This past week contained a number of interesting economic statistics, some encouraging and some concerning.
First. Last Tuesday, the Conference Board reported that consumer confidence fell by 3.9 percent in April (likely caused in part by the recent rise in gasoline prices).
Also last Tuesday, a report that got little attention in the press that was put out by the Commerce Department on GDP by Industry for 2006 showed that the manufacturing sector maintained its share of GDP last year at 12.1 percent…the same as its share in 2005. This is the first time in a decade (1995) that manufacturing did not become a smaller share of the economy. The reason: in real terms, growth in manufacturing value added (output) matched the rise in the overall GDP last year, 3.3 percent. At the same time, the inflation rate in manufacturing came in at 2.4 percent last year, which was slightly below the 2.9 percent inflation rate for the economy overall last year. This marks the 2nd consecutive year that the inflation rate in manufacturing was positive, this after 9 consecutive years of deflation.
On Wednesday, the Commerce Department reported that new orders for durable goods rose a strong 3.4 percent in March..the second rise in as many months. Importantly, new orders for non-defense capital goods (excluding aircraft) rose by a stronger 4.7 percent last month..the fastest monthy increase since September 2004. After declining four out of the prior five months, news of a sizable reobound in capital goods orders is a positive omen for business investment in the second quarter.
Finally, last Friday the Commerce Department released its advanced report on first quarter GDP growth, which showed that the economy grew at an annual rate of just 1.3 percent in the first quarter of 2007, marking the slowest quarterly pace in four years. Consumer spending rose a strong 3.8 percent thanks to the recent surge in real wages. Meanwhile, residential investment posted a 17 percent decline, marking the fourth consecutive double digit drop in housing. This downturn in housing continues to have a significant negative impact on some manufacturing sectors, such as wood products, furniture and nonmetallic mineral products, all of which posted falling output in the first quarter.
Business investment grew by a modest 2 percent in the first quarter, which is a reassuring turnaround from the 3.1 percent drop in the fourth quarter, especially for manufacturers who produce capital equipment. At the same time businesses inventory investment moderated for a second consecutive quarter. While this is a negative in GDP accounting, the drawdown in inventories is actually reassuring news. During the latter half of last year, manufacturing accumulated excessive inventories. Today’s report shows that firms are working down their inventories to more reasonable levels, which means that a more problematic inventory correction has been averted.
It is important to note that there will be several revisions to today’s advanced report card on GDP. there is a good chance that subsequent revisions will upgrade the performance of the economy in the first quarter, particularly in the area of trade. One of the more surprising features of today’s report was the 1.2 percent fall in exports in the first quarter, the first decline in exports in 15 quarters. Because March trade data has not yet been published, and the recent Institute for Supply Management report on manufacturing showed that export orders surged to a four-month high in March, export grow has a good chance of being revised upward. This should bring first quarter economic growth closer to 2 percent when all is said and done.
Up on the docket this coming week: construction spending on Monday, the ISM report on Manufacturing on Tuesday, total manufacturing orders on Wednesday, 1st quarter productivity on Thursday and April employment on Friday. Stay tuned!