly low inventory levels in many parts of the country, existing-home sales lost momentum in July and decreased year-over-year for the first time since November 2015, 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, fell 3.2% to a seasonally adjusted annual rate of 5.39 million. For only the second time in the last 21 months, sales are below a year ago.

Lawrence Yun, NAR chief economist, says existing sales fell off track in July after steadily climbing the last four months.

“Severely restrained inventory and the tightening grip it’s putting on affordability is the primary culprit for the considerable sales slump throughout much of the country last month,” he said. “Realtors are reporting diminished buyer traffic because of the scarce number of affordable homes on the market, and the lack of supply is stifling the efforts of many prospective buyers attempting to purchase while mortgage rates hover at historical lows.”

Total housing inventory at the end of July inched 0.9% higher to 2.13 million existing homes available for sale, but is still 5.8% lower than a year ago and has now declined year-over-year for 14 straight months.

“Although home sales are still expected to finish the year at their strongest pace since the downturn, thanks to a very strong spring, the housing market is undershooting its full potential because of inadequate existing inventory combined with new home construction failing to catch up with underlying demand,” Yun said. “As a result, sales in all regions are now flat or below a year ago and price growth isn’t slowing to a healthier and sustainable pace.”

Single-family home sales dropped 2% to a seasonally adjusted annual rate of 4.82 million in July and are now 0.8% under the 4.86 million pace a year ago. Existing condominium and co-op sales dropped 12.3% to a seasonally adjusted annual rate of 570,000 units in July and are now 8.1% below the July 2015 level.

In sharp contrast to existing homes, new home sales in July unexpectedly climbed to their highest level since October 2007, according to the U.S. Commerce Department.

Sales of newly built, single-family homes rose 12.4% in July from a downwardly revised June reading to a seasonally adjusted annual rate of 654,000 units, the fifth straight monthly increase.

“This rise in new home sales is consistent with our builders’ reports that market conditions have been improving,” said National Association of Homebuilders Chairman Ed Brady, “As existing home inventory remains flat, we should see more consumers turning to new construction.”

Regionally, new home sales rose by 40% in the Northeast, 18.1% in the South, and 1.2% in the Midwest. Sales remained unchanged in the West.

“July’s positive report shows there is a need for new single-family homes, buoyed by increased household formation, job gains and attractive mortgage rates,” said NAHB Chief Economist Robert Dietz. “This uptick in demand should translate into increased housing production throughout 2016 and into next year.”  

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