Thursday, May 28, 2015

Manufacturing, construction spending on the rise

Economics in a nutshell: Solid manufacturing demand points to an improving economy despite the cautiousness of consumers.

Manufacturing, construction spending on the rise

Workers install a roof on a home under construction in Charlotte, N.C . (AP Photo / Chuck Burton)
Workers install a roof on a home under construction in Charlotte, N.C . (AP Photo / Chuck Burton)

INDICATOR: August Supply Managers' Manufacturing Index/July Construction Spending and CoreLogic Home Prices

KEY DATA: ISM: up 0.3 point; Orders: up 4.9 points/Construction Spending: up 0.6%/Home Prices (Monthly): up 1.8%; Year-over-Year: up 12.4%

IN A NUTSHELL: "Solid manufacturing demand points to an improving economy despite the cautiousness of consumers."

WHAT IT MEANS: The first of the August numbers is in and it is very good. The Institute for Supply Management's manufacturing index rose slightly but that was better than expected. With household spending looking iffy, there was growing belief the manufacturing sector would slow. That didn't happen as new orders, including both imports and exports, surged. While the rate of production growth eased, the index is still the second highest in over two years. The strong increase in demand has slowed the run off of backlogs but it is still happening. As for payrolls, firms continue to hire though at a slightly less aggressive pace. Nonetheless, that bodes well for the manufacturing portion of the employment report, which will be released on Friday.

Two other reports indicated that the economy started off the quarter doing better than it had been during the spring. Housing prices surged in July, according to CoreLogic. The gains were consistent with other indices but this first reading for July points to continued strong price increases. That should move more homeowners above water, increasing the number of homes on the market and sales as well. Construction spending rose solidly with only the public sector pulling back. Not much of a surprise there. Austerity means just that, less spending and with sequestration being a mindless way to cut, needed projects are being axed.

MARKETS AND FED POLICY IMPLICATIONS: Households are not out there shopping a whole lot but that has yet to cause a huge slowdown in growth. Of course, when you are not growing robustly, that is not saying a whole lot. But if consumption is modest, we need other sectors to step up to keep the economy from faltering and it does look like manufacturing, construction and residential real estate are doing just that. And with jobless claims at levels consistent with solid payroll gains, investors could be hopeful that Friday's employment report will be pretty good. I think that will happen. But if we get good numbers, it is not clear what will happen with the markets. Will economic fundamentals or Fed concerns drive prices? A healing labor market will likely point to higher interest rates no matter when the FOMC ultimately decides to start to slow down its asset purchases. Even the current 2.90% ten-year note is not consistent with solid economic growth and less Fed. While equity prices could be hurt by rising rates since that would imply a slower growing housing market, ultimately, the shift to looking more at the economy and less at the Fed will occur. When that happens, and I have no idea of the timing, then good numbers should finally be viewed as positive for equities but negative for bonds. Until then, it is anybody's guess how the markets will react to any given economic number.

About this blog
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm in Bucks County. He advises companies across the country on the risks and opportunities that economic developments may have on the organization’s operating environment. An accomplished public speaker, Joel’s humor and unique ability to make economics understandable have brought him a wide following. Reach Joel L. at joel@naroffeconomics.com .

Joel L. Naroff