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Economic Watch: Manufacturing Still Hearty Despite Small Declines, Construction Jumps

December 4, 2017

By Evan Lockridge

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Manufacturing activity in the U.S. remains strong, despite small declines recorded in three reports, while the construction sector posted its biggest gain in nearly half a year.

New orders for manufactured goods fell 0.1% in October from the month before, according to a report from the Commerce Department on Monday, but that was better than the 0.4% decline expected in a consensus estimate from analysts. This latest performance followed an upwardly revised September hike of 1.7%.

The drop in factory orders came as orders for durable goods fell by 0.8%, more than offsetting a 0.7% increase in orders for non-durable goods.

Orders for non-defense capital goods excluding aircraft, commonly referred to a “core capital goods,” and used as a measure of business spending plans, rose a revised 0.3% in October instead of the originally reported 0.5% drop reported earlier by the department.

Analysts at Econoday said this rise in core capital goods is worth noting because it “extends what is a very strong run for a component that offers leading indications on business investment."

Shipments of core capital good, also revised higher, “extend what is also an impressive run, one that feeds directly into nonresidential fixed investment and marks a strong early plus for fourth-quarter gross domestic product [performance]," Econoday notes.

In contrast, the same report showed shipments of manufactured goods, up 10 of the last 11 months, increased 0.6% in October following a September improvement of 1.1%.

“Looking past the headline, this report is very solid and points squarely at a rising contribution from the factory sector,” said Econoday.

Strong October Factory Activity Extends Into November

This followed two reports from Friday about the health of the nation’s manufacturing sector. It continued growing at a robust pace last month, although a bit more slowly.

While the closely watched numbers from the Institute for Supply Management showed U.S manufacturing activity declined slightly in November from the month before, according to its Purchasing Managers’ Index, it remained well in positive territory.

That PMI registered 58.2%, down 0.5 of a percentage point from October. A reading above 50% indicates expansion in manufacturing, and November marked the 15th straight month above this level.

Comments from the panel of purchasing executives reflect expanding business conditions, with new orders and production leading gains, employment expanding at a slower rate, order backlogs stable and expanding, and export orders all continuing to grow in November.

Supplier deliveries are still expanding but at slower rates, and inventories continued to contract during the period. Price increases continued, but at a slower rate.

Despite a slightly lower number for November compared to October, the measure shows solid growth ahead for the manufacturing sector, according to John E. Silvia, chief economist at Wells Fargo Securities.

“The composite index is coming off a cycle high of 60.8% in September, and with a six-month average of 58.4%, the index continues to signal firmness in the manufacturing sector,” he said. “For the year ahead, we expect GDP gains of 2% or greater.”

This came as a separate report was also released Friday by the financial information services provider IHS Markit that showed improved operating conditions across the U.S. manufacturing sector in November. The upturn was supported by solid, albeit slightly weaker, increases in output and new orders.

Its U.S. Manufacturing Purchasing Managers’ Index registered 53.9 in November, down from 54.6 in October. Like the ISM gauge, a reading above 50 indicates expansion in manufacturing, though it’s not expressed as a percentage.

Goods producers increased their output at a rate only slightly below that seen in October, according to the report, while anecdotal evidence suggested that the rise was due to greater order volumes and robust client demand.

New orders received by manufacturers rose at the second-fastest pace since March in November. Panelists linked the latest upturn to more favorable demand conditions, and noted more orders from domestic and foreign clients. Furthermore, export sales rose at a rate that, though moderate, was the second-fastest in 15 months.

The rate of expansion settled slightly after October’s rebound from the hurricanes, but still leaves the sector on course for its best quarter since the opening months of 2015, according to Chris Williamson, chief business economist at IHS Markit.

“What’s especially encouraging is that growth is being led by producers of business equipment and machinery, indicating investment spending is on the rise,” he said.  “Jobs growth in the sector has also picked up in recent months compared with the subdued hiring earlier in the year, suggesting that an expansionary mood is beginning to prevail in the goods-producing sector. Business optimism is now at its highest since the start of 2016, underscoring how firms believe the upturn has further to run as we move into 2018.”

Construction Spending Surges

Meantime, in the construction sector, a Friday report from the Commerce Department showed the amount of spending in October increased 1.5% from the revised September estimate, totaling $1.242 billion.

This marked the biggest increase in five months and met a consensus estimate from analysts. Furthermore, when October is compared to the same time in 2016, construction spending advanced 3.9%.

The overall gain was helped by a near 4% hike in public construction projects that included a 3.3% boost from state and local governments, while federal government spending on construction leaped by 11.1%.

“There was healthy growth this October in both public and private construction spending, with an exceptionally strong surge in public educational construction,” said Ken Simonson, the chief economist for the Associated General Contractors of America. “But for the first 10 months of 2017 combined, public investment, specifically in infrastructure, has fallen short of the already inadequate amounts posted in the same period of 2016.”

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