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NAM Weekly Economic ReportAugust 31, 2015
After tremendous stock market volatility earlier in the week, financial markets around the world began to stabilize somewhat by the end of last week. There are continuing economic challenges to watch out for, especially in China and the emerging markets, but equities have begun to recover from their steep losses for the most part (even as they remain more than 9 percent below the all-time high in May).
One thing that has helped shift the focus has been stronger economic numbers in the United States, particularly for real GDP growth. The estimate of growth in the U.S. economy was revised sharply higher, up from 2.3 percent in the original estimate to 3.7 percent in the latest report. This reflected better consumer and business spending data than previously thought, even as many of the underlying trends remained the same. Nonresidential fixed investment on structures and equipment was still soft, and net exports, while rebounding in the second quarter somewhat, have been a drag on growth so far this year. As such, it is hard not to be disappointed with growth in the first half of 2015, which expanded by 2.2 percent at the annual rate. While this was higher than the 1.5 percent annual rate in the previous estimate, it is more consistent with the low growth rates experienced since the end of the Great Recession than with the optimism for traction in the economy that manufacturers had when we started the new year.
At the same time, one could look at the GDP release as a sign of encouragement, too, as it is another indication that the economy has rebounded from weaknesses earlier in the year. Personal income and spending data have both increased modestly, improving from pullbacks during the spring, and the Conference Board’s consumer confidence measure recovered in August from an unexpected decline in July, led by an improved assessment of the availability of jobs. Housing market data have also been stronger, with new single-family home sales picking up in July, mirroring the starts data. To be fair, consumer sentiment was less upbeat in the University of Michigan and Thomson Reuters survey, suggesting that Americans remain somewhat cautious in their perceptions of the economy. Yet, even with the University of Michigan’s decline, confidence has largely improved from this point last year.
For their part, manufacturers are still seeking a stronger recovery, and the releases out last week provided mixed news about the state of the sector right now. On the positive side, new durable goods orders rose 2.0 percent in July, extending the 4.1 percent jump in June. Much of the gains in the past two months have come from the transportation equipment sector, and excluding that segment, new orders increased 0.6 percent in July. Yet, new orders excluding transportation have fallen 0.8 percent year-over-year, suggesting that manufacturers have struggled outside of aircraft and motor vehicles over the past 12 months.
Along those lines, the regional surveys out last week were both disappointing. Manufacturing activity stalledin the Richmond Federal Reserve Bank district in August, and the Kansas City Federal Reserve’s headline index has now contracted for six straight months. Reduced crude oil prices, the strong dollar and weaknesses abroad have taken their toll on demand and production. While respondents to the Richmond Federal Reserve’s survey were still cautiously optimistic about the next six months, the Kansas City Federal Reserve report was less hopeful in its expectations for the future. In that report, capital spending and exports were seen falling over the coming months, as manufacturers in that district remained anxious.
Such nuances in the economy show the conundrum that the Federal Reserve faces as it approaches the next Federal Open Market Committee (FOMC) meeting on September 16–17. I had long felt that the FOMC would act in September but have now begun to shift my thinking. In my view, action will likely be delayed until the FOMC’s December 15–16 meeting. Still, in light of stronger real GDP data, the pressure to act will only increase more, especially if we get strong jobs numbers later this week and if other data continue to show a rebound.
In addition to employment growth numbers, we will also get additional insights on the current health of the manufacturing sector this week. Tomorrow, the Institute for Supply Management will release the Manufacturing Purchasing Managers’ Index data for August, and we will be looking to see if the sector builds on the better new orders and production growth in the July report. In addition, the Dallas Federal Reserve Bank will release its survey of manufacturing activity, which will likely still be negatively impacted by lower crude oil prices, and the Census Bureau will extend upon the durable goods release discussed above with new factory orders data. Other highlights include new figures on construction spending, international trade and productivity.
Chad MoutrayChief EconomistNational Association of Manufacturers
Monday, August 24Chicago Fed National Activity Index
Tuesday, August 25Conference Board Consumer Confidence IndexNew Home SalesRichmond Fed Manufacturing Survey
Wednesday, August 26Durable Goods Orders and Shipments
Thursday, August 27Gross Domestic Product (Revision)Kansas City Fed Manufacturing Survey
Friday, August 28Personal Income and SpendingUniversity of Michigan Consumer Sentiment Index
Monday, August 31Dallas Fed Manufacturing Survey
Tuesday, September 1Construction SpendingISM Manufacturing Purchasing Managers’ Index
Wednesday, September 2ADP National Employment ReportFactory Orders and ShipmentsProductivity and Costs (Revision)
Thursday, September 3International Trade Report
Friday, September 4BLS National Employment Report
Summaries of Last Week's Economic Indicators
Chicago Fed National Activity IndexThe Chicago Federal Reserve Bank reported that the U.S. economy rebounded in July after a softer June. The National Activity Index (NAI) increased from -0.07 in June to 0.34 in July, its fastest pace since November. Numbers exceeding zero indicate a national economy that is expanding above its historical trend, with negative figures suggesting the opposite. Interestingly, the three-month moving average of the past three months was zero, suggesting that, despite the volatility, the U.S. economy was on trend overall.
The improvement in July stemmed largely from the recovery in manufacturing production, which jumped 0.8 percent after declining 0.3 percent in June. Production-related indicators added 0.28 percentage points to the NAI. In addition, strong labor market growth helped to add another 0.11 percentage points to the headline figure, with strong gains in manufacturing and nonfarm payroll employment. Housing continues to be a drag on the NAI—but only slightly so, subtracting 0.06 percentage points in July—since the market remains well below its historical trend. Yet, with starts exceeding 1.2 million for the first time since 2007, the sector appears to be headed in the right direction. Conference Board Consumer Confidence IndexThe Conference Board reported that consumer sentiment jumped strongly in August, rebounding from the sharp decline in July. The Consumer Confidence Index, which unexpectedly fell significantly from 99.8 in June to 91.0 in July, recovered in August, rising to 101.5. This was the second-highest level since August 2007, second only to January’s 103.8 reading. The improvement in this report stemmed largely from the public’s improved assessment of the labor market. For instance, 21.9 percent of respondents said that jobs were plentiful, up from 19.9 percent the month before. More importantly, those noting that jobs were hard to get fell from 27.4 percent to 21.9 percent.
Nonetheless, even with improved confidence overall, Americans remained cautious in their outlook for the future. Along those lines, the percent expecting an increase in income moving forward declined from 17.0 percent in July to 16.2 percent in August. On the positive side, those anticipating decreased incomes also fell, down from 11.3 percent to 10.0 percent.
This cautiousness also carried through to purchasing intentions, with the percent planning to buy an automobile (down from 11.8 percent to 10.6 percent), home (down from 5.9 percent to 4.1 percent) and/or appliance (down from 52.1 percent to 48.9 percent) all moving lower. We hope the strong gains in consumer confidence translate into increased spending down the line—something that we will look for in upcoming releases. Durable Goods Orders and ShipmentsThe Census Bureau reported that new durable goods orders rose 2.0 percent in July, extending the 4.1 percent jump in June. Through the first seven months of 2015, new durable goods orders have risen 6.3 percent. Much of the gain in June came from strong sales from the Paris Air Show, and as we would expect, nondefense aircraft orders came back to earth in July, down 6.0 percent. Even with this decline, however, transportation orders were up 4.7 percent, boosted by rebounding auto sales. Motor vehicle orders increased 0.8 percent in June and 4.0 percent in July, improving from softer demand during the spring and helping the segment notch a 7.3 percent year-to-date gain.
New durable goods excluding transportation increased 0.6 percent in July, and unlike the broader measure, it has fallen 0.8 percent year-to-date. This would indicate that durable goods sales have struggled so far this year outside of aircraft and motor vehicles. However, the past two months have fared better, with non-transportation durable goods demand up 1.5 percent since May. Year-over-year comparisons are not helpful in this case due to a surge in aircraft sales in July 2014 that boosted the overall numbers.
Looking specifically at the July data, better sales were recorded for computers and electronic products (up 2.0 percent), machinery (up 1.5 percent), other durable goods (up 1.4 percent) and electronic equipment and appliances (up 1.3 percent). There were also some areas with continuing weaknesses, including primary metals (down 1.8 percent) and fabricated metal products (down 1.3 percent).
Meanwhile, durable goods shipments rose 0.9 percent in June and 1.0 percent in July. Excluding transportation, these gains were more modest, up 0.4 percent in June and 0.2 percent in July. Year-to-date, shipments have increased just 0.5 percent, but since May, it has accelerated, up 1.8 percent over the past two months. In July, there were increased shipments for transportation equipment (up 2.5 percent, with a gain of 3.9 percent for motor vehicles and parts), electronic equipment and appliances (up 1.6 percent) and other durable goods (up 1.3 percent). In contrast, primary metals (down 0.9 percent), machinery (down 0.2 percent) and computers and electronic products (down 0.1 percent) had reduced shipments for the month. Gross Domestic Product (Revision)The Bureau of Economic Analysis revised its estimate of second quarter growth in the United States sharply higher. Real GDP increased 3.7 percent in the second quarter, significantly higher than the 2.3 percent original estimate released last month. This was slightly above the consensus estimate of 3.2 percent, and the improvement in economic growth for the quarter was attributed to upward revisions in many categories, particularly for inventory spending. Despite the better headline figure, the underlying trends were largely the same, including rebounds in consumer and business spending and with net exports recovering a bit after serving as a drag in the prior two quarters.
Yet, even with such strong gains in the second quarter, it is hard not to be disappointed with growth in the first half of 2015, which expanded by 2.2 percent at the annual rate. While this was higher than the 1.5 percent annual rate in the previous estimate, it is more consistent with the low growth rates experienced since the end of the Great Recession than with the optimism for traction in the economy that manufacturers had when we started the new year. Indeed, the manufacturing sector has struggled in recent months to rebound from softness earlier this year, largely on a number of economic headwinds that continue to dampen demand and production. The outlook for the third quarter is for 2.6 percent real GDP growth, with 2.2 percent growth for the year overall.
Looking more closely at the data, consumer spending was the biggest bright spot in the second quarter, up 3.1 percent at the annual rate. This reflected a recovery in durable and nondurable goods purchases after a weak first quarter, and personal consumption expenditures alone added 2.11 percentage points to real GDP. The remaining contributions were gross private domestic investment (0.88 percentage points), government spending (0.47 percentage points, mainly from local and state governments) and net exports (0.23 percentage points).
Growth in nonresidential fixed investment increased 3.2 percent in the second quarter, a nice improvement from the 0.6 percent decline in the earlier release. This reflected better spending on structures (up from a decline of 1.6 percent to a gain of 3.1 percent) and equipment (a decline of 0.4 percent instead of a 4.1 percent drop). As such, equipment spending provided a drag on growth, but that was more than offset by other improvements. Residential investment was also stronger, up 7.8 percent versus 6.6 percent, as the housing market has started to move in the right direction.
The trade picture looked somewhat better in the second quarter, but that must be framed in the context of sharp declines in the first quarter. Goods exports rose 6.5 percent in the second quarter, making a dent in the 11.7 percent decline in the first quarter. At the same time, growth in goods imports eased for the second straight quarter, down from 9.9 percent in the fourth quarter of 2014 to 7.2 percent in the first quarter to 2.7 percent in the second quarter. With exports growing faster than imports, net exports provided a positive contribution to the bottom line. Still, goods exports remain 3.0 percent lower at the annual rate after the second quarter than they were at the end of 2014. This suggests that the strong dollar and sluggish growth abroad have hampered export sales overall. Kansas City Fed Manufacturing SurveyThe Kansas City Federal Reserve Bank reported that manufacturing activity in its district has declined for six straight months. The composite index of general business conditions edged lower, down from -7 in July to -9 in August, with this measure in negative territory since March. Overall, manufacturers continue to report contracting levels of activity, with reduced crude oil prices, the strong dollar and weaknesses abroad pressuring the sector’s performance. Indeed, various measures of activity were negative across-the-board. These included new orders (down from -6 to -9), production (down from -5 to -16), shipments (down from -2 to -15) and exports (up from -10 to -4). Exports have now declined for eight consecutive months.
The job market was also weak, but with the pace of decline slowing a bit in July. The indices for employment (up from -19 to -10) and the average workweek (up from -18 to -7) both inched up somewhat, even as the labor market remained soft. Regarding hiring, the percentage of respondents saying that employment was higher rose from 11 percent in July to 18 percent in August, with 55 percent in this latest survey reporting no change.
The outlook for the next six months suggested that manufacturing leaders in the district are perhaps less optimistic than many of their regional peers. The forward-looking composite index dropped from 3 in July to zero in August. The other numbers were mixed. New orders (down from 13 to 9), shipments (down from 6 to 4), production (down from 5 to 4) and employment (down from 3 to 1) indicate that manufacturers anticipate slight increases over the coming months, even as the pace of expected growth has eased recently. On the other hand, they are less upbeat about capital spending (down from 1 to -2) and exports (down from 2 to -5).New Home SalesNew single-family home sales picked up in July, recovering from reduced activity in June, according to the Census Bureau. Sales rose from an annualized 481,000 in June to 507,000 in July, an increase of 5.4 percent. This figure has been quite volatile from month to month so far this year, up one month only to be down the next, ranging from 481,000 in June to 545,000 in February. The good news is that the data continue to reflect progress from last year, with single-family sales up 25.8 percent from the July 2014 level of 403,000. In this report, each region notched higher sales for the month except for the Midwest, with the largest gains in the Northeast.
Inventories declined only slightly, down from 5.3 months of supply on the market in June to 5.2 months in July. This remains higher than the 4.8 months in May. The median sales price jumped 5.1 percent to $285,900 in July. Personal Income and SpendingThe Bureau of Economic Analysis reported that personal income increased 0.4 percent, marking the fourth straight month with that pace. Across the past 12 months, personal incomes have risen 4.3 percent, up from 4.1 percent in the last report. Total manufacturing wages and salaries were $793.2 billion in July, up from $788.5 billion in June. This continues an upward trend for the sector, with manufacturing wages and salaries totaling $746.8 billion and $780.9 billion on average in 2013 and 2014, respectively.
Meanwhile, personal spending rose 0.3 percent in July for the second consecutive month, with positive growth for the sixth straight month. Durable and nondurable goods spending both increased, rebounding from a softer June, up 1.1 percent and 0.2 percent, respectively, in July. On a year-over-year basis, personal spending has increased by 3.5 percent since July 2014, up from the 3.4 percent pace the month before. In general, this suggests that Americans are increasing their spending modestly, but it also indicates a slower rate of purchasing than the more robust pace in late 2014. For instance, the year-over-year rate peaked at 5.0 percent in 2014 in August.
With income growth slightly outpacing consumer spending, the savings rate edged a bit higher, up from 4.7 percent to 4.9 percent. It has averaged 5.0 percent year-to-date, up from the 4.8 percent average for all of 2014.
In other news, the personal consumption expenditure (PCE) deflator rose 0.1 percent in July, decelerating from the 0.3 percent and 0.2 percent growth rates in May and June, respectively. This largely reflects slower energy price growth over the past two months. Still, even with these gains, energy prices remain 15.7 percent lower than a year ago. On a year-over-year basis, the PCE deflator was up just 0.3 percent, with core inflation, which excludes food and energy prices, up 1.2 percent. Each suggests that overall pricing pressures remain quite minimal, which continues to give the Federal Reserve flexibility in terms of monetary policy, at least for now. Richmond Fed Manufacturing SurveyThe Richmond Federal Reserve Bank reported that manufacturing activity stalled in August, pulling back from three months of rebounding sentiment. The composite index of general business activity declined from 13 in July to zero in August, its lowest level since April. Manufacturers reported weaker activity across-the-board, with only marginal growth in new orders (down from 17 to 1) and employment (unchanged at 1) and reductions in shipments (down from 16 to -4) and capacity utilization (down from 9 to -5). There have been a number of headlines so far this year, including a strong dollar, sluggish global growth and reduced crude oil prices. The data suggest that the sector has not fully emerged from those challenges despite some progress since the spring.
However, manufacturers in the region remain mostly upbeat about future sales and production. Expected growth in several key areas remains strong over the next six months despite easing in some categories in July. This includes new orders (down from 43 to 36), shipments (down from 42 to 36), capacity utilization (up from 27 to 34), employment (down from 22 to 19) and capital expenditures (down from 31 to 29). The average workweek (up from 3 to 12) also widened.
Meanwhile, inflationary pressures pulled back again, remaining quite minimal. Manufacturers in the district said that prices paid for raw materials grew 0.80 percent at the annual rate in August, down from 1.45 percent in July. In addition, respondents anticipate raw material prices to increase 1.51 percent at the annual rate six months from now, slightly higher than the 1.45 percent rate noted last month. This forward-looking measure, however, continues to indicate pricing growth below the Federal Reserve’s stated goal of 2 percent. University of Michigan Consumer Sentiment IndexThe University of Michigan and Thomson Reuters reported that consumer confidence ebbed ever so slightly in August. The Consumer Sentiment Index declined from 93.1 in July to 91.9 in August. This was lower than the 92.9 preliminary figure reported two weeks ago, and recent stock market volatility likely influenced this revision. Overall, the data have been quite volatile so far this year, ranging from a low of 90.7 in May to a high of 98.1 in January. This suggests that Americans have been anxious given the economic challenges in the early months of this year. The slight dip in August stemmed from weaker perceptions of both current (down from 107.2 to 105.1) and expected (down from 84.1 to 83.4) economic conditions.
On the other hand, the public is more upbeat today than last year, with consumer confidence averaging 94.3 through the first eight months of 2015, up from 84.1 for 2014 as a whole. That should provide some comfort, especially for those manufacturing sectors that are dependent on consumer spending for their growth.