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NAM Weekly Economic ReportApril 27, 2015
Durable goods orders jumped 4.0 percent in March, which should be a sign that the sector was growing strongly and rebounding from recent softness. Instead, strong aircraft and motor vehicle sales in the month masked broader weaknesses behind the surface. Excluding transportation equipment orders, durable goods sales dropped 0.2 percent for the month and have edged lower across the past six months. Durable goods shipments were somewhat more encouraging on a year-over-year basis, up 3.7 percent, but they have been essentially flat since September.
This finding mirrors weaknesses in other data points, with manufacturing activity easing over the past few months due to a number of significant headwinds in the economy. These include a stronger U.S. dollar, weaknesses abroad, persistent logistical challenges from the West Coast ports slowdown and weather. The Chicago Federal Reserve Bank’s National Activity Index was lower for the third straight month in March largely on these hurdles, particularly from production-related indicators. Similarly, the Kansas City Federal Reserve Bank observed falling activity levels across-the-board, with exports declining for the fourth consecutive month. The reduction in crude oil prices dampened demand and production in the district, hurting producers.
If there is any silver lining, it is that manufacturers in the United States remain positive in their outlook. In fact, 45 percent of respondents to the Kansas City Fed Manufacturing Survey expect orders to increase over the next six months, with 38 percent anticipating greater production. Exports were the one main area where respondents continue to expect challenges. Likewise, the Markit Flash U.S. Manufacturing PMI found that export orders turned negative in April as a stronger dollar and sluggish growth in international markets weakened sales. Nonetheless, even with the above-mentioned headwinds, the Markit analysis continued to indicate decent growth in new orders, output and hiring in April.
Overseas, preliminary manufacturing data for China and Europe were both weaker in April. Chinese manufacturers reported declines for the fourth time in the past five months. The contraction in China stemmed largely from reduced domestic demand, with its economy continuing to decelerate. Production expanded slightly in April, albeit at a slower pace. Meanwhile, manufacturing activity in the Eurozone has improved today from where it was a few months ago; yet, new orders, output and exports were a bit softer in April than in March. The good news was that the data points reflect somewhat modest growth, and we have seen some rebounds in several recent indicators, including industrial production and economic sentiment. Still, even with better numbers, growth in Europe will be slow, which is why the European Central Bank has moved so aggressively toward stimulative measures.
Meanwhile, we received mixed news on the housing front last week. Existing home sales rebounded in March after slowing in recent months, especially in the Midwest and Northeast due to poor weather conditions. This was an encouraging development. However, it remains a seller’s market. Supplies of existing home sales remain low, helping to push median prices higher. In contrast, new single-family home sales declined in March to their slowest pace in four months. Looking at a longer time horizon, new home sales have jumped significantly, up 19.4 percent, but the Midwest and Northeast have yet to fully recover from recent slowness in their year-over-year activity levels. In addition, unlike the existing home market, inventories of new homes for sale have increased in March, which should benefit buyers.
This week, we will be looking for improved manufacturing activity in April after easing in recent months, with the Institute for Supply Management releasing new Purchasing Managers’ Index data on Friday. In addition, the Dallas and Richmond Federal Reserve Banks will report on activity in their regions on Monday and Tuesday, respectively. The economic highlight will come on Wednesday, with the release of real GDP data for the first quarter. My estimate is for 1.5 percent growth. Other data releases next week include the latest figures on construction spending, consumer confidence, employment costs and personal income and spending.
Chad MoutrayChief EconomistNational Association of Manufacturers
Monday, April 20Chicago Fed National Activity IndexNABE Business Conditions Survey
Tuesday, April 21State Employment Report
Wednesday, April 22Existing Home Sales
Thursday, April 23Kansas City Fed Manufacturing SurveyMarkit Flash Manufacturing PMIs for the United States, China, and the EurozoneNew Home Sales
Friday, April 24Durable Goods Orders and Shipments
Monday, April 27Dallas Fed Manufacturing Survey
Tuesday, April 28Conference Board Consumer ConfidenceRichmond Fed Manufacturing Survey
Wednesday, April 29Business Employment DynamicsFOMC Monetary Policy StatementGross Domestic Product (First Quarter 2015)
Thursday, April 30Employment Cost IndexPersonal Income and Spending
Friday, May 1Construction SpendingISM Purchasing Managers’ IndexUniversity of Michigan Consumer Sentiment (Revision)
Summaries of Last Week's Economic Indicators
Indeed, production-related indicators were one of the main drags on growth in March, subtracting 0.27 points from the index. Manufacturing production edged marginally higher, up 0.1 percent in March, but the broader measure of industrial production declined by 0.6 percent. Manufacturing output has been lower than desired for four straight months. In addition, employment, consumer spending and housing were also weaknesses during the month.
Excluding transportation, the news was less encouraging, with durable goods down 0.2 percent. Indeed, durable goods orders excluding transportation have fallen from their recent peak of $169.2 billion in September to $159.9 billion in March, a drop of 5.5 percent over the past six months. To be fair, the September figure might have been an outlier, with an average of $164.6 billion for 2014 as a whole. Still, that represents a softer sales environment than we would prefer for the broader durable goods sector.
Looking specifically at the March data, computers and related products (up 11.0 percent) was the only major sector outside of transportation equipment to notch a sales gain for the month. The other segments were all negative, including communications equipment (down 5.3 percent), machinery (down 1.5 percent), electrical equipment and appliances (down 1.1 percent), fabricated metal products (down 0.4 percent), other durable goods (down 0.3 percent) and primary metals (down 0.2 percent).
Meanwhile, durable goods shipments increased by 1.1 percent in March, growing for the first time in three months. Similar to new orders, however, shipments fell 0.3 percent when transportation equipment shipments were excluded. On a year-over-year basis, durable goods shipments have risen modestly, up 3.7 percent, but over the past six months, they have been essentially flat (up 0.1 percent). In March, there were increased shipments for transportation equipment (up 4.3 percent, including a 5.4 percent gain for motor vehicles) and computers and electronic products (up 1.6 percent). Other major sectors had declines.
Still, supplies of existing homes for sale remain low. There were 4.6 months of supply on the market in March, down from 4.7 months in February and 5.4 months in September. This had helped to lead to stronger growth in prices. The existing median home price in March was $212,100, or 7.8 percent higher than in March 2014.
Other measures of current manufacturing activity indicate net declines in activity across-the-board. This included new orders (up from -20 to -12), shipments (down from 0 to -7), production (unchanged at -2), employment (down from -2 to -18) and the average workweek (up from -17 to -10). Overall, these figures were quite discouraging. Many of these subcomponents have now contracted for four straight months, including for new orders, a proxy of future activity. One positive has been lower input costs, helped by reductions in energy expenses.
Kansas City Federal Reserve Bank Vice President and Economist Chad Wilkerson said, “Regional factories had their worst month in quite some time, as exports continued to drop and conditions worsened among producers of oil and gas–related goods.”
Looking ahead six months, manufacturers in the district remained positive; however, this optimism has taken a hit in recent months. The expected composite index has fallen from 21 in November to 6 in April. Yet, even with some softening in sentiment, 45 percent predict increased sales, and 38 percent anticipate higher production levels in the coming months. Perhaps more disappointing, hiring (down from 7 to -2) and exports (down from 4 to -6) are expected to remain challenged moving forward.
In general, the Chinese economy continues to decelerate. Real GDP rose 7.0 percent year-over-year in the first quarter, down from 7.3 percent growth in the fourth quarter. Moreover, industrial production, retail sales and fixed asset investments have each slowed materially in the first quarter. The data points are likely to lead the Chinese government to pursue new stimulative measures.
In Europe, the Markit Flash Eurozone Manufacturing PMI decreased from 52.2 in March to 51.9 in April. As such, there was modest growth reported for manufacturers in April, even with the slight deceleration for the month. Manufacturing activity today remains improved from where it was just a few months ago, however, with the headline index up from 50.1 in November. Still, the underlying data were mostly lower across-the-board in April, including new orders (down from 52.5 to 51.6), output (down from 53.6 to 53.1) and exports (down from 52.7 to 51.8). Hiring (up from 51.6 to 51.7) was one of the few areas with progress in April.
The broader story for Europe reflects recent progress but also persistent challenges. Industrial production rebounded in February in the Eurozone, and economic sentiment marginally improved in its most recent survey. Nonetheless, other data highlight continuing challenges. The unemployment rate ticked up slightly to 11.3 percent. Many observers continue to worry about deflation, and annual inflation declined 0.1 percent in March. As a result, the European Central Bank is spending 1 trillion euros over the next 18 months to spur greater economic growth as part of its quantitative easing program.
Meanwhile, the Markit Flash U.S. Manufacturing PMI declined from 55.7 in March to 54.2 in April. Yet, even with somewhat weaker data for the month, demand, production and employment rates continue to be relatively decent. Indices for new orders (down from 57.2 to 55.4), output (down from 58.8 to 55.4) and hiring (down from 53.8 to 53.6) decelerated for the month, but with growth remaining at a modest pace. At the same time, exports (down from 50.0 to 48.6) turned negative as a stronger dollar and weaknesses abroad dampened manufacturers’ ability to grow international sales.
There were some bright spots to highlight. Falling energy prices have reduced overall input costs, with 57 percent of goods-producing industry respondents saying their costs were lower during the past three months. Firms were also hiring a bit more, with 43 percent of goods-producing businesses adding workers. Along those lines, 58 percent of goods-producing firms noted challenges in filling open positions. Capital spending was a net positive, with 38 percent noting increases. This was down from 51 percent in January, however, indicating some deceleration in capital investments from just three months ago.
In terms of the economic outlook, 59 percent of industry respondents predict real GDP growth of 2.1 percent to 3.0 percent in 2015, with 29 percent forecasting growth of 3.1 percent to 4.0 percent. My own forecast calls for 2.8 percent growth this year.
Unlike the existing home market (see above), inventories of new homes for sale increased in March. There were 5.3 months of supply on the market in March, up from 4.6 months in February. However, this remains below the average of 5.6 months of supply during the second half of 2014. The median home price in March was $273,700.
Meanwhile, Nebraska (2.6 percent) has the lowest unemployment rate in the country, supplanting North Dakota (3.1 percent). These two states were closely followed by Utah (3.4 percent), South Dakota (3.5 percent), Minnesota (3.7 percent), Idaho (3.8 percent), Oklahoma (3.9 percent) and New Hampshire (3.9 percent) with unemployment rates well below the national average (5.5 percent). At the other end of the spectrum, the highest unemployment rates in March were in the District of Columbia (7.7 percent), Nevada (7.1 percent) and Mississippi (6.8 percent).