Economic Watch: Manufacturing Solid, Construction Disappoints

U.S. manufacturing activity in July remained solid, according to two reports issued on Aug. 1. Meanwhile, separate reports showed overall construction activity in the U.S. eased as consumer spending and personal incomes barely improved.

The Institute for Supply Management’s manufacturing index registered 56.3, down 1.5% from June but still well above a level the level of 50 that indicates expansion in this segment, which makes up about 12% of the U.S. economy.

This latest reading was just below a consensus estimate from analysts, but showed manufacturing is continuing to build on June’s gain with a return to expansion not seen since 2014, according to CNBC.

Comments from the survey of supply managers generally reflect expanding business conditions, with new orders, production, employment, backlog, and exports all growing in July compared to June, as well as supplier deliveries showing improving and inventories unchanged during the period.

Of the 18 manufacturing industries, 15 reported growth in July.

Meantime, a separate report on manufacturing showed a solid improvement in operating conditions while the upturn in business conditions was largely driven by marked and accelerated expansions in both output and new orders.

The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index registered 53.3 in July, up from 52 in June. Like the ISM report, a reading above 50 indicates expansion.

Production at U.S. manufacturers increased for the fourteenth month running in July while new orders received by US manufacturing firms grew at a solid pace, recovering from the nine-month low seen in June.

“The only real blot on the copybook was a decline in exports for the first time since last September,” said Chris Williamson, chief business economist at IHS Markit “However, although rising, the survey indices remain consistent with only very modest increases in comparable official data such as manufacturing output, durable goods orders and payroll numbers.”

He said the manufacturing sector remains stuck in a low gear, though is at least gaining momentum and will hopefully shift up a gear as we move through the second half of the year if demand continues to improve.

IHS Markit expects gross domestic product growth to accelerate to a near 3% annualized rate in the third quarter, fueled by gains in consumer spending and business investment, which should benefit manufacturing.

This follows a Commerce Department report from last Friday that showed the U.S. GDP increased at an annual rate of 2.6% in the second quarter of the year following a downwardly revised 1.2% pace in the first three months of 2017

These reports are in sharp contrast to a separate one from the Commerce Department on Tuesday that showed construction spending in the U.S. fell 1.3% in June from May’s revised level.

The performance was well short of a 0.4% increase forecast by a panel of economists and is the biggest decline since April.

Despite the month-over-month drop, the seasonally adjusted annual rate of $1,205.8 billion is 1.6% better than the level from June 2016. Also, in the first six months of 2017 the level is 4.8% higher than it was during the first half of 2016.

Lastly, another Commerce Department report released Tuesday showed personal income in June was relatively flat compared to the month before while consumer spending edged up just 0.1% following an upwardly revised 0.2% gain in May.

The so-called core personal consumption expenditures (PCE) price index increased 1.5% after advancing by the same margin in May. This is the Federal Reserve’s preferred measure of inflation, for which the central bank has set a target of 2%.

According to CNBC, data in the personal spending report was included in the second-quarter gross domestic product report published last week. It showed consumer spending increasing at a 2.8% annualized rate, which accounted for the bulk of the economy's 2.6% annual growth during the quarter.

U.S. consumers reduced spending at the end of the second quarter as income growth stagnated, according to chief economist at Stifel Fixed Income, Lindsey Piegza.

“As a consumer-based economy, the fastest way to arrest even today's modest pace of topline activity is to further restrain consumer activity,” she said. “As labor market conditions remain modest at best with still limited opportunities in terms of high-paying, full-time employment, shoppers will expectedly continue to tighten their purse strings, undermining the Fed’s expectations for a sizable ‘rebound’ in the near-term.”