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Economic Watch: Manufacturing Surges, Construction Scores Record High

January 3, 2018

By Evan Lockridge

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Two readings of the nation’s manufacturing sector showed solid increases in December with one showing the strongest growth in nearly three years while another report showed construction spending hit a record high.

Economic activity in the manufacturing sector expanded in December for the 16th straight month and the overall economy grew for the 103rd consecutive month, according to the monthly survey of the nation’s supply executives by the Institute for Supply Management and its Purchasing Managers’ Index (PMI). The overall performance also beat many analysts’ expectations.

The December PMI registered 59.7, an increase of 1.5 percentage points from the November reading of 58.2. The New Orders Index registered 69.4, an increase of 5.4 percentage points from November while the Production Index registered 65.8, a 1.9 percentage point increase compared to the month before.

A headline reading above 50 indicates that the manufacturing economy is generally expanding, below 50 indicates that it is generally contracting.

“Comments from the panel reflect expanding business conditions, with new orders and production leading gains, employment expanding at a slower rate, order backlogs expanding at a faster rate, and export orders and imports continuing to grow in December,” said Timothy R. Fiore, chair of the ISM Manufacturing Business Survey Committee. “Supplier deliveries continued to slow at a faster rate, and inventories continued to contract at a slower rate during the period. Price increases continued at a faster rate. The Customers’ Inventories Index declined and remains at low levels.”

Of the 18 manufacturing industries surveyed in December, 16 reported growth.

The average score for 2017 was 57.6, which marked the best annual performance since 2004.

A separate but similar report from the financial information services provider IHS Markit also showed improved results with its gauge showing manufacturing growth in December was the best since March 2015.

The seasonally adjusted final U.S. Manufacturing Purchasing Managers’ Index registered 55.1 in December, up from 53.9 in November. The latest index reading signaled a solid improvement in the health of the sector. December data also rounded off the strongest quarterly performance since the start of 2015.

Like the ISM index, a reading above 50 indicates the manufacturing sector is expanding.

Output at manufacturers expanded at a steep pace in December, with growth reaching an eleven-month high. Panelists attributed greater production to more favorable demand conditions and increased new order volumes.

New business received by manufacturers continued to rise in December, with the rate of expansion accelerating to a ten-month high. Anecdotal evidence linked increases to greater demand from new and existing clients, according to the report. Exports sales, however, grew at a marginal pace.

“The upbeat mood is underscored by an increased appetite to hire new staff, with the survey indicating that factory payroll numbers are rising at a rate not seen for over three years. Indicators of backlogs of work and input buying likewise suggest production will continue to grow at a solid pace as we move into 2018,” said Chris Williamson, chief business economist at IHS Markit. “However, the strengthening of demand for raw materials has led to supply chain delays, which have in turn been increasingly linked to higher prices as a sellers’ market develops. Input price inflation accelerated to one of the highest rates seen over the past five years in December, as suppliers hiked prices for a wide range of inputs.”

Williamson said the combination of strengthening growth, a solid labor market, and rising prices will add to expectations that the Federal Reserve will remain on track for another interest rate hike in the near future, with March being a likely possibility.

Construction Spending Booming

Meantime, a new report from the Commerce Department showed the value of construction spending in November increased 0.8% from the downwardly revised October level, hitting a new high of $1.257 trillion.

The November level is also 2.4% higher than compared to the same time a year ago while the level in the first 11 months of 2017 is 4.2% higher than during the first 11 months of 2016.

The results either met or beat a consensus estimate from analysts as the construction sector was helped by a surge in investment in private residential and nonresidential projects.

Spending on private residential projects jumped to its highest level since February 2007 and it follows other recent numbers showing a boom in home building.

“The residential side of this report joins a tide of rising tide of favorable data on the housing sector which, like manufacturing, appears to have accelerated into year end, which will be a positive for fourth-quarter GDP and points to momentum for first-quarter GDP," said analysts at Econoday.

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