Economic Watch: Manufacturing Continues Expanding, Construction Mixed

Two reports about the nation’s manufacturing sector during April showed it continued expanding, though they differed in just how much activity increased overall. Another report indicated activity in the construction sector was volatile.

The Institute for Supply Management’s Purchasing Managers’ Index registered 57.3, a decrease of 2 points from the March reading of 59.3. A reading above 50 indicates manufacturing is expanding, which it has done for 20 straight months.

The ISM's New Orders Index registered 61.2, a decrease from the March reading of 61.9, while the Production Index registered 57.2, a drop compared to the March reading of 61.

Comments from the panel of purchasing executives reflected continued expanding business strength, according to Timothy Fiore, chairman of the ISM Manufacturing Business Survey Committee.

“Demand remains strong, with the New Orders Index at 60 or above for the 12th straight month, and the Customers’ Inventories Index remaining at low levels,” he said. “The Backlog of Orders Index continued expanding, with its highest reading since May 2004, when it registered 63.”

Consumption, described as production and employment, continues to expand, but has been restrained by labor and skill shortages, Fiore said. “Inputs, expressed as supplier deliveries, inventories and imports, declined overall, due primarily to inventory reductions, likely led by supplier performance restrictions.”

He noted the Prices Index is at its highest level since April 2011, when it registered 82.6. In April, price increases occurred across 17 of 18 industry sectors.

“Demand remains robust, but the nation’s employment resources and supply chains continue to struggle,” Fiore said.

Analysts at TD Economics noted that although steel and aluminum tariffs ordered by President Trump have yet to take effect, with most advanced economy trade partners largely exempt for at least another month, they continue to drive anxiety among manufacturers about shortages of steel, driving up the price of the commodity.

“While the proposed tariffs announced by the U.S. administration remain more bluster than bite, they are acting to elevate economic policy uncertainty and denting business confidence both domestically and abroad,” said Fotios Raptis, senior economist at TD Economics.

IHS Markit: Manufacturing Growth Stronger

In contrast, a separate survey about manufacturing released by financial information services provider IHS Markit showed April data signaled a steep improvement in operating conditions across the U.S. manufacturing sector, hitting its highest level since September 2014.

Its final U.S. Manufacturing Purchasing Managers’ Index for April registered 56.5, up from 55.6 in March. Like the ISM survey, a reading above 50 shows manufacturing is expanding.

The pace of improvement was also well above the series trend. Quicker rates of output and new order growth and a greater deterioration in vendor performance contributed to the higher index reading.

Growth of goods production accelerated in April, with the rate of increase reaching the fastest since January 2017. Anecdotal evidence suggested the steep rise was due to greater new order volumes and the acquisition of new clients.

As the pace of new order growth continued to exceed that of output, the level of outstanding business increased again in April. At the same time, employment growth softened slightly, with the pace of job creation dipping to an eight-month low, albeit remaining solid.

Greater global demand for raw materials and the recently introduced tariffs were reportedly key factors behind greater cost burdens in April. Moreover, the rate of input price inflation accelerated to the sharpest in almost seven years, similar to the results seen in the ISM report.

The Markit survey suggests the economy has started the second quarter on a solid footing and sends an encouraging signal for gross domestic product (GDP) growth to accelerate after the modest 2.3% rate of expansion seen in the first quarter.

With inflows of new orders rising at an accelerated pace, greater input buying and business expectations regarding future production levels running at one of the highest levels seen over the past three years, there’s plenty of evidence to suggest strong growth will persist through May.

“The upturn is being led by large firms, with smaller companies trailing behind but nonetheless also seeing some of the best business conditions for three years,” said Chris Williamson, chief business economist at IHS Markit.

He said warning lights are being flashed in relation to inflation, however. With factories reporting the strongest rise in prices for nearly seven years, suppliers are hiking prices in response to surging demand, while tariffs and higher oil prices are also exerting upward pressure on costs.

“With the average price of goods leaving factories rising at the fastest rate since 2011, consumer price inflation looks set to accelerate,” Williamson said.

Construction Spending Falls From Month Before, Up From Year Earlier

Meantime, a report on construction spending in March showed a pull-back from the month before – but it was ahead of year earlier levels.

The Commerce Department reported construction spending was estimated at a seasonally adjusted annual rate of $1,284.7 billion, 1.7% below the revised February estimate but 3.6% higher than the March 2017 level. February’s level of construction was also revised higher to show a 1% increase rather than the originally reported 0.1% gain.

During the first three months of this year, construction spending amounted to $279.0 billion, 5.5% above the $264.5 billion for the same period in 2017.

The decline in the month-to-month performance was due to a downturn in spending on private construction, the biggest in seven years, which includes both residential and non-residential building. Public construction was nearly the same as it was the month before, though highway construction ticked higher by 1.2%.

“Construction spending data are known for their volatility, which should limit the surprise from a very unexpected 1.7% decline in March, far below Econoday's consensus range,” said analysts at Econoday.

They noted the housing sector is the weakness in the report. Residential spending was down 3.5% the month, including dips for both single-family homes, down 0.4%, and multi-units, down 2.7%.

“But the minus signs don't stop here with private non-residential spending, held down by continuing weakness in factory spending and a monthly downturn for commercial spending, falling 0.4 percent in the month,” Econoday said. “Today's data are a surprise for forecasters but are offset by a heavy upward revision to February…and may paradoxically build up expectations for a construction rebound in coming reports.”