US factory activity increased more than expected in December, boosted by a surge in new orders growth, in a further sign of strong economic momentum at the end of 2017.
The economy’s robust fundamentals were also underscored by other data yesterday showing construction spending rising to a record high in November amid broad gains in both private and public outlays. The Institute for Supply Management (ISM) said its index of national factory activity jumped to a reading of 59.7 last month from 58.2 in November.
A reading above 50 indicates growth in manufacturing, which accounts for about 12% of the US economy.
The survey’s production sub-index rose 1.9 points to a reading of 65.8 and a gauge of new orders shot up 5.4 points to 69.4. Manufacturers also reported an increase in export orders. A measure of factory employment, however, fell to 57.0 last month from 59.7 in November.
Manufacturing is likely to get a boost this year from a $1.5tn tax cut approved by the Republican-controlled US Congress last month. The overhaul of the tax code, the most sweeping in 30 years, slashed the corporate income tax rate to 21% from 35%. Business spending surged in anticipation of the corporate tax cuts.
Recent weakness in the dollar and a strengthening global economy are expected to buoy exports of US-made goods, which would underpin manufacturing.
US stock indexes hit new record highs, while prices of US Treasuries were mixed.
In a separate report yesterday, the Commerce Department said construction spending rose 0.8% to an all-time high of $1.257tn in November. Construction spending advanced 2.4% on a year-on-year basis.
The manufacturing and construction reports added to data ranging from the labour market to housing and consumer spending in sketching a robust picture of the US economy. Gross domestic product estimates for the fourth quarter are converging around a 2.8% annualised rate. The economy grew at a 3.2% pace in the third quarter. In November, spending on private residential projects soared 1.0% to the highest level since February 2007 after rising 0.3% in October.
The increase was in line with a recent jump in homebuilding and supports the view that housing would boost economic growth in the fourth quarter after acting as a drag on gross domestic product since the April-June period.
Spending on nonresidential structures rebounded 0.9% in November after falling 0.2% in the prior month.
Overall, spending on private construction projects climbed 1.0% in November to a record high. That followed a 0.3% increase in October. Outlays on public construction projects rose 0.2% in November after jumping 3.5% in October.
Spending on state and local government construction projects rose 0.7%. Federal government construction spending tumbled 4.8%.
Major automakers post lower December US sales
Most major automakers yesterday reported lower December US sales despite hefty consumer discounts, as higher interest rates and a new tax code cast uncertainty over their prospects in 2018.
Automakers had benefited in 2017 from the continued shift in consumer tastes away from passenger cars to far more profitable pickup trucks and SUVs, with final US new vehicle sales set to come in just under the record 17.55mn in 2016.
But industry observers expect sales to edge lower again in 2018 after a long bull run, thanks to a saturated market and rising rates that will boost consumers’ monthly payments and reduce their purchasing power.
Last month, the Federal Reserve raised rates a quarter of a percentage point to a range of 1.25% to 1.50% and maintained its forecast of three more increases in 2018 and 2019. It is unknown if sales will see any benefit from the sweeping tax overhaul passed by the Republican-controlled US Congress.
In a conference call with analysts, Ford Motor Co said the new tax code should be a “net positive” for the industry.
Consumer discounts aimed at moving vehicles off dealer lots will likely remain a concern for the industry. Discounts of more than 10% of a vehicle’s sticker price can hurt resale values, in turn weighing on new vehicle sales.
In December, auto consultancies JD Power and LMC estimated discounts had topped 10% for the 17th time in the last 18 months. General Motors Co reported a 3.3% drop in sales in December, driven by a decline in lower-margin fleet sales to government agencies and rental car companies.
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