- INDICATOR: December Manufacturing Activity and November Home Prices and Construction
- KEY DATA: ISM (Manufacturing): +1.5 points; Orders: +7.2 points/ CoreLogic Home Prices (monthly): +1.1%; Year: +7.1%/ Construction: +0.9%
- IN A NUTSHELL: “The economy is ending the year on a high note with even the manufacturing sector showing signs of faster growth.”
WHAT IT MEANS: It appears that President Obama will be leaving his successor with a pretty good economy. (He can only wish the same could have been said of his predecessor.) Manufacturing has been the weakest link in the economy for a couple of years now, but that appears to be changing. The Institute for Supply Management’s reading of manufacturing activity was up nicely in December, hitting its highest level in two years. New orders surged and that led to a jump in production. Twelve industries reported increases while only four were down. There was even some additional hiring. That bodes well for Friday’s employment report. Backlogs are still disappearing, though that should change with the growing orders.
On the housing front, home prices are rising even more sharply. CoreLogic reported that their measure of housing costs rose sharply in November. The 7.1% jump from November 2015 was the largest since spring 2014. This acceleration in price increases could continue for a while, as the rise in mortgage rates seems to be forcing people off the fence, as expected. But the stronger demand is facing limited inventory, which is a recipe for price inflation.
The construction sector is also improving as activity was up across the board. Be it the private or public sector, residential or nonresidential, the value of construction put in place rose in November.
MARKETS AND FED POLICY IMPLICATIONS: The economy is in pretty good shape. Yes, it would be nice if growth was in the 3% range, but with the labor force and productivity stagnant, that would be hard to reach for any extended period. Realistically, 2.5% - 2.75% in 2017 would be really good and if it is faster, great. That would be possible if the economy is hyped by tax cuts and spending increases, but it is more likely the impacts will not be felt until the second half of the year and even more so in 2018.
Also, there are risks to growth such as rising interest rates and energy prices. Ending the ACA may sound good but it could harm health care spending, slowing that sector. And, of course, a trade war would be really damaging. But that is for our politicians to sort out.
For now, what we can say is that conditions are good and getting better. Investors should be pleased with today’s numbers, but they are looking ahead to major tax breaks. As long as there is hope that will happen, the markets should hold up. But eventually, budget reality has to enter the equation and the implications for the deficit are troublesome. I guess we will find out soon if the last seven years of spending controls and budget deficit reductions was a financial philosophy or a political strategy.
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.
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