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NAM Weekly Economic ReportOctober 20, 2014
Global financial markets were highly volatile last week, with investors concerned about slower growth in Europe and an Ebola outbreak in the United States, among other factors. Indeed, industrial production in the Eurozone fell 1.8 percent in August, and activity was down largely across-the-board, most notably in Germany (down 4.3 percent), the Eurozone’s largest economy. Sluggish income and labor market growth in Europe has also pushed inflationary pressures lower, with year-over-year pricing changes of just 0.3 percent in September. Despite such worries, equity markets began to rebound on Friday, with the Dow Jones Industrial Average (DJIA) closing at 16380.41. Nonetheless, the DJIA remains 5.2 percent below its all-time high of 17279.74 on September 19.
Still, the U.S. economy has shown signs of resilience. Despite a softer August, manufacturing productionincreased 0.5 percent in September. Over the past 12 months, output in the sector has risen 3.7 percent. While this was slower than its July year-over-year pace, it reflects a nice improvement from the more sluggish 1.5 percent rate in January.
Moreover, surveys from the Manufacturers Alliance for Productivity and Innovation (MAPI) and the New Yorkand Philadelphia Federal Reserve Banks observed expanding activity levels in their latest reports. Each measure eased somewhat in October, but they were expansionary nonetheless. The weakest of these reports was the Empire State Manufacturing Survey, which observed a slight contraction in new orders. Yet, even there, respondents remained mostly optimistic about demand and output over the next six months. Along those lines, MAPI has a generally upbeat outlook, predicting that manufacturing production will increase by 3.4 percent in 2014 and 4.0 percent in 2015.
Housing starts exceeded 1 million again, increasing from an annualized 957,000 units in August to 1,017,000 in September. This continues a slow-but-steady trend upward, with an average of 978,111 so far in 2014 relative to an average of 930,000 for all of 2013. Still, there was relatively weak housing activity throughout much of the second half of last year and the first half of this year, and the latest data suggest that the sector has begun to stabilize somewhat. I continue to predict housing starts solidly in the 1.1 million unit range by the beginning of 2015. Homebuilder confidence has also reflected a positive outlook despite slipping a bit in October. Lower mortgage rates might spur more residential construction activity. According to Freddie Mac, average 30-year fixed mortgage rates fell to 3.97 percent this past week, their lowest level since June 2013.
Meanwhile, there was mixed news on the consumer front. On the positive side, consumer confidencereached a pre-recessionary high, according to the University of Michigan and Thomson Reuters. This is a sign that improvements in the economy and lower gasoline prices have helped to lift Americans’ spirits. Yet, there are also lingering worries about income and labor market growth, and consumers remain somewhat cautious overall. Retail spending declined 0.3 percent in September, suggesting softness as we begin autumn. At the same time, year-over-year growth in retail sales was up 4.3 percent, a fairly decent rate, and the holiday season retail outlook looks pretty strong. We hope we will see better consumer spending data in the coming months.
This week, we will get additional insights regarding the health of the global economy. Markit will release Flash Purchasing Managers’ Index (PMI) data for China, Japan, the Eurozone and the United States. The European data are expected to show continued weakness, but we will be watching for signs of progress in the Chinese manufacturing sector, which has decelerated in recent months. The Kansas City Federal Reserve Bank will also unveil its latest manufacturing survey, and it is expected to show continued expansion in its district. Beyond these surveys, we will learn about growth in consumer prices, and if they are similar to the producer price index data released last week, they will reflect easing in both food and energy costs. Other highlights this week include reports on existing and new home sales, leading indicators and state employment.
Chad MoutrayChief EconomistNational Association of Manufacturers
Monday, October 13COLUMBUS DAY HOLIDAY
Tuesday, October 14NFIB Small Business Survey
Wednesday, October 15Beige BookNY Fed Empire State Manufacturing SurveyProducer Price IndexRetail Sales
Thursday, October 16Industrial ProductionMAPI Manufacturing SurveyNAHB Housing Market IndexPhiladelphia Fed Manufacturing Survey
Friday, October 17Housing Starts and PermitsUniversity of Michigan Consumer Sentiment
Monday, October 20None
Tuesday, October 21Existing Home SalesState Employment Report
Wednesday, October 22Consumer Price Index
Thursday, October 23Conference Board Leading IndicatorsFlash PMIs for China, Eurozone, Japan and the United StatesKansas City Fed Manufacturing Survey
Friday, October 24New Home Sales
Summaries of Last Week's Economic Indicators
As usual, the bulk of the monthly change stemmed from an increase in the highly volatile multifamily segment. Multifamily housing starts rose from 318,000 at the annual rate in August to 371,000 in September, and the year-to-date average has been 353,667 units. Yet, multifamily starts have ranged from 314,000 in January to 446,000 in July, with large shifts from month to month. Even with such unpredictability, multifamily unit activity has trended higher, up 32.0 percent over the past 12 months.
At the same time, single-family starts were also higher, up from 639,000 to 646,000. The average through the first nine months of 2014 is 624,444, and year-over-year growth in September was 11.0 percent. The recent peak was 652,000 in July.
Meanwhile, housing permits mirrored many of these same developments, with permitting up from 1,003,000 to 1,018,000. On a year-over-year basis, housing permits grew 2.5 percent since September 2013. However, the underlying data were mixed. Multifamily permits were up from 376,000 to 394,000, whereas single-family permitting edged slightly lower, down from 627,000 to 624,000. Permits for single-family homes have improved after bottoming out at 593,000 in February, but the data have been in a narrow range over much of the past year, with a year-over-year decline of 0.5 percent.
Nonetheless, we still remain optimistic about residential construction activity moving forward, and I would expect continued movement in the right direction, even with some volatility. I continue to predict housing starts solidly in the 1.1 million unit range by the beginning of 2015. One thing that might help spur more activity—beyond an improving economy, of course—is lower interest rates. According to Freddie Mac, average 30-year fixed mortgage rates fell to 3.97 percent this past week, their lowest level since June 2013.
Capacity utilization in the sector was also higher, up from 77.1 percent to 77.3 percent. On a year-over-year basis, capacity utilization has expanded by a modest 2.1 percent.
Both durable and nondurable goods production rose 0.5 percent in September. Furniture and related products (up 2.4 percent), aerospace and other transportation equipment (up 1.7 percent), miscellaneous durable goods (up 1.6 percent), apparel and leather products (up 1.5 percent) and plastics and rubber products (up 1.2 percent) led production growth for the month. In contrast, sectors that declined included motor vehicles and parts (down 1.4 percent), wood products (down 0.8 percent), nonmetallic mineral products (down 0.2 percent) and machinery (down 0.1 percent).
Meanwhile, overall industrial production jumped 1.0 percent in September, a nice gain after declining by 0.2 percent in August. Mining (up 1.8 percent) and utilities (up 3.9 percent) were up strongly for the month. Mining production, in particular, has increased significantly over the past 12 months, up 9.1 percent, largely due to the pickup in energy exploration. Total capacity utilization rose from 78.7 percent to 79.3 percent, its highest level since May 2007.
In conclusion, manufacturers have continued to be mostly upbeat about the economy. These production figures suggest that manufacturing output growth remains relatively healthy, with durable and nondurable goods production up 5.4 percent and 2.7 percent year-over-year, respectively. Each represents progress from earlier in the year (even if the durable goods figure has fallen since July).
Nonetheless, volatility in global markets and a still cautious consumer pose downward risks moving forward, and it will be interesting to see how events play out in the coming weeks to see if they derail what had been a relatively positive outlook for manufacturers.
Still, several key indicators eased in this survey, including export orders (down from 67 to 65), the orders backlog (down from 72 to 69), prospective U.S. shipments (down from 87 to 83) and prospective foreign shipments (down from 76 to 72). Each reading, however, continues to reflect strong growth.
In contrast, there were some weaknesses to note. The percentage of respondents operating above 85 percent capacity dropped from 30.0 percent in July to 26.7 percent in October. Expected business investments also slowed considerably in this survey, with 2015 U.S. investment spending just barely above 2014’s pace (down from 67 to 52), whereas foreign investment activity was expected to decline next year relative to this year (down from 64 to 48). On the other hand, the rate of R&D spending was expected to accelerate slightly (up from 67 to 70).
Overall, the data support the notion that manufacturing activity continues to improve, mirroring similar findings from other indicators. MAPI has a generally upbeat outlook for the coming months, predicting that manufacturing production will increase by 3.4 percent in 2014 and 4.0 percent in 2015.
Nonetheless, October’s decline was widespread, occurring in each region of the country, but the biggest decreases were noted in the Midwest and West. The pace of single-family sales (down from 63 to 57) and expected activity (down from 67 to 64) were slightly off.
Indeed, many of the underlying data points were softer in September. For instance, the net percentage of respondents expecting sales to be higher in the next three months has fallen from 15 percent in May to 5 percent in September. Along those lines, the net percentage planning to hire more workers in the next three months has declined from 13 percent in July (a seven-year high) to 9 percent in September. In addition, capital spending plans over the next three to six months also dropped slightly, down from 27 percent in August to 22 percent in September.
Interestingly, the percentage of small business owners saying the next three months were a good time to expand improved, up from 9 percent in August to 13 percent in September (its highest level since December 2007, the first month of the recession). As such, the data have a nuanced perspective, showing both improvements in the economy and persistent challenges. Economic conditions and the political climate were the main reasons noted for those suggesting it was not a good time for expansion. Government regulations and red tape were the most important problem, cited by 22 percent of respondents. This was followed by taxes (21 percent) and poor sales (14 percent).
A decrease in new orders (down from 16.9 to -1.7) helped to explain the change in sentiment. The percentage of respondents suggesting that sales had increased in the month dropped from 40.1 percent in September to 21.9 percent in October, a shift that produced the change in direction for the new orders index. Growth in shipments (down from 27.1 to 1.1) also slowed, with the percentage of firms saying that shipments had declined in the month jumping from 16.7 percent to 25.0 percent.
On the positive side, manufacturing activity has now expanded for 21 months, and businesses have reported rebounding activity levels overall since earlier in the year. In addition, employment (up from 3.3 to 10.2) picked up somewhat in October. Pricing pressures (down from 23.9 to 11.4) have eased.
Looking ahead six months, manufacturers in the region remain mostly optimistic. While many of the forward-looking measures pulled back slightly in October, they still show strength in the outlook. For instance, 52.9 percent of respondents anticipate higher levels of new orders over the coming months, down from 57.1 percent in the prior survey. Nearly 24 percent expect to add more workers over the next six months, with 34.1 percent planning additional capital expenditures. These figures tend to indicate a brighter future for manufacturers, even if the current sales and shipments data are soft.
The pace of new orders (up from 15.5 to 17.3) picked up in October, which bodes well for future activity. This shift occurred largely because the percentage of respondents citing declining sales dropped from 22.1 percent in September to 18.9 percent in October. At the same time, growth rates for shipments (down from 21.6 to 16.6) and employment (down from 21.2 to 12.1) have both decelerated for the month. Along those lines, the average workweek contracted slightly, down from 4.4 to -1.3, falling for the first time since February.
Manufacturers remained overwhelmingly upbeat in their outlook despite a decrease in the forward-looking composite measure (down from 56.0 to 54.5). In fact, 58.0 percent of respondents anticipate increased new orders in the next six months, with 58.5 percent seeing higher shipment levels. Regarding employment, 33.1 percent expect to add new workers in the coming months, with just 5.1 percent indicating possible declines. Capital spending was also expected to increase at decent rates, particularly for equipment, computers and software and energy-saving investments.
Energy prices have fallen in four of the past five months, declining by 0.7 percent in September. One of the key drivers of this decrease was the fall in gasoline prices, down 2.6 percent for the month. Indeed, the price of West Texas Intermediate crude was $97.86 per barrel on August 29, but by September 30, that figure had fallen to $91.17 per barrel. (It has declined further since then, closing at roughly $83 per barrel on Friday. This could indicate further deceleration in energy and producer prices in October.)
Meanwhile, food prices also decreased 0.7 percent in September. After rising 5.4 percent from December to April, producer prices for final demand food products have eased by 1.5 percent. As such, the cost of food remained 3.8 percent higher in September than at the start of the year. This has largely stemmed from higher prices for meats, eggs, dairy and produce. The largest price declines in August were in beef and veal, chicken, cooking oils, eggs, grains, milled rice, pork, oilseeds and turkey products.
Beyond food and energy, core prices for final demand goods were up 0.2 percent. There were higher monthly costs for commercial products, floor coverings, industrial chemicals, pumps and compressors and women’s apparel. At the same time, producer prices for footwear, household appliances and furniture, jewelry, lawn and garden equipment, passenger cars, toys and games and truck trailers were lower.
Core inflation for final demand goods and services was 1.6 percent in September, down from 1.8 percent in August and 2.1 percent in May. As such, the reduction in inflation during the past few months should take some pressure off of the Federal Reserve Board as it prepares to normalize its monetary policies.
Clothing and accessories (down 1.2 percent), building materials (down 1.1 percent), nonstore retailers (down 1.1 percent), gasoline stations (down 0.8 percent) and motor vehicles and parts (down 0.8 percent) were among the sectors with the largest declines in retail spending. A fair share of the decrease for gasoline stations stemmed from lower gasoline prices, with the average price per gallon of regular conventional gasoline dropping from $3.410 for the week of September 1 to $3.304 for the week of September 29. (The average has fallen further to $3.147 a gallon last week.) In addition, motor vehicle sales have continued to be strong (up 9.5 percent year-over-year) despite the decline in September.
In contrast, electronics and appliances (up 3.4 percent), food services and drinking places (up 0.6 percent), health and personal care (up 0.3 percent) and general merchandise (up 0.2 percent) stores notched retail sales gains in September. The increase in electronics spending was likely spurred by the introduction of new iPhone models from Apple.
Overall, retail sales figures suggest that Americans remain quite cautious. Lower gasoline prices should help fuel additional spending in the coming months, with the National Retail Federation forecasting holiday sales growth of 4.1 percent this year. Though we are starting autumn with weaker data, suggesting that consumers remain anxious, we hope to see retail spending pick up in the coming months.
Even with the increase in October, the University of Michigan report also shows these anxieties. The index for the current economic environment was unchanged at 98.9, and it remains below its recent peak of 99.8 in August. Geopolitical events, slowing global growth, stock market volatility and worries about Ebola might help to explain this hesitance. Moreover, Americans remain concerned about labor market and income growth, despite better data of late on the hiring front.
At the same time, the future-oriented index rose from 75.4 to 78.4, its highest level in two years. Lower gasoline prices likely lifted people’s spirits, helping to increase disposable income, at least for now. Overall, this survey suggests that consumers’ views about the economy are quite nuanced, and at least for this month, optimism about the future outweighed the concerns.
We will get final data on October consumer sentiment from the University of Michigan on October 31. The Conference Board will also release its survey data on consumer confidence on October 28.