Economic Watch: Manufacturing, Spending, Income Jump; Construction Flat but Strong

March 1, 2018

By Evan Lockridge

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Manufacturing in the U.S. continued its hot streak in February, but there are questions following other data released earlier about the sector. Personal incomes and expenditures were up, and construction spending remained robust despite little change from the month before.

Economic activity in the manufacturing sector, as measured by the Institute for Supply Management’s Purchasing Managers Index (PMI), registered 60.8%. That's an increase of 1.7 percentage points from the January reading, which marked the 18th month of growth.

A reading above 50% indicates expansion. February's report is the highest reading since May 2004 and beat analysts’ expectations.

The New Orders Index registered 64.2%, a decrease of 1.2 percentage points from the January reading of 65.4%. The Production Index registered 62%, a 2.5 percentage point decrease compared to the January reading of 64.5%.

Comments from the panel reflect expanding business conditions, according to the report. New orders and production maintained high levels of expansion; employment expanded at a faster rate to support production, order backlogs expanded at a faster rate, and export orders and imports continued to grow faster in February.

Of the 18 manufacturing industries surveyed, 15 reported growth last month.

“Alongside strong domestic demand come encouraging signs of robust foreign demand,” said Fotios Raptis, senior economist at TD Economics. “New export orders surged to a cycle-high, and PMI manufacturing surveys reported this morning suggest that global demand for manufactured goods remains strong in many parts of the world. This bodes well for first quarter global trade volumes and economic activity more broadly.”

Markit Manufacturing Report Also Strong

A similar report from the financial information services provider IHS Markit was nearly as positive, showing one of the strongest improvements in the health of the U.S. manufacturing sector seen over the past three years, led by a sharp expansion in new orders.

Its U.S. Manufacturing Purchasing Managers’ Index (PMI) registered 55.3 in February, down slightly from 55.5 in January. Although below January’s 34-month high, the overall improvement in operating conditions across the manufacturing sector was one of the strongest recorded since late 2014.

Like the ISM gauge, a reading above 50 in the IHS Markit index indicates expansion, though it's not expressed as a percentage.

Growth of manufacturing output remained solid in February, despite easing slightly to a three-month low. The sustained upturn in production was widely linked to greater client demand and increased order book volumes, according to the report.

According to Chris Williamson, chief business economist at IHS Markit, the survey’s output index readings for the first two months of 2018 are indicative of the sector growing at an annualized rate of just under 3%.

“The most encouraging news was another surge in new order inflows, which helped boost optimism about the year ahead and drive further widespread job gains. Manufacturers are clearly in expansion mode, enjoying robust demand from home alongside rising export orders,” he said.

Williamson also noted capacity is still being stretched, as indicated by widespread supply chain delays and the build-up of uncompleted orders at factories.

“Demand, in other words, is running ahead of supply, meaning pricing power is improving. Factory selling prices are consequently rising at the steepest rate for four years,” Williamson said.

Wells Fargo Securities pointed out these reports are the latest signals that positive sentiment is giving way to euphoria in the manufacturing sector. Yet this comes amid a run of what it said is “admittedly lousy hard data.”

It pointed out that recent government numbers show core capital goods orders have been in retreat for the past two months. Similarly, manufacturing production has flat-lined for two straight months.

“In times of such pronounced survey strength, the gap between hard and soft data is usually narrowed by business surveys getting reined in, rather than the hard orders data experiencing a marked acceleration,” Wells Fargo said.

Personal Income, Spending Rise, but Raise Inflation Concerns

Meantime, a Commerce Department report showed personal income increased slightly more than expected during January, while personal spending rose in line with estimates.

The 0.4% gain in personal income matched December’s performance. Personal spending edged up by 0.2% in January after climbing by an upwardly revised 0.4% in December.

Also, disposable personal income surged 0.9%, as Americans paid $70.1 billion less in taxes due to the effects of the tax reform. Social security payments increased by $23.8 billion compared to only $4.2 billion in December 2017.

“This meant that real disposable personal income increased a strong 0.6% during the first month of the year, which will help to close the gap between the growth in real personal consumption expenditures and real disposable personal income,” said Eugenio J. Alemán, senior economist at Wells Fargo Securities.

This was the strongest growth in real disposable personal income since April 2015.

“Now that income growth is on the right track, it is clear that the probability for consumption growth to recover in the next several months increases,” Alemán said. “This probability increases further after the release of consumer confidence, which hit a new cycle high in February,”

He noted while consumption may be weak in the first quarter of the year, Wells Fargo expects a recovery in the pace of consumption for the rest of the quarters.

However, there could be a downside to this rise in wages. According to, earlier reports showing an acceleration in wage growth have sparked concerns over surging inflation, triggering volatility seen earlier this year in the stock and bond markets.

Construction Spending Flat But Resilient

Lastly, a separate Commerce Department report on U.S. construction spending during January showed activity was nearly unchanged from the upwardly revised December level and was below analysts’ expectations. Nevertheless, it remained strong as it posted a 3.2% increase from a year earlier.

January spending was led by the public sector, which increased 1.8%, compared to a 0.5% drop for the private construction. Overall residential construction spending moved up 0.2% during the month, but is 4.3% higher compared to January 2017.

Analysts at Wells Fargo seemed to brush aside the flat December to January performance as they noted the three-month annualize rate of new construction increased 8.4%.

“Although seasonality issues could be at work, this morning’s data is an early sign of continued near-term momentum in this sector,” Wells Fargo said.

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