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NAM Weekly Economic ReportOctober 27, 2014
What a difference a week makes. After a volatile week in financial markets amid worldwide economic worries, things calmed down last week. While the Dow Jones Industrial Average remains 2.7 percent below its all-time high on September 19, it gained 425 points last week, or 2.6 percent. Attitudes shifted to a more positive stance on decent earnings reports and on news that firms remain mostly upbeat in their outlook. Of course, downside risks to the economy continue, including news of terrorism in Canada and still sluggish growth abroad. However, at least for now, cautious optimism is outweighing these concerns.
A fair share of the concern lately has stemmed from slowing growth in China and worries that Europe might slip back into a recession. Last week, there was better news for these regions, most notably in Europe. TheMarkit Flash Eurozone Manufacturing Purchasing Managers’ Index (PMI) increased from 50.3 in September to 50.7 in October, a better-than-expected figure on higher output and employment. This was good news, as September’s figure had been the lowest level since July 2013, when Europe first emerged from its recession. Still, the Eurozone’s challenges remain far from over, with new orders contracting for the second straight month and exports easing. In addition, while Germany improved somewhat for the month, French manufacturers (down 48.4 to 47.6) continue to report weaknesses.
At the same time, Chinese manufacturing activity rose to its highest level in three months, up from 50.2 to 50.4. It was the fifth consecutive monthly expansion in manufacturing activity in China, with demand and production growing, albeit slower than we might prefer. In general, we continue to see Chinese growth decelerating. For instance, real GDP slowed from 7.5 percent year-over-year growth in the second quarter to 7.3 percent in the third quarter. The paces of fixed real investment and retail sales have also eased considerably so far this year. On the positive side, industrial production picked up a little in September, even as its trend line also reflects sharply lower growth rates.
Meanwhile, in the United States, the Markit Flash Manufacturing PMI dropped slightly, down from 57.5 to 56.2. Yet, new orders, output and hiring continue to grow at decent rates, with each measure reflecting progress from earlier in the year. The Kansas City Federal Reserve Bank also reported expanding activity levels, albeit at a slower pace, in October. Exports were a concern in both releases, but given the softness in international markets, this should not be a surprise.
Other economic indicators released last week mostly focused on prices and housing. Consumer prices rose 0.1 percent in September, but the annual pace of inflation remained largely in check at 1.7 percent. This will be relevant this week with the Federal Open Market Committee meeting, particularly as it debates when to raise short-term rates. Lower energy costs have been helpful in this regard, with the average price per gallon of regular gasoline falling to $3.070 last week. The Federal Reserve is expected to end its quantitative easing initiative. Regarding the housing market, both existing and new home sales were higher in September, reflecting progress from just six months ago. We hope this suggests that the market is moving in the right direction.
This week, the highlight will be the release of third-quarter real GDP data, which come out on Thursday. I estimate that the U.S. economy grew by 3.25 percent in the third quarter—a relatively healthy pace after the sluggish first-half performance. Beyond this measure, other items to watch include surveys from the Dallas and Richmond Federal Reserve Banks and the latest data on consumer confidence, durable goods orders, employer costs and personal income and spending.
Chad MoutrayChief EconomistNational Association of Manufacturers
Monday, October 20None
Tuesday, October 21Existing Home SalesState Employment Report
Wednesday, October 22Consumer Price Index
Thursday, October 23Conference Board Leading IndicatorsFlash PMIs for China, the Eurozone and the United StatesKansas City Fed Manufacturing Survey
Friday, October 24New Home Sales
Monday, October 27Dallas Fed Manufacturing Survey
Tuesday, October 28Conference Board Consumer ConfidenceDurable Goods Orders and ShipmentsRichmond Fed Manufacturing Survey
Wednesday, October 29FOMC Monetary Policy Statement
Thursday, October 30Gross Domestic Product (Third Quarter 2014)
Friday, October 31Employment Cost IndexPersonal Income and SpendingUniversity of Michigan Consumer Sentiment (Revised)
Summaries of Last Week's Economic Indicators
Meanwhile, the Coincident Economic Index (CEI), which assesses current conditions, increased 0.4 percent in September. It was the fastest monthly pace of growth for the CEI since March. All four subcomponents of the CEI made positive contributions for the month, including industrial production, nonfarm payrolls, personal income and manufacturing and trade sales.
Consumers continue to benefit from lower energy costs, down 0.7 percent in September. Gasoline costs alone were off 1.0 percent, or 3.5 percent year-over-year. In fact, we have seen the price of regular conventional gasoline fall from its 2014 peak of $3.639 per gallon on average for the week of June 23 to $3.070 last week, according to the Energy Information Administration. This has helped to offset pricing pressures elsewhere, and it is expected to provide a stimulatory effect to consumer spending over the coming months, assuming it continues.
Core consumer prices, excluding food and energy costs, were also up 0.1 percent in September. Appliances, medical care commodities and shelter expenses saw the largest monthly price increases, but these were offset by declining costs for computers, household furnishings, used cars and trucks and women’s apparel, among other categories.
The annual pace of inflation was 1.7 percent in September, unchanged from August. This was an improvement from June’s 2.1 percent year-over-year rate, but it represents an acceleration from February’s 1.1 percent pace. Core inflation was also 1.7 percent, and as such, it remains in an acceptable range for now.
Inventories fell somewhat, down from 5.5 months of supply on the market in August to 5.3 months in September. Existing home sales were higher in every region except the Midwest, with the largest gains in the West. The median home price in September was $209,700, or 5.6 percent higher than the year before.
As such, Chinese manufacturers are expanding but not by as much as we might prefer. This finding is consistent with the deceleration in other Chinese data, including real GDP, which slowed from 7.5 percent year-over-year growth in the second quarter to 7.3 percent in the third quarter. Fixed real investment (down from 16.5 percent year-over-year in August to 16.1 percent in September) and retail sales (down from 11.9 percent year-over-year to 11.6 percent) also declined. On the positive side, industrial production picked up, increasing from the year-over-year rate of 6.9 percent in August to 8.0 percent in September; yet, that remained lower than July’s 9.0 percent pace.
Meanwhile, the Markit Flash Eurozone Manufacturing PMI increased from 50.3 to 50.7. That is good news, as the September figure had been the lowest level since July 2013, when Europe first emerged from its recession. October’s reading was higher largely due to a pickup in output (up from 51.0 to 51.9) and employment (up from 50.1 to 50.6). Still, new orders (unchanged at 49.3) contracted for the second straight month, with exports (down from 51.6 to 50.5) easing. The Eurozone continues to face challenges in manufacturing, especially in terms of falling sales. The results also vary by country, with Germany (up from 49.9 to 51.8) improving somewhat, while French manufacturers (down 48.4 to 47.6) continue to report weakness.
Closer to home, the Markit Flash U.S. Manufacturing PMI dropped slightly, down from 57.5 to 56.2. The pace of activity was down across-the-board, including new orders (down from 59.8 to 57.1), output (down from 59.6 to 58.0), hiring (down from 56.4 to 56.2) and exports (down from 54.1 to 51.9). While the index for new orders was at its lowest level since January’s 53.9 reading, it is hard to get too worked up over October’s decline for these indicators. After all, demand, production and employment continue to grow at decent rates, and manufacturers are reporting higher activity levels than earlier in the year.
Still, we would like to see better results to begin the fourth quarter, particularly for exports. Given the softness in worldwide markets, however, this weakness should not be a surprise.
In contrast, the average workweek (down from 2 to -3) and export orders (down from -1 to -9) both contracted. This continues a trend of struggling sales abroad in the region, with the export sales index negative in all but three months over the past year. Softer global economic growth has not helped.
On the other hand, manufacturers in the district remain mostly upbeat in their outlook for the next six months, with the forward-looking composite index unchanged at 17. Forty-four percent of respondents expect higher sales in the months ahead, with 37 percent planning to increase their capital expenditures. At the same time, one-third anticipate bringing on new workers. Moreover, the index for expected exports shifted from 0 to 8, suggesting some hopefulness for better global markets. The one downside is that nearly half of respondents expect higher raw material costs over the next six months.
The Midwest saw the largest gains in new home sales in September, with weakness in the West. There were 5.3 months of supply on the market, unchanged from the month before but better than the 6.0 months in July. The median home price for new single-family units was $256,600.
North Dakota continues to have the lowest unemployment rate in the United States (2.8 percent), with Georgia having the highest (7.9 percent).