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Economic Watch: Manufacturing, Leading Indicators Rebound

October 24, 2016

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New preliminary numbers suggest U.S. manufacturers started the fourth quarter in a strong fashion, and other numbers point to an improving overall economy in the final three months of the year -- with manufacturing and housing, two key areas related to truck freight, helping lead the way.

The Flash U.S. Manufacturing Purchasing Managers’ Index from the financial information services provider IHS Markit rebounded to a level of 53.2 in October, from a three-month low of 51.5 in September. With the rate of improvement  the fastest since October 2015, the report signaled a solid upturn in overall business conditions.

Stronger output and new business growth were the key factors boosting the headline PMI, which helped offset a drag from softer job hiring in October. A rebound in business conditions contributed to greater input buying among manufacturing firms and renewed pressures on capacity. At the same time, manufacturers sought to boost their stocks of inputs, with pre-production inventories rising for the first time since November 2015.

Manufacturing production has now increased for five months running, following a slight dip in May.

Manufacturing production has now increased for five months running, following a slight dip in May. Survey respondents cited an accelerated pace of new business growth and, in some cases, efforts to boost production in anticipation of stronger client demand in the months ahead.

To that end, incoming new orders picked up at the fastest pace for 12 months. Anecdotal evidence suggested that new product launches and stronger domestic demand resulted in greater sales volumes. However, some firms continued to report delayed decision-making among clients, linked to uncertainty ahead of the presidential election.

New export orders increased only slightly in October, but this was an improvement on the fractional decline seen during the previous survey period.

“Manufacturing showed further signs of pulling out of the malaise seen earlier in the year, starting the fourth quarter on a solid footing,” said Chris Williamson, chief business economist at IHS Markit. “Both output and new orders are rising at the fastest rates for a year amid increasingly widespread optimism that demand will pick up again after the presidential election, which has been commonly cited as a key factor that has subdued spending and investment in recent months.”

He said there are also signs that the drag from cost-cutting policies of deliberate inventory reduction is moving into reverse.

“Inventory-building should therefore provide an extra boost to the economy in the fourth quarter,” Williamson said. “Weak export growth, attributable to the strong dollar, and lackluster hiring [in manufacturing] remain big areas of disappointment, and highlight an ongoing dependency on domestic demand and a need to keep labor costs low amid a still-uncertain economic and political outlook.”

A final report for October is set for release the first of November. A more closely watched report on manufacturing from the Institute for Supply Mangement is due out at the same time.

Leading Indicators, Existing Home Sales Improving

Two other reports released late last week also are encouraging.

The Leading Economic Index for the U.S., from the private research group The Conference Board, increased 0.2% in September to 124.4. That followed a 0.2 % decline in August, and a 0.5% increase in July. (The measure uses a baseline of 100 from 2010.)

"Together with the pickup in the six-month growth rate, [the September LEI] suggests that the economy should continue expanding at a moderate pace through early 2017,” said Ataman Ozyildirim, director of business cycles and growth research at The Conference Board. “Housing permits, unemployment insurance claims, and the interest rate spread were the main components lifting the index in September.”

The index is made up of 10 components, including manufacturing, stock prices and housing.

New, separate figures show existing-home sales rebounded strongly in September, propelled by sales from first-time buyers reaching a 34% share – a high not seen in over four years, according to the National Association of Realtors.

Total existing-home sales, which include single-family homes, townhomes, condominiums and co-ops, rose 3.2% to a seasonally adjusted annual rate of 5.47 million in September from a downwardly revised 5.30 million in August. After last month's gain, sales are at their highest pace since June and are 0.6% above a year ago.

Lawrence Yun, NAR chief economist, said the two-month slump in existing sales reversed course convincingly in September.

"The home search over the past several months for a lot of prospective buyers, and especially for first-time buyers, took longer than usual because of the competition for the minimal amount of homes for sale," he said. "Most families and move-up buyers look to close before the new school year starts. Their diminishing presence from the market towards the end of summer created more opportunities for aspiring first-time homeowners to buy last month."

According to Yun, housing inventory has been tight much of the year, leading to higher prices. New home construction, while strong, has not been able to keep up with demand. Figures for new home sales in September are scheduled to be released Wednesday. However, new home sales in August were described as “solid” by the National Association of Homebuilders, despite a 7.6% decline from July.

Single-family home sales, the lion’s share of the market, increased 4.1% to a seasonally adjusted annual rate of 4.86 million in September from 4.67 million in August, and are now 0.6% above the 4.83 million pace a year ago.

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