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NAM Weekly Economic ReportApril 21, 2014
The Federal Reserve Board’s April Beige Book brought new evidence that the moderate economic recovery is getting back on track as the impact of the harsh winter weather abates. Manufacturing improved in most of the Federal Reserve’s 12 districts, growing at a “steady pace” in New York, Atlanta, St. Louis and Dallas, and gaining “some momentum” in San Francisco. The transportation sector strengthened, with the outlook described as optimistic. Reports on both residential and commercial construction showed that the sector continues to improve, albeit slowly; this was consistent with the moderate pickup in housing starts, from 920,000 in February to 946,000 in March. Consumer spending increased in most districts, confirming that the resilience of the household sector remains a key driver of the recovery. The Beige Book also indicated that price and wage pressures remain limited. This supports the majority view of the Federal Open Market Committee that there is still sufficient slack in the labor market to warrant an accommodative monetary policy for some time.
The Philadelphia Federal Reserve’s Business Outlook Survey painted a similar picture, confirming a pickup in manufacturing activity following weather-related weakness the previous month, and with respondents optimistic that growth would continue over the coming months. Demand for manufactured goods rose, with the new orders index at +5.7 compared to February’s -5.2; shipments also increased. Employment levels were steady, but the survey recorded a more optimistic outlook here as well, with the percentage of firms expecting higher employment rising to 34 percent compared to February’s 27 percent. Just under half of firms polled expected higher capital spending this year compared to 2013, with one-fifth expecting a lower level. Firms not planning to increase capital spending cited low growth, low capacity utilization and limited need to replace capital and technology equipment. Overall, the Philadelphia Federal Reserve survey and the Beige Book confirm that the recovery is gaining more traction, but also suggest it will take longer for the pace of activity to accelerate in a more decisive manner.
Federal Reserve Chair Janet Yellen underscored the benign inflation scenario in a speech at the Economic Club of New York—her second public speech since assuming the Federal Reserve’s leadership. Asked whether the Federal Reserve would be prepared to let inflation drift above 2 percent in order to provide additional support to the recovery, Yellen noted that the risks are still skewed toward inflation being too low, not too high, and the Federal Reserve’s challenge for the time being is to bring inflation up and closer to the 2 percent target. She also pointed out that this low inflation environment currently characterizes not just the United States, but other main advanced economies, notably Japan and Europe, where the European Central Bank is debating possible additional monetary stimulus. Yellen stressed, however, that the Federal Reserve is well aware that overshooting the inflation objective “can be very costly,” and will, therefore, tighten policy in a timely manner at a pace dictated by the improvement in activity and employment. Unwinding monetary stimulus at the right pace is essential to the recovery’s sustainability, and the Federal Reserve will keep striving to guide market expectations to minimize the risks of sudden adjustments in market interest rates during the transition.
Inflation, meanwhile, edged up in March, with the headline Consumer Price Index (CPI) rising to 1.5 percent year-over-year compared to 1.1 percent in February, driven by increases in the prices of food, natural gas and electricity, partially compensated by a drop in gasoline prices. Core CPI inflation, calculated by stripping out the more volatile energy and food components, rose to 1.7 percent year-over-year from February’s 1.6 percent. The Federal Reserve’s preferred measure of inflation, however—the change in the Personal Consumption Expenditure Deflator Index—is significantly lower and stood at 0.9 percent in February (the March figure has not yet been released).
This week will allow us to take the pulse of global manufacturing, with the Markit Flash Manufacturing PMIs for the United States, China and the Eurozone. The reading for China will be followed especially closely, given that an intensification of China’s slowdown might have repercussions on global demand for commodities. The durable goods report will offer another important gauge of the pace of the recovery and the health of demand for manufacturing in the United States. Other highlights include new home sales and the University of Michigan Consumer Sentiment Index.
Chad MoutrayChief EconomistNational Association of Manufacturers
Editor’s Note: Many thanks to General Electric Chief Economist Marco Annunziata for compiling this week’s Monday Economic Report.
Last Week's Indicators:(Summaries Appear Below)
Monday, April 14Business Inventories
Tuesday, April 15Consumer Price IndexNAHB Housing Market IndexNew York Fed Empire State Manufacturing Survey
Wednesday, April 16Federal Reserve Board’s Beige BookHousing Starts and PermitsIndustrial Production
Thursday, April 17MAPI Manufacturing SurveyPhiladelphia Fed Manufacturing Survey
Friday, April 18Conference Board Leading IndicatorsState Employment Report
This Week's Indicators:Monday, April 21Chicago Fed National Activity Index
Tuesday, April 22Existing Home SalesRichmond Fed Manufacturing Survey
Wednesday, April 23Markit Flash Manufacturing PMIs for the United States, China and the EurozoneNew Home Sales
Thursday, April 24Durable GoodsKansas City Fed Manufacturing Survey
Friday, April 25Real GDP by Industry (Fourth Quarter 2013)University of Michigan Consumer Sentiment
Summaries of Last Week's Economic Indicators