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Economic Watch: Manufacturing Surges, Construction Rebounds

October 2, 2017

By Evan Lockridge

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Manufacturing activity in the U.S. turned higher in September, hitting its highest level in 13 years, according to newly released survey results of supply executives. A separate report showed construction spending rebounded after two straight monthly drops.

The Institute for Supply Management’s index of manufacturing activity registered 60.8% for September, an increase of two percentage points from the August reading. That's its highest level since January 2004, with 17 of 18 manufacturing industries reporting growth last month.

A reading over 50% indicates the manufacturing sector is expanding, while below 50% signals contraction. This latest reading was far better than a slight downturn expected in a poll of analysts.

The New Orders Index registered 64.6%, an increase of 4.3 percentage points from the August reading, while the Production Index registered 62.2%, a 1.2 percentage point increase. The Employment Index registered 60.3%, an increase of 0.4 of a percentage point from the August level.  

"Order input continues at a strong pace, averaging 61.6% since December 2016, setting the pace for production activity," said Timothy Fiore, chair of the Institute for Supply Management’s Manufacturing Business Survey Committee. "Production remains at strong growth levels in most industries, in spite of weather conditions and supplier delivery constraints experienced during the period.”

A separate, similar survey from the financial information services provider IHS Markit showed a further improvement in operating conditions across the U.S. manufacturing   sector. 

Its U.S. Manufacturing Purchasing Managers’ Index registered 53.1 in September, up slightly on the preliminary reading of 53 and rising from 52.8 in August. The upturn signaled a slight pick-up in growth momentum and a strong improvement in overall operating conditions across the sector.

Like the ISM report, a reading above 50 in the IHS Markit survey indicates expansion in the manufacturing sector.

Despite the overall increase in September, Chris Williamson, chief business economist at IHS Markit, expressed a concern about the report.

“While the headline PMI remained resiliently elevated in September, despite disruption from hurricanes Harvey and Irma, the details of the survey are more worrying,” he said. “Output growth was unchanged on August’s 14-month low, and translates into stagnation at best in terms of the official manufacturing output data. Firms’ expectations of future output growth also slipped to a four-month low.”

Williamson said although the hurricanes appear to have made little overall impact on production, supply delays were widely reported and prices for many inputs rose, suggesting some near-term upward pressure on inflation.

Construction Spending Improves After Two Monthly Drops

A separate Commerce Department reported showed construction spending in the U.S. during August turned around, jumping 0.5% from the month before. This followed declines of a revised and combined 2% drop in June and July but is the best showing since a 1.6% improvement in May.

The August figure is 2.5% above the level from the same time a year ago. Also, during the first eight months of this year, construction spending is 4.7% higher than during the same period in 2016.

“Construction spending data in coming months are likely to be very volatile due to hurricanes derailing projects and as rebuilding gets underway,” said Mark Vitner, senior economist at Wells Fargo Securities. “Seasonal adjustment will likely exacerbate impacts during fall months. We expect residential construction to be a drag on gross domestic product (GDP) until maybe next spring.”

All of this follows generally positive reports the latter part of last week showing an economy that's humming along.

The Commerce Department reported the nation’s GDP improved at an annual rate of 3.1% in the second quarter of the year, slightly better than the 3% level it reported a month earlier and its best pace in two years. Also, orders for durable goods increased 1.7% in August, according to a separate Commerce Department report, while orders for nondefense capital goods minus aircraft, an indicator of business investment, rose 0.9%, following an upwardly revised 1.1% gain in July.

These performances in the GDP and the orders for durable goods, including those for capital goods, beat many analysts’ expectations.

Meantime, there was a small decline in consumer sentiment during September, according to the University of Michigan’s monthly survey. But consumers’ positive views on the economy largely held up well, given the extent of damages from hurricanes Harvey and Irma.

Also, separate Commerce Department reports on consumer spending and personal incomes were slightly weaker in August, despite a relatively strong start to the third quarter, leading some analysts to forecast a slightly weaker third quarter GDP performance.

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