The National Association of Manufacturers (NAM) creates insightful weekly economic reports. As a member of the NAM Council of Manufacturing Associations, HI has received permission to post these reports as a service to our members and other interested parties. HI members have access to a broad array of economic data - some made publicly available, like this report, and others available exclusively to members on a free or low-cost subscription basis. For a complete listing of HI member services, please visit www.Pumps.org/Benefits or contact us at Membership@Pumps.org. For information on NAM, visit their website at www.nam.org.
NAM Weekly Economic ReportNovember 24, 2014
Central banks around the world have acted recently in an attempt to lift a sagging global economy. On Friday, for instance, the European Central Bank (ECB) announced that it has begun purchasing asset-backed securities, finally beginning a quantitative easing program that some have long sought. Earlier in the day, ECB President Mario Draghi said that “we will do what we must” to spur economic growth. In addition, the People’s Bank of China surprised markets by cutting interest rates on Friday. These actions followed the Bank of Japan’s announcement on October 31 that it would increase the amount of its monthly asset purchases.
Economic data released last week showing stalled growth in both Asia and Europe helped to support these new monetary policy steps. The HSBC Flash China Manufacturing Purchasing Managers’ Index (PMI) fell to neutral in November, its weakest reading since contracting in the first five months of 2014. Indeed, output contracted for the first time since May. The data were soft in Europe as well. The Markit Flash Eurozone Manufacturing PMI declined to 50.4 in November, with new orders contracting for the third straight month.Real GDP increased 0.2 percent in the third quarter, suggesting the stronger growth continues to remain elusive in the Eurozone. On a year-over-year basis, the European economy has grown 0.8 percent. Meanwhile, Japanese GDP declined for the second straight quarter, suggesting that its economy has slipped back into a recession.
These worldwide moves stand in stark contrast to what is happening in the United States. The Federal Reserve Board ended its quantitative easing program at its October 28–29 meeting, and there is an expectation that it will begin to raise short-term interest rates in either the second or third quarter of 2015. In the minutes to the latest Federal Open Market Committee (FOMC) meeting, participants noted improvements in the U.S. economy, including in the labor market, but they also were concerned about the global outlook. These worries, however, were not enough for FOMC participants to deviate from a path toward normalization. The Federal Reserve has certainly benefited—as have consumers and businesses—from reduced pricing pressures, with falling energy costs pushing down annual inflation rates.
The manufacturing data released last week were mostly positive. Sentiment surveys from the Kansas City,New York and Philadelphia Federal Reserve Banks found that activity picked up in November in the sector, with stronger demand and output cited. Of these reports, the standout was the responses to the Philadelphia survey, with its composite index measuring an off-the-chart 40.8 for the month. You would have to go back two decades to find a higher figure (December 1993’s 41.2 reading). That optimism carried through to the forward-looking indices, with manufacturers generally upbeat about the next six months in each regional survey.At the same time, manufacturing production rose 0.2 percent in October. While output in the sector has risen 3.4 percent year-over-year, the pace has decelerated over the past three months. Capacity utilization for manufacturers has also edged lower over this time frame, down from 77.8 percent in July to 77.2 percent in October. As such, manufacturing production has been softer this autumn than we might prefer. The global environment might account for some of that weakness, but there are also signs that domestic demand has been more cautious than desired.
In terms of construction, the most recent housing market data were mixed, but the sector shows signs of improvement longer term. New housing starts decreased from 1,038,000 annualized units in September to 1,008,000 units in October. The decline, however, came from the highly volatile multifamily segment, with single-family starts up for the month and year-over-year. In addition, housing permits were also higher, which bodes well for future activity. I continue to predict housing starts solidly in the 1.1 million unit range by the beginning of 2015, and the pace of housing permits in this report puts this outlook clearly within range. Homebuilders were also more upbeat in November, with the Housing Market Index now exceeding 50 for five straight months.
This week, we will get a revised figure for third-quarter real GDP growth on Tuesday. It had originally been estimated to be 3.5 percent, with the current consensus calling for a revision to 3.3 percent growth. In addition, the Dallas and Richmond Federal Reserve Banks will release their November manufacturing surveys on Monday and Tuesday, respectively. Other highlights include consumer confidence, durable goods orders and personal income and spending. There will be no economic releases on Thursday and Friday due to the Thanksgiving holiday.
Chad MoutrayChief EconomistNational Association of Manufacturers
P.S.: If you have not already done so, please take a moment to complete the latest NAM/IndustryWeekSurvey of Manufacturers. This 20-question survey helps us to gauge how manufacturing sentiment has changed since September’s survey. It also includes some special questions on reactions to the midterm elections and various policy issues. To complete the survey, click here. Responses are due by Wednesday, November 26. As always, all responses are anonymous.
Monday, November 17Industrial ProductionNY Fed Empire State Manufacturing Survey
Tuesday, November 18NAHB Housing Market IndexProducer Price Index
Wednesday, November 19FOMC Minutes (October 28–29 Meeting) Housing Starts and Permits
Thursday, November 20Conference Board Leading IndicatorsConsumer Price IndexMarkit Flash PMIs for China, Japan, Eurozone and the United StatesPhiladelphia Fed Manufacturing Survey
Friday, November 21Kansas City Fed Manufacturing SurveyState Employment Report
Monday, November 24Chicago Fed National Activity IndexDallas Fed Manufacturing Survey
Tuesday, November 25Conference Board Consumer ConfidenceGross Domestic Product (Third-Quarter Revision)Richmond Fed Manufacturing Survey
Wednesday, November 26Durable Goods Orders and ShipmentsPersonal Income and SpendingUniversity of Michigan Consumer Sentiment (Revision)
Thursday, November 27THANKSGIVING
Friday, November 28None
Summaries of Last Week's Economic Indicators
Meanwhile, the Coincident Economic Index (CEI), which assesses current conditions, rose 0.1 percent. In this measure, reduced industrial production in October served as a slight drag on the CEI. However, manufacturing production was slightly higher as described below. The other three subcomponents of the CEI made positive contributions for the month, including nonfarm payrolls, personal income and manufacturing and trade sales.Consumer Price IndexThe Bureau of Labor Statistics reported that consumer prices were unchanged in October. Over the past 12 months, consumer inflation has risen 1.7 percent. In addition, core prices, which exclude food and energy costs, were up 1.8 percent year-over-year. As such, core inflation continues to remain below the Federal Reserve’s stated goal of 2 percent at the annual rate, which it has now done for 20 consecutive months. Overall, these trends mirror the producer price index data (see below).
In particular, Americans continue to benefit from falling energy prices, which declined 1.9 percent in October and have dropped in each of the past four months. Since peaking in June, total consumer energy costs have decreased 5.4 percent. Indeed, we have seen the average price of regular gasoline decline from $3.64 a gallon during the week of June 23 to $2.86 a gallon this week, according to the Energy Information Administration.
In contrast, food prices rose 0.1 percent in October, increasing 3.1 percent year-over-year. As with previous months, the largest monthly price gains were for dairy products and fruits and vegetables. Lower meat prices in October somewhat offset these increases, although meat costs have jumped significantly over the past 12 months.
Meanwhile, excluding food and energy items, consumer prices rose 0.2 percent. There were higher prices for medical care, new motor vehicles, shelter expenses and transportation services, with reduced costs for apparel and used cars and trucks.Housing Starts and PermitsThe Census Bureau and the U.S. Department of Housing and Urban Development reported that housing data were mixed in October, but the overarching trend line remains positive. New housing starts eased somewhat, down from a revised 1,038,000 annualized units in September to 1,008,000 in October. Yet, housing permits—a proxy of future activity—rose from 1,031,000 to 1,080,000 units. That was the highest level of residential permitting since June 2008. In addition, new starts have also edged higher, up from an average of 955,167 in the first half of 2014 to 1,027,000 in the four months so far in the second half.
Breaking the October data down further, the decline in housing starts stemmed from a drop in the highly volatile multifamily segment, down from 370,000 units at the annual rate to 313,000. The good news was that single-family starts continued to improve, up from 668,000 to 696,000. Moreover, single-family activity has risen 15.4 percent year-over-year.
Meanwhile, housing permits were higher for both single-family (up from 631,000 to 640,000) and multifamily (up from 400,000 to 440,000) units in October. Permitting has grown more modestly over the past 12 months than seen in the starts figures, up 1.2 percent year-over-year or 2.4 percent for single-family units.
While residential construction activity has been softer than desired since mid-2013, the data show that the housing market has started to stabilize and improve. I continue to predict housing starts solidly in the 1.1 million unit range by the beginning of 2015, and the pace of housing permits in this report puts this outlook clearly within range. An improving economy and historically low interest rates should help to spur more activity. According to Freddie Mac, the average 30-year fixed mortgage rate last week was 3.99 percent.Industrial ProductionManufacturing production rose 0.2 percent in October. At the same time, output in the sector was revised down from an original estimate of 0.5 percent in September to 0.2 percent. As such, manufacturing production has been weaker over the past three months than desired. Capacity utilization among manufacturers has also edged lower over this time frame, down 77.8 percent in July to 77.2 percent in October.
On a year-over-year basis, manufacturing production has risen 3.4 percent since October 2013. That indicates modest growth over the past 12 months, and yet, it also reflects a deceleration in the year-over-year pace since peaking in July at 4.9 percent.
Looking specifically at October’s manufacturing data, durable and nondurable goods production increased 0.1 percent and 0.3 percent, respectively. Sectors with the largest monthly gains included machinery (up 1.3 percent), plastics and rubber products (up 0.8 percent), chemicals (up 0.7 percent), computer and electronic products (up 0.7 percent), furniture and related products (up 0.6 percent) and apparel and leather (up 0.5 percent).
At the same time, motor vehicles and parts (down 1.2 percent), nonmetallic mineral products (down 1.2 percent), aerospace and miscellaneous transportation equipment (down 0.6 percent), electrical equipment and appliances (down 0.4 percent), paper (down 0.2 percent) and primary metals (down 0.2 percent) experienced reduced output in October.
Meanwhile, overall industrial production declined 0.1 percent in October, falling for the second time in the past three months. The consensus expectation had been for an increase of around 0.2 percent. While manufacturing output was higher for the month, production was lower for mining (down 0.9 percent) and utilities (down 0.7 percent). Total capacity utilization decreased from 79.2 percent in September to 78.9 percent in October.
In conclusion, surveys suggest that manufacturers remain mostly upbeat in their outlook for the next few months. Yet, the October industrial production data show that output in the manufacturing sector has been softer this autumn than we might prefer. While the sector continues to expand modestly, it is hard not to be disappointed with activity levels over the past three months.
Kansas City Fed Manufacturing SurveyThe Federal Reserve Bank of Kansas City reported that manufacturing activity picked up somewhat in its district in November. The composite index rose from 4 in October to 7 in November, its highest level in four months. Along those lines, production (up from 3 to 9), shipments (up from zero to 7) and employment (up from 6 to 9) improved for the month. In addition, export sales (up from -9 to 8) were positive for the first time since April. Yet, growth remains far from robust, with new orders (down from 2 to 1) decelerating for the fourth consecutive month and just barely above neutral.
Most of the sample comments mentioned the difficulty in obtaining new workers. In addition to losing skilled talent to other companies, they also discussed rising health care costs due to the Affordable Care Act. Beyond these issues, there were renewed worries about upcoming weather challenges, something that hurt manufacturers last year. One respondent said, “The early onset of extremely cold weather will decrease our winter sales. We plan to build inventory in anticipation of a strong spring demand.”
Still, the outlook for the next six months looks favorable. Roughly half of the respondents anticipate increased production and shipments, with 37 percent planning to add workers. The forward-looking composite index rose from 17 to 22, its second-highest reading of the year. Expected capital spending (down from 21 to 15) eased a bit, but investment plans remain relatively strong, with 29 percent predicting increases over the coming months.Markit Flash PMIs for China, Japan, Eurozone and the United StatesThe HSBC Flash China Manufacturing PMI fell to neutral (50) in November, down from 50.4 in October. This was the weakest reading since Chinese respondents noted contracting activity levels from January through May. Indeed, output contracted once again (down from 50.7 to 49.5) for the first time since May. Hiring (down from 48.9 to 48.4) was also negative for the 13th straight month. On the positive side, new orders (up from 51.2 to 51.4) edged slightly higher, and exports (down from 51.7 to 50.5) continued to expand, albeit at a much slower pace.
The data were soft in Europe as well. The Markit Flash Eurozone Manufacturing PMI declined from 50.6 to 50.4. To illustrate how much Europe’s economy has slowed recently, the sector’s PMI values have averaged 50.5 over the past four months (August through November), with an average of 52.8 for the first seven months of 2014. Like China, the underlying November data were mixed. New orders (down from 49.5 to 49.1) contracted for the third straight month. Yet, output (up from 51.5 to 51.8) rose slightly, with modest expansion. Employment growth (down from 50.5 to 50.1) essentially stalled.
Meanwhile, the Markit Flash U.S. Manufacturing PMI declined from 55.9 to 54.7, its lowest level since January’s weather-related issues. The softer data stemmed largely from lower export sales (down from 51.2 to 48.1), with weaknesses abroad challenging U.S. manufacturers’ overseas sales. Some of the other key data points were also off somewhat, but each remains at relatively decent rates of growth. For instance, new orders (down from 57.1 to 55.2) and output (down from 57.8 to 55.6) continue to reflect moderate expansion. In addition, hiring (up from 54.9 to 55.1) picked up slightly for the month. According to Markit Chief Economist Chris Williamson, the data “point to GDP growth [in the U.S.] slowing to around 2.5 percent in the fourth quarter.”
The other main data point out last week came from Japan. Despite the fact that Japanese GDP declined for the second straight quarter (down 1.6 percent year-over-year in the third quarter), preliminary data on manufacturing activity reflect some strength. The Markit/JMMA Flash Japan Manufacturing PMI dropped from 52.4 to 52.1; yet, the output measure (up from 51.3 to 53.5) rose to its highest level since March. NAHB Housing Market IndexThe Housing Market Index from the National Association of Home Builders (NAHB) and Wells Fargo increased from 54 in October to 58 in November. The index has now exceeded 50—the point at which more builders are positive than negative in their outlook—for five straight months. As such, homebuilders are more optimistic than earlier in the year, with the index bottoming out at 45 in May.
The NAHB report shows progress in November in every region of the country, with the largest improvements in the Northeast and West. More importantly, homebuilders are upbeat about activity over the next six months, with the forward-looking measure of single-family sales up from 64 to 66. Indeed, NAHB Chief Economist David Crowe said, “We expect the momentum to continue into 2015.”NY Fed Empire State Manufacturing SurveyThe Empire State Manufacturing Survey reported a pickup in activity again in November after slowing somewhat in October. The New York Federal Reserve Bank’s composite index of general business conditions rose from 6.2 in October to 10.2 in November. While this figure reflects continued expansion in the sector, it is perhaps notable that the headline figure had averaged 21.2 from May to September. As such, growth for manufacturers in the district has been more modest in the fourth quarter than midyear.
The good news was that activity was up for many key measures. For instance, the index for new orders shifted from a slight contraction in October (-1.7) to moderate growth in November (9.1). More manufacturers reported an increase in new orders, up from 21.9 percent in October to 32.2 percent in November, which accounted for the difference between the two months. Similarly, the pace of shipments (up from 1.1 to 11.8) also improved.
However, challenges in the labor market continued. The average employee workweek contracted further (down from -1.1 to -7.5). Indeed, 17.0 percent of respondents suggested their employees were working fewer hours. Along those lines, the index for employment eased, down from 10.2 to 8.5, indicating a slower pace of hiring for the month.
Fortunately, manufacturers in the region remain mostly optimistic in their outlook. The forward-looking composite index rose from 41.7 to 47.6, its highest level since January 2012. Across the next six months, manufacturers in the district anticipate increased levels of new orders (up from 42.3 to 47.0), shipments (up from 42.5 to 44.7), employment (up from 12.5 to 24.5), the average workweek (up from -2.3 to 8.5), capital expenditures (up from 21.6 to 27.7) and technology spending (up from 15.9 to 19.2). In fact, roughly half of the respondents expect sales to be higher over the coming months, with one-third anticipating new hires.Philadelphia Fed Manufacturing SurveyThe Federal Reserve Bank of Philadelphia reported that manufacturing activity expanded strongly in November, with its composite index measuring an off-the-chart 40.8 for the month. This was up from 20.7 in October, and one would need to go back two decades to find a higher figure (December 1993’s 41.2 reading). In fact, 49.2 percent of respondents to the Manufacturing Business Outlook Survey said that conditions had improved in November, up from 34.2 percent who said the same thing in October. Along those lines, the survey has registered above-average index figures since the first quarter, averaging 23.0 from April to November. That suggests manufacturers in the district are very positive about their businesses.
Looking at the underlying data, new orders (up from 17.3 to 35.7) and shipments (up from 16.6 to 31.9) were also up sharply. The percentage of manufacturers taking the survey suggesting that orders had increased rose from 36.2 percent to 44.4 percent, with the percentage noting declines dropping from 18.9 percent to 8.7 percent. Hiring (up from 12.1 to 22.4) also moved in the right direction, with 29.0 percent of respondents saying their employment levels rose during the month. Another positive was the continued easing in pricing pressures (down from 27.6 to 17.3).
Manufacturers remained overwhelmingly upbeat in their outlook. The forward-looking composite measure rose from 54.5 to 57.7. In fact, 58.2 percent of respondents anticipate increased new orders in the next six months, with 55.7 percent seeing higher shipment levels. Regarding employment, nearly 40 percent expect to add new workers in the coming months, with just 8.3 percent indicating possible declines. Capital spending was also expected to increase at decent rates.
In some special questions regarding hiring plans, manufacturers in the region said that expected sales growth, the need for workers with different skills and an overworked existing staff were the top reasons for increasing employment over the coming months. The inability to find workers with the right skills was the challenge cited most.Producer Price IndexThe Bureau of Labor Statistics reported that producer prices for final demand goods and services rose 0.2 percent in October. Yet, that gain stemmed mainly from increased costs for food (up 1.0 percent) and services (up 0.5 percent). Producer prices for final demand goods fell for the fourth straight month, down 0.4 percent. Falling energy costs (down 3.0 percent) continue to force the overall headline number lower. Indeed, prices for final demand energy goods have declined 5.9 percent since June, helping to decelerate overall inflationary pressures for producers.
At the same time, food prices rebounded from a softer September. Through the first 10 months of 2014, prices for final demand foods have risen 4.8 percent. In October, cooking oils, eggs, fruits, meats and vegetables accounted for the bulk of the monthly jump in food costs, with those same categories responsible for the year-to-date gains.
Excluding food and energy, producer prices for final demand goods decreased 0.1 percent. Declining costs for alcoholic beverages, industrial chemicals, jewelry, pet food and tires offset higher prices for metal-forming machine tools, mining machinery, passenger cars and pharmaceutical preparations.
Despite the slight uptick in producer prices in October, the year-over-year pace of inflation continued to decelerate. Producer prices for final demand goods and services have risen 1.55 percent since October 2013, down from 2.12 percent in May and 1.65 percent in September. Core inflation, which excludes food and energy costs, increased 1.78 percent over the past 12 months, or the fifth consecutive month with core prices below the Federal Reserve’s stated goal of 2 percent. As such, pricing pressures appear to be under control, at least for now, assisted more recently by lower energy costs.State Employment ReportThe Bureau of Labor Statistics reported that Wisconsin created the most net new manufacturing workers in October, hiring 5,400 additional employees for the month. Other states with significant increases in manufacturing employment in October included Pennsylvania (up 2,700), Indiana (up 2,500), Minnesota (up 2,300), Oregon (up 2,200) and South Carolina (up 2,100). Looking over the past 12 months, the five states with the greatest manufacturing employment gains were Indiana (up 24,100), Texas (up 14,900), Ohio (up 13,700), Wisconsin (up 12,100) and Minnesota (up 10,500).
North Dakota (2.8 percent) continues to have the lowest unemployment rate in the country. South Dakota (3.3 percent), Nebraska (3.4 percent) and Utah (3.6 percent) also reported unemployment rates that are well below the U.S. average of 5.8 percent. At the other end of the spectrum, the highest unemployment rates were in Georgia (7.7 percent), the District of Columbia (7.6 percent), Mississippi (7.6 percent), Rhode Island (7.4 percent) and California (7.3 percent).