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Economic Watch: Manufacturing Starts Year Strong, Housing Best in Years

January 24, 2017

By Evan Lockridge

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The U.S. manufacturing sector had a solid start to 2017, with overall operating conditions improving at the quickest pace for nearly two years, according to preliminary report issued Tuesday by financial information services provider IHS Markit. A separate report shows existing home sales closed out 2016 as the best year in a decade.

IHS Markit's January Flash U.S. Manufacturing Purchasing Managers’ Index registered 55.1, up from a final reading of 54.3 in December, to signal a marked upturn in the health of the sector that was the strongest since March 2015. A reading over 50 indicates growth in the manufacturing sector.

The solid improvement in business conditions was largely driven by sharper increases in output and new orders, which rose at the fastest rates in 22 and 28 months, respectively. At the same time, companies raised their purchasing activity at the steepest rate since early 2015 and increased their payrolls further in order to meet greater production requirements.

Positive expectations around the demand outlook were highlighted by further increases in stocks of purchased items and finished goods, with the latter increasing at the quickest pace since early 2007. Optimism around the 12-month outlook for production also improved at the start of the year and reached its highest level since March 2016.

U.S. manufacturers reported increased production for the eighth month running in January. Furthermore, the rate of expansion picked up to its sharpest since March 2015. Higher output was overwhelmingly linked by respondents to greater inflows of new work, with latest data showing the steepest increase in total new orders for 28 months. The upturn in new business appeared to be led by stronger domestic demand, as new export work rose only slightly at the start of 2017, as has been the case in each of the past four months.

Manufacturing employment continued to increase in January as firms looked to increase their capacity. Though solid overall, however, the rate of job creation eased slightly from the 18-month high seen in December.

Chris Williamson, chief business economist at IHS Markit, said U.S. manufacturers are seeing a bumper start to 2017, with production surging higher in January on the back of rising inflows of new orders.

“New work is growing at the fastest rate for over two years, thanks mainly to rising demand from customers in the home market. Export growth remains subdued, stymied by the strong dollar,” he said. “The survey results suggest that faster manufacturing growth and inventory rebuilding should help boost the U.S. gross domestic product (GDP) in the first quarter if current trends persist in coming months.”

Williamson also pointed out other benefits, such as rising factory employment, which should also help improve consumer morale and spending.

“However, with such strong growth being signaled and price pressures rising, speculation around the next Federal Reserve [interest] rate hike will intensify,” he said.

IHS Markit will release its final report on January in early February, around the same time as the more closely watched but similar survey on manufacturing from the Institute of Supply Management is due.

Housing Best In Nearly A Decade

A separate report released Tuesday showed existing home sales closed out 2016 as the best year in a decade, despite a December decline, according to the National Association of Realtors.

Total existing-home sales (completed transactions that include single-family homes, townhomes, condominiums and co-ops) finished 2016 at 5.45 million. That surpassed the 2015 level of 5.25 million, the highest since 2006.

In December, existing sales fell 2.8% to a seasonally adjusted annual rate of 5.49 million from an upwardly revised rate of 5.65 million in November, leaving December numbers only 0.7% higher than a year earlier.

Lawrence Yun, NAR chief economist, said the housing market's best year since the Great Recession ended on a healthy but somewhat softer note.

"Solid job creation throughout 2016 and exceptionally low mortgage rates translated into a good year for the housing market," he said. "However, higher mortgage rates and home prices combined with record low inventory levels stunted sales in much of the country in December."

According to Yun, while a lack of listings and fast-rising home prices were a headwind all year, the surge in interest and home prices since early November ultimately caught some prospective buyers off guard and dimmed their appetite or ability to buy a home.

Single-family home sales, the lion’s share of the market, fell 1.8% to a seasonally adjusted annual rate of 4.88 million in December from 4.97 million in November, but they are still 1.5% above the pace a year ago.

This follows news last week from the U.S. Commerce Department that showed housing starts in December jumped 11.3% above the revised November rate and are 5.3% higher than the same time a year earlier.

For all of 2016 there were 1.17 million housing starts, 4.9% higher than the 2015 level and the best year since 2007.

Also, the number of building permits issued in December, an indicator of future construction, slipped 0.2% from November but was 0.7% higher than compared to December 2015.

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