Manufacturing Activity Should Pick Up in 2017, Even With Persistent Challenges

By Chad Moutray

There is a sense of optimism in the air as 2017 begins, especially since the election. Americans appear to be cautiously upbeat about growth moving forward, and equity markets have reached all-time highs, largely on a belief that the new administration will bring needed tax and regulatory reforms and a significant infrastructure package. At the same time, markets are also sensing that additional federal spending might bring about greater debt. Hence, the slumping bond market has sent yields up notably, even before the Federal Reserve raised interest rates in December. Likewise, the U.S. dollar has continued to strengthen — up more than 25 percent since June 2014 against major currencies — challenging manufacturers as they attempt to increase exports.

The strong dollar has been a major headwind to growth for manufacturers over the past two years, and as a result, production has been relatively stagnant over much of that time. U.S.- manufactured goods exports declined for the second straight year, as well, which is off 5.2 percent year-to-date through the third quarter. Nonetheless, there were signs of stabilization in the second half of 2016. Sentiment surveys have largely reported improved sentiment in recent months, with better demand and output data and modest growth. This includes the NAM 2016 Manufacturers’ Outlook Survey, with the percentage of respondents who are positive about their own company’s performance at nearly a two-year high.

Beyond manufacturing, consumers have begun to open up their pocketbooks once again after being very cautious at the beginning of 2016. In October, retail spending rose 4.2 percent over the past 12 months, its fastest year-over-year rate in nearly two years. At the same time, new housing starts jumped in October to 1,323,000 units at the annual rate, which is the highest level since August 2007. That pace will likely pull back in November,

but it continues movement in the right direction. Indeed, such growth should help provide a boost to economic growth moving forward.

The U.S. economy grew just 1.1 percent at the annual rate in the first half of 2016, but the second half of the year has looked somewhat better. Real gross domestic product rose 3.2 percent in the third quarter, and fourth-quarter growth should also hover near 3 percent. In the third quarter, consumer spending, net exports and inventory spending were bright spots. At the same time, drags on growth came from business spending on structures and residential investment, and overall nonresidential fixed investment continued to be more sluggish than desired.

I would expect real GDP to increase by 1.6 percent in 2016 despite the better data seen in the second half of the year. On the positive side, the current forecast is for 2.5 percent growth in 2017, with manufacturing production up 1.8 percent.

For much of last year, businesses – including manufacturers – were rather cautious about the economy. As a result, hiring and capital spending data were very weak. Through the first 11 months of 2016, manufacturing employment fell by 60,000 on net. Yet, job openings have remained quite elevated, and I would anticipate better hiring data moving into 2017, especially with stronger activity projected. Look for the unemployment rate to hover around 4.5 or 4.6 percent in 2017, with manufacturers adding around 80,000 workers.

Overall, even with persistent challenges, manufacturers remain upbeat about demand and production in 2017. After a couple years of significant headwinds, that news is entirely welcome.

Chad Moutray is chief economist for the National Association of

Manufacturers, where he serves as the NAM’s economic forecaster and spokesperson on economic issues. Prior to joining the NAM, Moutray was the chief economist and director of economic

research for the Office of Advocacy at the U.S. Small Business Administration from 2002 to 2010. Moutray has also been the dean of the School of Business Administration at Robert Morris College in Chicago, Illinois (now Robert Morris University of Illinois). 27

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