Monday Economic Report - December 28, 2015

A Publication of the National Association of Manufacturers

MONDAY ECONOMIC REPORTNAM/IndustryWeek Survey of Manufactures Business Outlook by Quarter, 2012-2014

The U.S. economy grew 2.0 percent in the third quarter, according to the latest revision from the Bureau of Economic Analysis. Consumer spending was one of the brighter spots, up 3.0 percent at the annual rate. This was lower than the 3.6 percent pace in the second quarter, but decent overall. Goods purchases added 1.08 percentage points to real GDP, and when including services, all real GDP growth in the third quarter came from consumer spending. The net impact of business investment, government expenditures and net exports essentially offset one another. Slower inventory spending provided one of the larger drags on real GDP growth in the third quarter, subtracting 0.71 percentage points from the headline number. For now, the current forecast is for real GDP to increase 2.0 percent once again in the fourth quarter. The economic outlook for 2016 is for 2.4 percent growth.

While consumer spending has continued to grow modestly, boosting overall economic growth, the underlying data provide a mixed picture. Personal spending rose 0.3 percent in November, led by rebounds in durable and nondurable goods purchases. Yet, the increases in goods spending in November followed two months of softness, and service-sector spending was unchanged for the second straight month. Indeed, there is a general sense that consumers are holding back in terms of their overall purchases. Personal consumption expenditures have risen 2.9 percent over the past 12 months. While this represents modest growth in personal spending year-over-year, this pace has decelerated over the course of this year. For instance, the year-over-year rate was 4.4 percent one year ago. Moreover, the savings rate edged down from 5.6 percent to 5.5 percent. Even with the decline, this was the second-highest rate since December 2012. Consumer confidence continues to be subpar despite picking up a little in December, according to the University of Michigan and Thomson Reuters.

To the extent that there are lingering anxieties about the current economic environment, challenges in the manufacturing sector have contributed to those worries. The Chicago Federal Reserve Bank’s National Activity Index (NAI) has been negative for four straight months, suggesting that the U.S. economy has grown below its historical trend of late. Much of this weakness has come from manufacturing, which has suffered the effects of global headwinds. While manufacturing production held steady in November, industrial production fell for the third consecutive month. Likewise, new durable goods orders were unchanged in November, but core capital goods spending was down 0.4 percent. Indeed, outside of transportation equipment, new orders fell 0.1 percent for the month, with year-over-year declines that were even larger, down 1.9 percent. On the positive side, the Richmond Federal Reserve Bank reported improved activity in December, rebounding after three straight months of declines, even as overall conditions remained relatively soft.

Meanwhile, the two reports on residential sales out last week moved in opposite directions. Housing starts figures have generally moved in the right direction, with 1,173,000 units in November at the annual rate, and new home sales were also higher, up 4.3 percent for the month. There were an annualized 490,000 units sold in November, up from 449,000 units one year ago, or 9.1 percent. Still, this figure was less than the 545,000 units sold in February, which was the year-to-date peak in 2015, indicating that there remains room for improvement. Along those lines, the existing home sales market has been weak of late, falling in three of the past four months. Sales of existing homes decreased from an annualized 5.32 million units in October to 4.76 million units in November, slowing down from its peak of 5.58 million units in July. The reduced activity levels in November came from declines in single-family sales. We hope to see activity pick up moving forward.

This week, there will only be a handful of economic indicators to digest. The Dallas Federal Reserve Bank will release its latest manufacturing survey this morning, and it will likely continue to show the negative impacts on the sector from lower crude oil prices and the strong dollar. Tomorrow, we will get preliminary data on goods exports and imports for November from the U.S. Department of Commerce as well as consumer confidence figures from the Conference Board.

Chad Moutray, Ph.D., CBE
Chief Economist
National Association of Manufacturers

Note: Due to the holidays, we will not be issuing a report on Monday, January 4. The next report will be released on Monday, January 11.

Economic Indicators

Last Week's Indicators (Summaries Appear Below)

Monday, December 21
Chicago Fed National Activity Index

Tuesday, December 22
Existing Home Sales
Gross Domestic Product (Second Revision)
Richmond Fed Manufacturing Survey

Wednesday, December 23
Durable Goods Orders and Shipments
New Home Sales
Personal Income and Spending
University of Michigan Consumer Sentiment (Revision)

Thursday, December 24
CHRISTMAS EVE

Friday, December 25
CHRISTMAS DAY

This Week's Indicators

Monday, December 28
Dallas Fed Manufacturing Survey

Tuesday, December 29
Conference Board Consumer Confidence
International Trade in Goods (Preliminary)

Wednesday, December 30
None

Thursday, December 31
NEW YEAR’S EVE

Friday, January 1
NEW YEAR’S DAY

Summaries for Last Week's Economic Indicators

Chicago Fed National Activity Index
The Chicago Federal Reserve Bank reported that the U.S. economy weakened further in November. The NAI declined from -0.17 in October to -0.30 in November, remaining in negative territory for the fourth straight month. Numbers exceeding zero indicate a national economy that is expanding above its historical trend, with negative figures suggesting the opposite. The NAI has been below its historical trend in all but two months year-to-date, with the three-month moving average edging slightly lower, from -0.18 to -0.20.

Much of this weakness has come from manufacturing, which has suffered the effects of global headwinds. While manufacturing production held steady in November, industrial production fell for the third consecutive month. Other indicators were mixed, with nonfarm payroll growth providing a positive contribution to the NAI in November, while sales and housing provided a slight drag.

Durable Goods Orders and Shipments
The Census Bureau reported that new durable goods orders were unchanged in November. With that said, the report also suggested broader weakness in durable goods demand outside of defense aircraft, which jumped 46.9 percent for the month, up from $5.6 billion in October to $8.2 billion in November. Indeed, new orders excluding transportation equipment edged down 0.1 percent in November, with core capital goods spending (or nondefense capital goods excluding aircraft) down 0.4 percent. Overall, this report continues a trend of soft growth for the sector, with global challenges and reduced commodity prices dampening demand and production. Since November 2014, new durable goods orders have risen 1.2 percent, but excluding transportation equipment, year-over-year sales were down 1.9 percent.

Looking specifically at the sector-by-sector monthly new orders analysis, the largest increases in November were in communications equipment (up 3.7 percent), electrical equipment and appliances (up 2.6 percent), motor vehicles and parts (up 1.5 percent) and fabricated metal products (up 0.9 percent). In contrast, there were declining new orders for primary metals (down 2.7 percent), machinery (down 1.5 percent) and computers and related products (down 0.9 percent) in November. In addition, nondefense aircraft and parts orders dropped 22.2 percent in November after soaring up 78.7 percent in October. Aircraft sales are often quite volatile from month to month.

Meanwhile, durable goods shipments were up 0.9 percent in November, rebounding from the 1.2 percent decline in October. Yet, excluding transportation, November shipments were down 0.1 percent, suggesting broader weaknesses beyond nondefense aircraft (up 16.0 percent) and motor vehicles and parts (up 1.8 percent). Along those lines, shipments were lower for the month in the following segments: computers and related products (down 3.9 percent), electrical equipment and appliances (down 1.6 percent), primary metals (down 1.4 percent) and machinery (down 0.5 percent). In fact, core capital goods shipments were down 0.5 percent.

On a year-over-year basis, durable goods shipments have risen 1.8 percent, or conversely, they were down 1.7 percent when excluding transportation equipment shipments.

Existing Home Sales
According to the National Association of Realtors® (NAR), existing home sales declined 10.5 percent in November, falling for the third time in the past four months. Sales of existing homes decreased from an annualized 5.32 million units in October to 4.76 million units in November, slowing down from its peak of 5.58 million units in July. The reduced activity levels in November came from declines in single-family sales (down from 4.72 million to 4.15 million), with condo and co-op sales slightly higher (up from 600,000 to 610,000). Moreover, each region of the country reported decreases. Lawrence Yun, NAR’s chief economist, attributed these declines to “sparse inventory and affordability issues” in the existing home market.

Nonetheless, the soft sales figures did increase the number of months of supply on the market, from 4.8 months to 5.1 months. This was primarily from single-family units (up from 4.8 months to 5.2 months), with condo and co-op inventories more restricted (down from 4.9 months to 4.5 months). The median price for existing homes sold in December was $220,300.

Gross Domestic Product (Second Revision)
The Bureau of Economic Analysis reported that the U.S. economy grew 2.0 percent in the third quarter. That exceeds the original estimate of 1.5 percent, but dips below the 2.1 percent figure released last month. The largest variable in these three estimates was the impact of inventory spending, with businesses replenishing their stockpiles at a slower pace in this report than in the last one (but not as severely as originally thought). In the end, spending on private inventories subtracted 0.71 percentage points from real GDP growth in the third quarter. On the upside, a pickup in demand would necessitate additional production because of depleted inventory stockpiles. That could yield somewhat better growth moving forward.

For now, however, the current forecast is for real GDP to increase by 2.0 percent once again in the fourth quarter. The outlook for 2016 is for the economy to grow by 2.4 percent.

Other observations for real GDP growth in the third quarter followed trends seen in the past release. Consumer spending was one of the brighter spots, up 3.0 percent at the annual rate. This was lower than the 3.6 percent pace in the second quarter, but decent overall. Goods purchases added 1.08 percentage points to real GDP, and when including services, all real GDP growth in the third quarter came from consumer spending. The net impact of business investment, government expenditures and net exports essentially offset one another.  

Nonresidential fixed investment rose 2.6 percent in the third quarter, slowing from 4.1 percent growth in the second quarter. Equipment spending rebounded somewhat, but investments declined for both structures and intellectual property. As such, the data were softer than desired, with pullbacks in the energy sector and its supply chain continuing to serve as a drag on structures. On the other hand, residential spending growth was pretty strong, up 8.2 percent in the quarter.

Net exports have significantly dragged down growth for much of the past year, with the strong dollar and weaker demand abroad hurting our ability to increase international sales. Along those lines, net exports subtracted 0.89 and 1.92 percentage points, respectively, in the fourth quarter of 2014 and the first quarter of 2015. In the third quarter, goods exports fell 0.9 percent, with goods imports up 1.4 percent, and net exports subtracted 0.26 percentage points from top-line real GDP growth.

New Home Sales
The Census Bureau and the U.S. Department of Housing and Urban Development reported that new home sales rose 4.3 percent in November. Sales of single-family residences increased from a revised 470,000 units in October at the annual rate to 490,000 units in November. That represents a 9.1 percent increase from one year ago, with 449,000 units sold in November 2014; however, it was less than the 545,000 units sold in February, which was the year-to-date peak in 2015. In this latest report, new home sales were higher in the South and West, but lower in the Midwest and Northeast.

The number of months of supply edged lower for the second straight month, down from 6.1 months in September, to 5.8 months in October, to 5.7 months in November. This was up from 4.9 months of supply in May, indicating a pickup in inventories of homes for sale in recent months. The median home price in November was $305,000, up 0.8 percent from $302,700 one year ago.

Personal Income and Spending
The Bureau of Economic Analysis reported that personal spending increased 0.3 percent in November, rebounding from being unchanged in October. Indeed, spending on durable and nondurable goods items were both higher for the month, up 1.1 percent and 0.9 percent, respectively, which was encouraging. However, overall spending remained softer than desired, with a general sense that Americans are holding back in terms of their overall consumer purchases. The increases in goods spending in November followed two months of softness, and service-sector spending was unchanged for the second straight month. Moreover, personal consumption expenditures have risen 2.9 percent over the past 12 months. While this represents modest growth in personal spending year-over-year, this pace has decelerated over the course of this year. For instance, the year-over-year rate was 4.4 percent one year ago.

At the same time, personal income rose 0.3 percent in November. On a year-over-year basis, personal incomes have grown 4.4 percent since November 2014. Meanwhile, total manufacturing wages and salaries increased from $816.4 billion in October to $826.8 billion in November. These have generally trended in the right direction, even with recent softness in the sector, up from the $746.8 billion and $780.9 billion averages of 2013 and 2014, respectively.

The savings rate edged down from 5.6 percent to 5.5 percent. Even with the decline, this was the second-highest rate since December 2012, supporting the notion that consumers are holding back a little in their spending.

In other news, the personal consumption expenditure (PCE) deflator was unchanged in November. Prices for goods were down 0.4 percent, with service-sector costs up 0.2 percent. Excluding food and energy, the PCE deflator inched up 0.1 percent. In general, pricing pressures have been reduced by falling energy costs over the past year, which have declined 15.8 percent year-over-year. Over the past 12 months, the PCE deflator has risen just 0.4 percent, with core inflation, which excludes food and energy prices, up 1.3 percent. Each suggests that overall pricing pressures remain quite minimal for now.

Richmond Fed Manufacturing Survey
The Richmond Federal Reserve Bank reported improved activity in December, rebounding after three straight months of declines. The composite index of general business activity rose from -3 in November to 6 in December, its first positive reading since July. (The measure was zero in August.) As such, manufacturers in the district ended 2015 with better news, even as overall conditions remained relatively soft. The higher headline number stemmed largely from improvements in new orders (up from -6 to 8), capacity utilization (up from zero to 2), employment (up from zero to 12) and the average workweek (up from -3 to 7). At the same time, shipments (up from -2 to zero) and the backlog of orders (up from -16 to zero) stabilized for the month.

The economic outlook for the next six months also continued to trend upward, even as sentiment has dampened somewhat from prior months. Forward-looking measures for shipments (up from 21 to 24), hiring (up from 11 to 16) and capital expenditures (up from 6 to 23) each expanded in December. At the same time, index readings for new orders (down from 27 to 23) and capacity utilization (down from 24 to 16) remained relatively strong despite some easing for the month. Nonetheless, the average workweek (down from 12 to 4) was expected to grow only slightly moving forward.

Meanwhile, inflationary pressures remained quite minimal. Manufacturers in the district noted that prices paid for raw materials grew 0.67 percent at the annual rate in December, edging up from 0.61 percent in November. With that said, raw material prices are picking up a little, up from 1.21 percent at the annual rate six months from now in the last report to 1.60 percent this time. Even with some acceleration in costs, pricing growth is expected to remain below the Federal Reserve’s stated goal of 2 percent.

University of Michigan Consumer Sentiment (Revision)
The University of Michigan and Thomson Reuters reported that consumer confidence increased somewhat in December. The Consumer Sentiment Index increased for the third consecutive month, up from 91.3 in November to 92.6 in December. Preliminary data had pegged December’s reading as 91.8; therefore, the final data suggest a slightly more upbeat sentiment for the month than in earlier estimates. Yet, at the same time, this report also continued to reflect an American public that remains anxious about the economy. The headline index reached a post-recessionary high in January of 98.1, and it has largely trended lower since then on worries about the economic outlook. To further illustrate this deceleration in confidence, this measure averaged just 91.0 in the second half of 2015, down from 94.9 in the first half of the year.

The November data rose on a better assessment of current economic conditions (up from 104.3 to 108.1), but it was then held back by weaknesses in the public’s perceptions of the future economic outlook (down from 82.9 to 82.7). Over the longer term, consumers were slightly less upbeat today than one year ago (93.6), but they were more confident than two years ago (82.5). The larger news, however, is that the data remain at subpar levels, something that we hope begins to turn around in the coming months.

Questions or Comments?

Contact Chief Economist Chad Moutray at cmoutray@nam.org.

Related Tags: