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Forward Indicators: When the going is good don't stop : Business

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Business Sentiment
Business sentiment also was highly positive throughout the year. Purchasing managers’ indexes in the manufacturing and service sectors from the Institute for Supply Management exhibited resilient optimism all year. Manufacturing PMI was 59.3 in November with the annual moving average at its highest in 14 years. New orders saw their strongest sustained surge this year since 2005 and employment had its best 12 months following the hiring recovery in 2010 and 2011.

Business sentiment in the much larger service sector was even more ebullient. September’s score of 61.6 in the index was the second highest in the 21 year history of the series. The 12 month moving average was the highest on record. Similar heights were reached by averages for new orders, the strongest in 13 years, and employment, also the most positive since the start of the series in July 1997.

The Small Business Optimism Index from the National Federation of Independent Business, a gauge that dates to January 1975 saw the highest result on record in August at 108.80 and the highest annual moving average in November at 106.72.

Business investment which had been active in the second and third quarters retreated somewhat in September and October. Non-defense capital goods minus aircraft, known for short as Cap-Ex, a closely watched proxy for business capital spending, dipped from its 0.7% 12 month moving average in July to 0.3% in October. This spending could recover if the inventory produced in the third quarter, which was a large part of GDP, moves to sale quickly.   

Annual gains in industrial production have risen sharply since the beginning of 2016. They reached 5.5% in September, the highest since the recession recovery in 2011 and posted the best 12 month moving average at 3.8 % in November.  

Housing has been the one exception to an overall strong economy. Existing home sales, about 90% of the US market, peaked in November 2017 at 5.72 million annualized units. Sales have fallen 10% to 5.15 million in September though they recovered to 5.32 million in November. Rising mortgage rates have taken their toll on home buyers. The rate of a 30-year fixed mortgage jumped more than a point from 4.16% in early December 2017 to 5.17% on November 9th. Rates have since eased to below 5%. Though 30-year fixed rates are well below historical averages the long period of extremely low cost borrowing may have conditioned purchasers to expect the exceptional in home purchase interest expenses. That expectation may take some time to disappear.

Of the three legs of the economy, consumption, business investment and government spending the first is growing at a healthy rate, the second will expand as long as the first does and the third should remain stable, as political gridlock takes over Washington.


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