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Manufacturing Activity Continues To Gain Ground In November

This morning the ISM Manufacturing Index unexpectedly rose from 56.4 to 57.3 in November, the highest reading since April 2011. The index was widely expected to decline amid projections of further restrictive domestic demand.

Headline ISM with 6month moving average

In the details, production rose from 60.8 to 62.8 and new orders improved from 60.6 to 63.6 in November. The backlog of orders gained from 51.5 to 54.0 and new export orders increased from 57.0 to 59.5. Even employment continued to gain momentum rising to 56.5 after falling more than two points to 53.2 in October. Imports also continued to expand in November albeit at a slightly slower pace, slowing from 55.5 to 55.0.

Bottom line: Despite expectations of a weakening consumer base amid lackluster job creation and still minimal income growth, the U.S. consumer remains afloat prompting U.S. manufacturers to continue to ramp up production. Improving international demand is also supporting heighted manufacturing activity not only in the U.S. but across the globe: Chinese , Euro-zone, and UK manufacturing output all grew more than expected in November. Still, we remain cautiously optimistic going forward into the remaining months of the year. Preliminary estimates show that while October spending was robust, supported at least in part by a growing wealth effect thanks to lower gas prices and heightened equity prices, November (and December) sales may take a hit. According to the National Retail Federation, spending across Black Friday weekend declined for the first time since 2009. With discounts coming earlier and earlier ahead of the holidays many retailers fear that shoppers frontloaded spending activity to the front of the fourth quarter leaving little holiday cheer from now until year end.

Also, in case you were distracted last week by the upcoming turkey holiday – as most of us were –the key economic releases were reported on Wednesday.

Durable goods orders fell 2.0% in October, in line with the median consensus on Bloomberg, but a significant decline nonetheless. Excluding transportation, durable orders fell 0.1% in October, significantly weaker than the +0.5% rise expected.

More importantly, however, non-defense capital goods orders ex-transportation, a proxy for business investment, fell 1.2% in October, down 8.8% on a three month annualized basis.
Defense capital goods orders fell 16.3% in October nearly reversing the 20.0% rise last month.

Cap goods orders ex-defense, ex-aircraft, YoY

Bottom line: Awash in cash, businesses remain sidelined, hesitant to invest in structures, equipment and certainly additional employees. Heading into the final quarter of the year, this morning's October durable orders report suggests what little momentum was gained at the end of the first half of the year is already losing ground.

Also Wednesday morning, initial jobless claims dropped 10k falling from 326k to 316k in the week ending November 23rd, pulling the 4-week average down to 332k.

Bottom line: Claims continue to take meaningful steps in the right direction. But from the Fed's point of view, lower job destruction, while a welcomed reprieve, is still a far cry from meaningful job creation.

Finally on Wednesday, consumer confidence rose from 72 to 75.1 in the final November reading.

Bottom Line: As we wrote in last week's edition of the Economic Insight, despite weak labor market conditions and tepid income growth, lower gas prices and higher equity markets are helping to keep consumer optimism afloat.

This week, the key economic release comes Friday with the November nonfarm payroll report. The median consensus expects a rise of 181k, down slightly from the outsized 204k rise in October.

Lindsey M. Piegza
Managing Director, Chief Economist

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