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Economic Watch: Manufacturing, Construction Post Impressive Gains

December 1, 2016

By Evan Lockridge

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In another sign the U.S. economy is gathering more steam, two reports released Thursday morning showed a strong rebound in the nation’s manufacturing sector while another indicated construction remains strong following earlier positive indicators.

The survey of purchasing managers by the Institute for Supply Management showed economic activity in the manufacturing sector expanded in November, and the overall economy grew for the 90th consecutive month, according to the industry group's Purchasing Managers’ Index.

The November PMI registered 53.2%, an increase of 1.3 percentage points from the October reading of 51.9%. A reading above 50% indicates expansion in the manufacturing sector while a reading below 50% indicates contraction.

This is not only the best reading in five months and the third straight monthly hike, but it also beat a consensus estimate from Wall Street analysts. Late last year and early into this year, manufacturing slumped to where the sector was contracting for the first time in the economic recovery since the Great Recession.

The New Orders Index for November registered 53%, an increase of 0.9 of a percentage point from the October reading of 52.1 while the Production Index registered 56%, 1.4 percentage points higher than the October reading of 54.6 percent. Of the 18 manufacturing industries, 11 reported growth in November.

"The past relationship between the PMI and the overall economy indicates that the average PMI for January through November (51.2%) corresponds to a 2.5% increase in real gross domestic product (GDP) on an annualized basis,” said Bradley J. Holcomb, chair of the ISM Manufacturing Business Survey Committee. “In addition, if the PMI for November (53.2%) is annualized, it corresponds to a 3.2% increase in real GDP annually."

Meantime, a similar report from financial information services provider IHS Markit showed manufacturing last month had the strongest growth rate for new orders since March 2015.

At 54.1 in November, the final Markit U.S. Manufacturing Purchasing Managers’ Index picked up from 53.4 in October and signaled the strongest improvement in business conditions for just over one year. The latest reading was up from the preliminary reading of 53.9 and the joint-highest seen since March 2015, indicating a robust improvement in manufacturing performance.

Like the ISM report, a reading above 50 indicates expansion in the manufacturing economy, though it’s not expressed as a percent.

A sharp and accelerated rise in new business volumes was reported by manufacturing companies during November, according to the IHS Markit report. This was mainly driven by domestic sales. New orders from abroad increased only marginally since the previous month, with survey respondents citing competitive pressures and the strong dollar. Anecdotal evidence suggested that improving U.S. economic conditions and greater confidence among clients had led to rising levels of new work.

“Both production and order books are growing at impressive rates, fueled predominantly by rising domestic demand for goods from both consumers and businesses. Companies are also rebuilding stock levels, suggesting the recent inventory drag is easing,” said Chris Williamson, chief business economist at IHS Markit “The stronger dollar is hurting exporters, but the flip-side of the exchange rate appreciation is lower import costs.”

Construction Spending Highest in Seven Months

Also released on Thursday was a report by the Commerce Department showing construction spending in the U.S. during October increased 0.5% above the upwardly revised September level and is 3.5% higher compared to October 2015. The performance was also the strongest since March.

September was originally reported as falling 0.4% while August was also revised to show a 0.5% increase rather than a 0.5% decline. Even with these revisions, October’s performance met a consensus estimate from analysts.

During the first 10 months of this year, construction spending amounted to $972.2 billion, 4.5% above the  $930.7 billion for the same period in 2015.

While overall spending on private construction fell 0.2% in October from the month before, residential construction increased 1.6% while nonresidential building fell 2.1%. In the public construction sector there was an overall rise of 2.8%, helped in part by a 1.9% increase in highway construction.

Other Reports also Positive

All of this follows the release of the so called “Beige Book” on Wednesday by the Federal Reserve, which looks at economic conditions in the central bank’s different districts. It characterized growth as “modest” or “moderate," marking little change from earlier reports.

Most analysts believe this report and other recent ones give members of the Federal Open Market Committee enough ammunition to push through an interest rate hike of .25% when they meet Dec.13 and 14.

Among other reports earlier this week, as well as before Thanksgiving, that indicated an improving economy was one from the Commerce Department showing personal spending posted its biggest gain in five months during October while personal incomes rose for the second straight month.

Meantime, a report from payroll processor ADP showed 216,000 private sector jobs were added in the U.S. during November while October’s level was revised down from 147,000 to 119,000. That report is ahead of federal job numbers set to be released Friday, including the nation’s unemployment rate.

Also, existing home sales in October hit their highest level since 2007, according to the National Association of Realtors, while orders for business equipment, an indictor of business investment, advanced in October for the fourth time in the last five months, according to the Commerce Department.

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