Manufacturing's Value-Added Contributions to the US Economy
Monday, January 22, 2018
Posted by: Alyce Ryan
Written By: Chad Moutray, Ph.D., CBE, Chief Economist, NAM
AICC, through its membership in the Council of Manufacturing Associations, is pleased to present the "Monday Economic Report” from the NATIONAL ASSOCIATION OF MANUFACTURERS (NAM).
Real GDP grew 3.2 percent in the third quarter, boosted by strength in consumer and business spending and net exports and extending the 3.1 percent gain in the second quarter. According to new data from the Bureau of Economic Analysis, manufacturing added 0.24 percentage points to top-line growth in the third quarter, with mixed results for the sector. Real value-added output grew 2.0 percent for manufacturers in the third quarter, buoyed by a 7.5 percent growth rate for durable goods firms but weighed down by a 4.1 percent decline for nondurable goods businesses. Recent hurricanes hit the latter hard, especially in chemical and energy markets.
Overall, manufacturing gross output increased to $6.031 trillion in the third quarter, rising to its highest point since the fourth quarter of 2014. Those findings closely mirrored the value-added data for manufacturing, which rose to $2.252 trillion in the third quarter, another new all-time high. Value-added output for durable goods increased to $1.224 trillion, with nondurable goods value-added output rising to $1.028 trillion. The bottom line is that manufacturing accounted for 11.5 percent of real GDP in the third quarter, which remained the same from the prior report. Adjusting for inflation, there was also a new all-time high for real value-added output in manufacturing, up to $1.958 trillion in the third quarter. Those figures are in chained 2009 dollars, and the latest number edged out the previous peak of $1.955 trillion recorded in the third quarter of 2007, or just before the start of the Great Recession.
Manufacturers will get the first look at fourth-quarter real GDP growth on Friday, and if current estimates hold, the numbers should show the U.S. economy grew at least 3 percent for the third straight quarter. Strong consumer and business spending, combined with an improvement in exports, have helped expand the economy. The NAM is forecasting 3.6 percent growth in the fourth quarter, with 2.3 percent and 3.0 percent growth in 2017 and 2018, respectively.
Meanwhile, manufacturing production rose for the fourth straight month in December, edging up 0.1 percent. While this was slower than the 0.3 percent gain in November and while more broad-based increases are preferable, the data remain encouraging overall. Indeed, manufacturing production has risen 2.4 percent over the past 12 months, down from 2.5 percent in November, which was the best year-over-year rate since July 2014. Similarly, manufacturing capacity utilization matched November’s rate of 76.4 percent, a reading not seen since May 2008. In terms of the forecast, manufacturing production is projected to grow 2.2 percent in 2018, up from 1.7 percent in 2017.
At the same time, total industrial production jumped 0.9 percent in December, bouncing back after falling 0.1 percent in November. In addition to manufacturing, both mining and utilities production increased, up 1.6 percent and 5.6 percent, respectively. Utilities benefited from colder temperatures. Over the past 12 months, industrial production has risen 3.6 percent, its highest rate since November 2014. Mining and utilities output increased 11.5 percent and 1.8 percent year-over-year, respectively. In addition, capacity utilization soared from 77.2 percent to 77.9 percent, the strongest rate since February 2015.
Regionally, manufacturing activity remained solid in the New York and Philadelphia Federal Reserve Bank districts despite their composite measures easing somewhat in the January surveys. New orders, shipments, hiring and capital spending continued to expand at healthy rates, even with some softening, and business leaders began the new year with an optimistic outlook for the next six months. In some special questions in the Philadelphia Federal Reserve survey, 71.7 percent of respondents said there had been an increase in demand for manufactured products over the past several months, with nearly 70 percent anticipating higher production in the first quarter of 2018. On the downside, these reports also indicated an acceleration in input costs, both for January and moving forward.
Turning to the housing market, the latest releases provided mixed levels of comfort. New housing starts fell from 1,299,000 units at the annual rate in November to 1,192,000 units in December, a three-month low. The decline in activity in the latest data came entirely from a significant reduction in single-family starts, off 11.8 percent from 948,000 units to 836,000 units, with notable decreases in every region of the country except the West (which was unchanged). Poor weather might have played a role in diminishing activity in December. More encouragingly, single-family starts have increased 3.5 percent over the past 12 months, up from 815,000 units in December 2016.
Such news might be more discouraging if there was not an expectation that December’s softer data might be a temporary blip toward stronger figures in the coming months. Along those lines, homebuilder optimism remains highly elevated with a healthy outlook for sales over the next six months. In addition, housing permits were also solid, essentially unchanged but down from an annualized 1,303,000 units in November to 1,302,000 units in December. It was the third consecutive month with permits—a proxy of future activity—exceeding 1.3 million units, with December’s reading not far from the 1,316,000 figure in October, which was the highest point since August 2007. Housing permits have risen 2.8 percent year-over-year, up from 1,266,000 units in December 2016.
This week, new surveys from IHS Markit and the Richmond and Kansas City Federal Reserve Banks will report on the health of manufacturing; they are expected to indicate continued expansion of the sector. Other highlights this week include updates on durable goods orders and shipments, existing and new home sales, the international trade in goods, leading indicators and state employment.