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NAM Weekly Economic ReportMarch 23, 2015
The U.S. economy has sputtered a bit in the early months of 2015. While it continues to grow modestly, several economic indicators are weaker than we would prefer. For example, manufacturing production decreased by 0.2 percent in February, declining for the third straight month. Many headwinds have combined to bring about this softness in the manufacturing sector, including global economic weakness, a strong U.S. dollar, the West Coast ports slowdown, a cautious consumer and the weather in some parts of the country.
On the positive side, manufacturing output has increased 3.4 percent over the past year, and manufacturers continue to be mostly upbeat about the coming months. We continue to expect 3.2 percent growth in manufacturing production in 2015, suggesting better performance moving forward. Surveys from the New York and Philadelphia Federal Reserve Banks mirrored these results, with both reports seeing an easing in current activity. They also continued to reflect brighter demand and output over the next six months, with employment and capital spending also expected to increase moving forward. Such findings provide some encouragement in our outlook for the sector.
Challenges in the current economy go well beyond manufacturing. As noted in last week’s report, retail sales were also lower for the third consecutive month in February, suggesting some lingering caution in the marketplace. Much of the recent decline has stemmed from lower gasoline prices, but there were also muted sales seen in other categories as well, including motor vehicles.
In addition, housing starts were quite disappointing, with the annualized pace of new residential construction activity plummeting from 1,081,000 in January to 897,000 in February. Weather was likely a factor, particularly with major snowstorms in the Northeast and the Midwest. On the other hand, housing permits data provided a little comfort, increasing from 1,060,000 units at the annual rate to 1,092,000. The data could suggest that the decline in starts will be temporary. Yet, the data also mirrored larger weaknesses, with single-family permitting down for the second straight month. Homebuilders were also less confident in their latest survey, but respondents continue to be more positive than negative in their assessments of current conditions.
For its part, the Federal Reserve recognized that there have been some significant headwinds in the economy, specifically saying that “economic growth has moderated somewhat” in the press statement following the March 17–18 Federal Open Market Committee (FOMC) meeting. The Federal Reserve also cited economic progress, such as improvements in the labor market, growth in household spending and increased business fixed investment. In conjunction with the FOMC meeting, the Federal Reserve released its latest economic projections, reflecting slightly eased growth from what it saw three months ago. Federal Reserve officials now predict real GDP growth of between 2.3 and 2.7 percent in 2015, with similar rates in 2016. On the positive side, the labor market appears to be doing better than anticipated. The Federal Reserve now forecasts the unemployment rate falling to 5.0 to 5.2 percent in 2015 and to 4.9 to 5.1 percent in 2016.
The larger headlines from the FOMC meeting stemmed from the removal of the word “patient” from the Federal Reserve’s statement. This suggests that short-term rates will not increase until at least the June 16–17 meeting. However, the federal funds rate will change only when data warrant such actions. For the most part, the Federal Reserve has been on automatic pilot with its intentions for a midyear hike, and this action clears the way for that to happen. In her press conference, however, Federal Reserve Chair Janet Yellen asserted, “Just because we removed the word ‘patient’ from the statement doesn’t mean we are going to be impatient.” While financial markets initially reacted positively toward this statement—assuming that it meant rates would go up later rather than sooner—the fact remains that short-term rates will move higher at some point in 2015, likely in June, July or September.
This week, there will be a number of economic reports released showing the current state of the manufacturing sector, starting with Flash PMIs from Markit for the United States, China and the Eurozone on Tuesday. In addition, there will be new surveys from the Richmond and Kansas City Federal Reserve Banks and preliminary durable goods and shipments numbers. On Friday, the Bureau of Economic Analysis will provide a second revision for fourth-quarter real GDP, which had previously been estimated to be 2.2 percent. Other highlights this week include the latest figures for consumer prices, consumer sentiment and existing and new home sales as well as February state employment data.
Chad MoutrayChief EconomistNational Association of Manufacturers
Monday, March 16Industrial ProductionNAHB Housing Market IndexNew York Fed Manufacturing Survey
Tuesday, March 17Housing Starts and PermitsState Employment Report for January
Wednesday, March 18FOMC Monetary Policy Statement
Thursday, March 19Conference Board Leading IndicatorsPhiladelphia Fed Manufacturing Survey
Friday, March 20None
Monday, March 23Chicago Fed National Activity IndexExisting Home Sales
Tuesday, March 24Consumer Price IndexMarkit Flash PMIs for the United States, China and the EurozoneNew Home SalesRichmond Fed Manufacturing Survey
Wednesday, March 25Durable Goods Orders and Shipments
Thursday, March 26Kansas City Fed Manufacturing Survey
Friday, March 27Gross Domestic Product (Second Revision)State Employment Report for FebruaryUniversity of Michigan Consumer Sentiment
Summaries of Last Week's Economic Indicators
At the same time, there were also some factors that contributed positively to the LEI in February. These included building permits, consumer confidence, favorable credit conditions, the interest rate spread and the stock market.
Meanwhile, the Coincident Economic Index (CEI), which assesses current conditions, was up also 0.2 percent in February. All four of the subcomponents to the CEI made positive contributions to growth, including industrial production, nonfarm payrolls, personal income and manufacturing and trade sales. However, the production data added just 0.01 percentage points to the CEI, and it followed two months of negative contributions, illustrating a slower start to the new year than we would prefer.FOMC Monetary Policy StatementAs expected, the Federal Reserve no longer says that it can be “patient” in normalizing monetary policy. The FOMC, which met March 17–18, does say that “an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting.” This suggests that short-term rates will not increase until at least the June 16–17 meeting. However, the federal funds rate will change only when data warrant such actions. Still, conventional wisdom holds that the FOMC will vote to raise rates at some point in 2015, likely in June, July or September. (There is no meeting in August.) For the most part, the Federal Reserve has been on automatic pilot with its intentions for a midyear hike, and this action clears the way for that to happen.
Yet, the Federal Reserve also recognizes that there have been some significant headwinds in the economy as we start 2015, specifically saying that “economic growth has moderated somewhat” in its statement. It noted softness in the housing sector, sluggish export growth and falling prices as signs of weakness. While there was no specific mention of strength in the U.S. dollar and its impact on the economy, especially for manufacturers and exports, it was likely a factor in the overall discussion. Of course, the Federal Reserve also cited economic progress, such as improvements in the labor market, growth in household spending and increased business fixed investment.
In conjunction with the FOMC meeting, the Federal Reserve released its latest economic projections, reflecting slightly eased growth from what it saw three months ago. Federal Reserve officials now predict real GDP growth of between 2.3 and 2.7 percent in 2015, with similar rates in 2016. In December, the Federal Reserve reported that it expected 2.6 to 3.0 percent growth this year and 2.5 to 3.0 percent in 2016. On the positive side, the labor market appears to be doing better than anticipated. The Federal Reserve now forecasts the unemployment rate falling to 5.0 to 5.2 percent in 2015 and to 4.9 to 5.1 percent in 2016. This contrasts with the December outlook of 5.2 to 5.3 percent in 2015 and 5.0 to 5.2 percent in 2016.
In terms of inflation, lower energy prices mean that the personal consumption expenditure deflator will increase just 0.6 to 0.8 percent in 2015, with core inflation (which excludes food and energy prices) up 1.3 to 1.4 percent. These estimates were lower than estimated in December. The Federal Reserve continues to predict that inflationary pressures will not exceed its 2 percent target over the next three years.Housing Starts and PermitsThe Census Bureau and the U.S. Department of Housing and Urban Development reported that residential construction activity plummeted in February, falling 17.0 percent. New housing starts declined from an annualized 1,081,000 in January to 897,000 in February. This was the slowest pace since January 2014. Perhaps coincidently, that month was marred by many winter storms, which were significant enough to lessen GDP and overall economic activity. This most recent report likely suffered from the same thing, particularly with major snowstorms in the Northeast and the Midwest, with starts in those two regions down 56.5 percent and 37.0 percent in February, respectively. Starts in the West were also weak, down 18.2 percent for the month.
The February data reflect declines in both single-family (down from 697,000 to 593,000) and multifamily (down from 384,000 to 304,000) housing starts. Single-family starts had averaged 678,833 in the second half of 2014, and February’s number represents the lowest level in eight months. Likewise, multifamily starts, which are often quite volatile from month to month, averaged 368,333 from July to December of last year, illustrating the softness of the market in February. As such, the data are a major disappointment, particularly for a housing market that had started to stabilize and improve midyear in 2014.
On the other hand, the housing permits data provide a level of comfort and seem to indicate that the sharp reduction in housing starts in February might be temporary. Housing permits increased from an annualized 1,060,000 in January to 1,092,000 in February. This is slightly shy of the recent peak of 1,102,000 in October and provides a hint of where new residential construction data should be headed in the coming months. With that said, permitting data were mixed. Single-family housing permits were lower for the second straight month (down from 661,000 to 620,000), whereas the boost in the headline figure came mostly from higher multifamily activity (up from 399,000 to 472,000). For the market to stabilize and start to grow again, we would need to see better single-family permits and starts.Industrial ProductionManufacturing production decreased by 0.2 percent in February, according to the Federal Reserve Board. This followed declines in both December and January, down 0.1 percent and 0.3 percent, respectively. Both of the prior two month’s data points were revised lower, with January’s manufacturing production figure originally estimated as an increase of 0.2 percent. Many headwinds have combined to bring about this softness in the manufacturing sector, including global economic weakness, a strong U.S. dollar, the West Coast ports slowdown, a cautious consumer and the weather in some parts of the country.
As a result, capacity utilization in the manufacturing sector fell for the third straight month, down from 78.1 percent in November to 77.3 percent in February.
Nondurable goods output was up 0.2 percent in February, contrasting with the 0.6 percent decline for durable goods manufacturers. Petroleum and coal products (up 1.9 percent), aerospace and miscellaneous transportation equipment (up 1.2 percent), textile and product mills (up 1.1 percent), chemicals (up 0.4 percent) and computer and electronic products (up 0.2 percent) had positive increases in production for the month.
Yet, on a sector-by-sector basis, the bulk had lower output levels in February. Industry groups with the largest declines included motor vehicles and parts (down 3.0 percent), apparel and leather (down 2.4 percent), primary metals (down 1.4 percent), nonmetallic mineral products (down 0.9 percent), fabricated metal products (down 0.7 percent) and electrical equipment and appliances (down 0.6 percent).
On the positive side, manufacturing production has increased 3.4 percent over the past 12 months. While this was a steep decline from the 4.9 percent year-over-year pace in January, it still represents a modest rate of growth overall. In addition, at least part of that deceleration could be explained by the very strong rebound in production in February 2014 after weather-related issues the month before.
The good news is that manufacturers continue to be mostly upbeat in their economic outlook for the coming months, as seen in the latest NAM/IndustryWeek Survey of Manufacturers. Their enthusiasm has been dampened a bit, however, over the past three months due to the headwinds mentioned earlier.
Meanwhile, total industrial production rose 0.1 percent in February, rebounding after declines in both December and January. Increased output among utilities led the headline figure higher, with utilities production up 7.3 percent for the month. Mining output fell 2.5 percent, joining manufacturing in the negative column for February. Total industrial production was up 3.5 percent since February 2014, and overall capacity utilization has declined from 79.8 percent in November to 78.9 percent in February. NAHB Housing Market IndexThe National Association of Home Builders (NAHB) and Wells Fargo reported that the Housing Market Index dropped from 55 in February to 53 in March. It was the third consecutive drop in confidence among homebuilders, down from 58 in December. The largest declines were in the Northeast and the West, with a rebound in assessments in the Midwest. For nine straight months, the index has exceeded 50, the level at which more builders are positive than negative in their view of current conditions.
Indeed, homebuilders remain upbeat about the next six months, with the index of expected single-family sales unchanged at 59. This indicates relatively strong growth in sales moving forward, even as the traffic of potential buyers dipped somewhat this month. NAHB Chief Economist David Crowe added, “We are expecting solid gains in the housing market this year, buoyed by sustained job growth, low mortgage interest rates and pent-up demand.”New York Fed Manufacturing SurveyThe Empire State Manufacturing Survey reported expansion in the sector for the third straight month in the district, but at a slower pace. The composite index of general business conditions from the New York Federal Reserve Bank has declined from 10.0 in January to 7.8 in February to 6.9 in March. The underlying data suggest a mixed picture for the sector. Shipments eased for the month (down from 14.1 to 7.9), but continued to grow at a decent rate. In contrast, growth in new orders slipped into negative territory (down from 1.2 to -2.4). Roughly one-quarter of survey respondents said their orders had increased for the month, with 27.5 percent noting declines. As such, the data mirror other indicators reflecting current headwinds in the economy.
On the other hand, this latest report also shows the labor market moving in the right direction, which is encouraging. The index for the number of employees increased to its fastest pace in 10 months (up from 10.1 to 18.6), reflecting relatively healthy gains in hiring. In the March survey, 26.8 percent said they had added to their workforce versus 8.3 percent suggesting that their employment levels were declining. In addition, the average employee workweek expanded again (up from -1.1 to 5.2).
The increase in hiring is consistent with an improved longer-term outlook. The index for expected conditions six months from now rose from 25.6 to 30.7, indicating a relatively upbeat assessment of the future, at least for now. Measures of expected sales, shipments, employment and capital expenditures continued to suggest strong growth in the coming months, even as a few of these indices eased a bit this time. Overall, this survey found that 42.1 percent predict higher sales over the next six months, with 38.1 percent anticipating more workers and 30.9 planning more capital spending.Philadelphia Fed Manufacturing SurveyThe Federal Reserve Bank of Philadelphia reported that manufacturing activity was expanding modestly in March. The composite index of general business activity edged marginally lower, down from 5.2 in February to 5.0 in March. Overall activity has been softer than desired in the first three months of 2015, averaging just 5.5, whereas the composite index had averaged a more robust 18.6 for 2014 as a whole. Nonetheless, the Manufacturing Business Outlook Survey has now expanded for 13 straight months, and business leaders in the district remain relatively optimistic about the coming months.
In March, many of the underlying data points eased, mirroring weaknesses seen nationally. For instance, the new orders index dropped from 5.4 to 3.9. While nearly 30 percent of respondents reported sales increasing for the month, 25.9 percent noted declines. Employment growth was also somewhat slower (down from 3.9 to 3.5). Perhaps more worrisome was the fact that shipments declined for the second time in the past three months (down from 8.1 to -7.8). In addition, the average workweek narrowed further (down from -6.0 to -11.4).
Despite some softer data in the current environment, manufacturers in the region were more upbeat about the next six months. The forward-looking composite measure rose from 29.7 to 32.0. In addition, 47.1 percent of respondents anticipate increased new orders in the months ahead, with 47.9 seeing higher shipment levels. Regarding employment, one-quarter expect to add new workers over the next six months, and almost one-third foresee increased capital spending moving forward.
There were also some special questions regarding capital investments, and those responding to the survey said they anticipated increased spending on software, non-computer equipment and computers and hardware. In contrast, spending on energy-saving investments and structures were expected to be at lower levels in 2015 than in 2014.State Employment ReportMichigan created the most net new manufacturing jobs in January, according to the latest state figures from the Bureau of Labor Statistics. There were 4,900 additional manufacturing workers in Michigan in January, which continues to benefit from strong demand in motor vehicles and parts. Other states with significant employment gains in the sector for the month included Georgia (up 3,900), Ohio (up 3,600), North Carolina (up 3,400), Wisconsin (up 2,900) and Kentucky (up 2,800).
Since the end of 2013, Michigan also fared well, adding 24,900 manufacturing employees from January 2014 to January 2015. Indiana (up 17,800), Texas (up 15,200), North Carolina (up 14,200), Georgia (up 13,700), Ohio (up 13,400) and Wisconsin (up 12,700) also had notable increases in manufacturing employment over that time frame.
Meanwhile, North Dakota (2.8 percent) and Nebraska (2.9 percent) had the lowest unemployment rates in the nation in January. South Dakota (3.4 percent), Utah (3.4 percent), Minnesota (3.7 percent) and Oklahoma (3.9 percent) were not far behind. At the other end of the spectrum, the highest unemployment rates in the country included the District of Columbia (7.7 percent), Mississippi (7.1 percent), Nevada (7.1 percent), Louisiana (7.0 percent) and California (6.9 percent).
February state employment data will be released on March 27.