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NAM Weekly Economic ReportApril 14, 2014
In the minutes of its March Federal Open Market Committee (FOMC) meeting, the Federal Reserve Board highlighted the negative impact of weather events on first-quarter growth. Winter storms hampered business investment, construction, consumer spending and manufacturing production. Nonetheless, the Federal Reserve still anticipates real GDP growth of between 2.8 and 3.0 percent in 2014, faster than last year’s 1.9 percent expansion. While this reflects a slight downgrade in the outlook for the year from the last forecast, it continues to suggest that the economy will regain its momentum moving forward. The Federal Reserve also predicts growth of 3.0 to 3.2 percent in 2015. The International Monetary Fund’s World Economic Outlook, which was released last week, mirrors these figures in its own forecasts for the United States.
The highlight of the FOMC minutes was the background discussion among participants regarding future monetary policy actions. The Federal Reserve largely feels that the U.S. labor market has a lot of “slack” in it, which is not reflected by the 6.7 percent unemployment rate. Despite improvements in the unemployment rate, weaknesses continue, with the participation rate near 30-year lows and high rates of both underemployment and part-time employment. While some FOMC members feel there has been sufficient economic progress to warrant less stimulative monetary policy measures, the majority view the current labor market as sufficiently weak enough to continue the Federal Reserve’s highly accommodative actions for the foreseeable future. The Federal Reserve will continue to reduce its long-term asset purchases, but short-term interest rates will likely not rise until next year at the earliest. Inflationary pressures remain modest, providing the Federal Reserve with some wiggle room to do its stimulative measures.
The most recent Job Openings and Labor Turnover Survey (JOLTS) data suggest the labor market for manufacturers remains soft. The number of manufacturing job openings declined for the third month in a row in February. Postings have been lower since peaking in November, and the December to February time frame mirrored the weather-related weaknesses seen in other data. Net hiring was also lower in those three months, with 2,000 more separations than hires in February. Still, the manufacturing sector has added an average of 12,125 workers each month since August, mirroring the uptick in demand and production that we have seen since that point. We are hopeful that hiring begins to accelerate again in the coming months.
Looking at the sentiment surveys last week, businesses and consumers were more upbeat. The California Manufacturing Survey from Chapman University reported rising expectations for new orders and production for the second quarter, but with employment growth remaining soft. Both durable and nondurable goods activity were anticipated to expand modestly in the current quarter. Likewise, small business owners in the National Federation of Independent Business’ (NFIB) survey were more optimistic about future sales, and those saying the next three months were a good time to expand edged marginally higher. Still, earnings remained weak, and the percentage suggesting they would bring on more workers moved lower. The University of Michigan and Thomson Reuters also noted improved consumer sentiment, a welcome gain after three months of dampened enthusiasm.
This week will be a busy one on the economic front, specifically with new reports on housing starts and industrial production. We hope to move beyond the weather-related weaknesses from earlier this year, and March’s manufacturing output numbers are expected to show a continued rebound. Similarly, housing starts moved slightly higher in February, but permits surpassed the 1 million mark for the first time since November; yet, rising interest rates, financial challenges for potential buyers and low inventory remain concerns. Other highlights this week include new data on consumer prices, leading indicators, manufacturing surveys from the New York and Philadelphia Federal Reserve Banks and state employment.
Chad MoutrayChief EconomistNational Association of Manufacturers
P.S. – I am excited to announce that General Electric Chief Economist Marco Annunziata will prepare the Monday Economic Report for April 21. This will give us an opportunity to gain insights from a well-respected economist with on-the-ground expertise in the sector.
Last Week's Indicators:
(Summaries Appear Below)
Monday, April 7Consumer Credit
Tuesday, April 8California Manufacturing SurveyJob Openings and Labor Turnover SurveyNFIB Small Business Survey
Wednesday, April 9FOMC Minutes
Thursday, April 10None
Friday, April 11Producer Price IndexUniversity of Michigan Consumer Sentiment
This Week's Indicators:Monday, April 14Business Inventories
Tuesday, April 15Consumer Price IndexNAHB Housing Market IndexNew York Fed Empire State Manufacturing Survey
Wednesday, April 16Federal Reserve Board’s Beige BookHousing Starts and PermitsIndustrial Production
Thursday, April 17MAPI Manufacturing SurveyPhiladelphia Fed Manufacturing Survey
Friday, April 18Conference Board Leading IndicatorsState Employment Report
Summaries of Last Week's Economic Indicators
California Manufacturing SurveyManufacturing activity in California is expected to improve in the second quarter, according to the A. Gary Anderson Center for Economic Research at Chapman University. The composite Purchasing Managers’ Index (PMI) increased from 56.2 in the first quarter (January) to 58.5 in the second quarter (April). Manufacturers largely anticipate increased paces for production (up from 60.5 to 64.4) and new orders (up from 55.8 to 60.9). Roughly half of survey respondents said they thought sales and output would be higher in the second quarter.
Employment growth remained soft (down from 55.6 to 53.3). Looking at specific responses, 24.1 percent felt their employment levels would increase in the second quarter, with 11.4 percent saying they would be lower. However, the bulk of responses (64.5 percent) said their hiring levels would be unchanged for the quarter. Net hiring was positive, albeit only modestly so.
The PMI for nondurable goods (up from 56.7 to 58.2) advanced more than for durable goods industries (up from 58.1 to 58.3). Each was lower than a year ago, however, when durable and nondurable goods firms had index values of 60.3 and 60.9, respectively.
Overall, the data show that manufacturers in California see demand and production picking up this quarter. However, the pace of growth remains below the level observed in mid-2013. Moreover, manufacturers in Orange County were less positive this quarter than the last (down from 64.1 to 58.5) on slower new order and employment growth.
Consumer CreditThe Federal Reserve Board reported that U.S. consumer credit outstanding rose 6.4 percent in February. Total consumer credit was $3.130 trillion, with $854.2 billion in revolving credit and $2.275 trillion in nonrevolving credit.
Over the past 12 months, consumer credit has risen 5.6 percent, but that tells only part of the story. Nonrevolving credit, which includes auto and student loans, increased 7.7 percent over that time frame. However, revolving credit, which includes credit cards and other credit lines, was up just 0.5 percent. In general, it suggests that Americans have been hesitant to use their credit cards when making purchases since the recession. Along those lines, revolving loans have declined in the first two months of 2014, down 0.3 percent from $856.8 billion in December.
Overall, growth in consumer credit has stemmed largely from increases in nonrevolving debt, especially for auto and student loans. For instance, student and motor vehicle loans increased 8.3 percent and 8.5 percent, respectively, using non-seasonally adjusted data in 2013.
FOMC MinutesThe Federal Reserve Board released the minutes of its March 18–19 FOMC meeting. While we already had the statement from this meeting, the minutes allow us to know the inner deliberations of the committee. Participants debated, for instance, the degree to which there was “slack” in the labor market, with some feeling the reduced unemployment rate masked continuing weaknesses (e.g., low participation rate, high rates of underemployment and part-time employment), while others felt that some of these weaknesses mirrored larger demographic trends.
FOMC members also spent some time focusing on the impact of global events on the U.S. economy. The recent deceleration in real GDP growth in China “had already put some downward pressure on world commodity prices, and a couple of participants observed that a larger-than-expected slowdown in economic growth in China could have adverse implications for global economic growth.” Participants also discussed the events in the Ukraine and the negative impact of possible geopolitical events.
One of the more controversial—in some circles—aspects of the March FOMC meeting was the dropping of the 6.5 percent target in its forward guidance. That target had been part of its guidance since the December 2012meeting. There were discussions about replacing the 6.5 percent target with another number. (Narayana Kocherlakota, the president and CEO of the Federal Reserve Bank of Minneapolis, dissented from the final statement and later suggested that he felt the target should have been 5.5 percent.) In the end, the majority of participants voted to approve the switch from a “quantitative” to a “qualitative” target, which would be data dependent but still provide the FOMC with flexibility to act when it needed to.
The FOMC also voted to continue tapering its long-term and mortgage-backed security purchases from $65 billion each month to $55 billion. The minutes go on to say the following: “Members again judged that, if the economy continued to develop as anticipated, the committee would likely reduce the pace of asset purchases in further measured steps at future meetings.”
In general, FOMC members wanted the public to know the Federal Reserve would maintain a highly accommodative stance on monetary policy for the foreseeable future. While tapering of long-term assets will continue at future meetings, short-term interest rates will stay near zero throughout 2014, and it is likely the Federal Reserve will not start to increase the federal funds rate until sometime in 2015.
Job Openings and Labor Turnover SurveyThe Bureau of Labor Statistics reported that manufacturing job openings declined for the third month in a row in February. After peaking at 298,000 in November, the number of job postings in the sector has continued to move lower, with 250,000 openings recorded in February. Weather has impacted overall economic activity negatively over much of this period, and it is possible that winter conditions hampered employment growth as well. Nonetheless, this trend reverses what had been upward movement from May to November of last year (up from 203,000 to 298,000).
Net hiring has followed a similar pattern and was also lower in February for the third straight month. Manufacturers added 234,000 workers in February, down from 244,000 in January. At the same time, the number of separations—including layoffs, quits and retirements—fell from 242,000 to 236,000 for the month. As such, net hiring (or hires minus separations) shifted from a net gain of 2,000 in January to a net loss of 2,000 in February. This was well below the net hiring rate of 41,000 in November, illustrating the current softness in the labor market.
In contrast, employment numbers in the larger economy improved in February. Total job openings increased from 3,874,000 in January to 4,173,000 in February. This was the fastest pace for job postings since January 2008. Likewise, net hiring in the month in the nonfarm business sector rose from a rather weak 97,000 in January to 203,000 in February. While manufacturers hired fewer workers during the month, there were notable increases for retail trade, leisure and hospitality and government.
NFIB Small Business SurveyThe NFIB reported that small business confidence in March recovered some of February’s decline. The Small Business Optimism Index increased from 91.4 in February to 93.4 in March, but it had fallen from 94.1 in January. Sentiment among small firm owners has generally moved higher over the past year; however, the government shutdown, weather and persistent uncertainties have dampened optimism at times.
Despite the higher headline figure, the underlying data were largely mixed. On the positive side, the percentage of firms saying the next three months were a good time to expand increased from 6 percent to 8 percent, returning it to the level recorded in January but still below December (10 percent). Of those saying it was not the right time for expansion, the economy was the primary reason.
Still, poor sales—a proxy for the current economy—was not listed as the “single most important problem.” Instead, the top concern was a tie between taxes and “red tape,” with each cited by 21 percent of respondents. This was followed by poor sales (14 percent), the cost of insurance (10 percent) and the quality of labor (9 percent). The net percentage of respondents saying they expect higher sales in the next three months rose from 3 percent to 12 percent, reflecting a pickup in sentiment.
Nonetheless, earnings figures remain weak overall, and employment and capital spending data were less positive. Small business owners said that hiring slightly declined in March, with the net percentage planning to bring on new workers in the next three months down from 12 percent in January to 7 percent in February to 5 percent in March. We hope the uptick in optimism on sales will reverse this trend in the coming months. Meanwhile, capital spending has edged marginally lower, with capital expenditure plans essentially unchanged so far this year.
Producer Price IndexThe Bureau of Labor Statistics reported that producer prices for goods and services at the final demand level rose 0.5 percent in March, the fastest pace in nine months. Behind this figure, there were a number of items to note. First, the increase in producer prices stemmed entirely from increased costs in the service sector (up 0.7 percent), with final demand producer prices for goods unchanged from February.
Second, at the goods level, producer prices were flat because a rise in food prices (up 1.1 percent) was essentially offset by a decline in energy prices (down 1.2 percent). Energy price decreases in March followed sharp spikes in January and February due to increased household heating costs. Meanwhile, food prices have risen significantly for three straight months, reversing the downward trend seen throughout much of last year. In March, the increase in food prices mainly came from meats and dairy products.
The bottom line was that pricing pressures continue to be quite minimal. Year-over-year growth in producer prices was 1.2 percent in March, up from 0.6 percent in February. Excluding the highly volatile areas of food and energy, core prices at the producer level rose 1.2 percent over the past 12 months, unchanged from the month before. As such, core input price growth remains below the Federal Reserve’s stated target of 2 percent, freeing the Federal Reserve to continue pursuing stimulative measures.
University of Michigan Consumer SentimentThe University of Michigan and Thomson Reuters released preliminary estimates for their Index of Consumer Sentiment. The main index rose from 80.0 in March to 82.6 in April, essentially back to where it was in December. Note that a final number will come out on April 25.
Poor weather conditions and anxieties about the weaker labor market dampened enthusiasm during the past three months, and as such, it was nice to see perceptions improve again. Attitudes about current (up from 95.7 to 97.1) and future (up from 70.0 to 73.3) conditions were both higher. However, the headline index remains well below 100, signifying that the public still has concerns about economic and income growth.