Monday Economic Report - February 29, 2016

A Publication of the National Association of Manufacturers

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

After several weeks with a steady slew of relatively bad economic reports, the data out last week were more mixed, with lingering soft spots but with some encouraging signs in others. We will start with the good news. Personal income and spending both rose 0.5 percent in January, rebounding from slowing at the end of 2015. On the spending front, the increase stemmed largely from increased purchases of durable goods and services, with nondurable goods activity unchanged. More importantly, personal spending has risen 4.2 percent over the past 12 months, a relatively decent pace, with incomes up 4.3 percent year-over-year. As such, it should not be a surprise that consumer spending was one of the few bright spots in the revised fourth quarter real GDP report. Personal consumption expenditures have helped to prop up the U.S. economy, even if we still get a sense that Americans are holding back from making even larger purchases. Indeed, consumers remain cautious, as seen in confidence surveys from the Conference Board and the University of Michigan.

Real GDP growth was revised slightly higher in the fourth quarter, up 1.0 percent at the annual rate instead of the earlier estimate of 0.7 percent. In addition to modest consumer spending, residential investment was another positive, up an annualized 8.0 percent in the fourth quarter. (The January housing market data out last week moved in opposite directions, with existing home sales edging higher in January but new home sales dropping sharply, likely due to severe winter weather.) Despite the marginally better GDP revision, the underlying headline remains the same: the U.S. economy slowed to a crawl at the end of 2015. Moreover, the current expectation is for real GDP to increase 2 percent in 2016, with manufacturing production up roughly 1 percent.

New durable goods orders rose 4.9 percent in January, rebounding from the 4.6 percent decline in December. Strong growth in transportation helped boost the January figure, bringing it back to essentially the level in November. New orders for durable goods products have increased 1.8 percent over the past 12 months. Yet, excluding transportation equipment, year-over-year growth for new orders would have been down 0.6 percent since January 2015. This suggests broader weaknesses outside of the transportation sector. Along those lines, demand for core capital goods (or nondefense capital goods excluding aircraft) has been quite weak over the past year, with new orders down 2.8 percent since January 2015.

Most of the other manufacturing data released last week reflect the ongoing challenging economic environment for the sector, especially in light of a strong U.S. dollar, reduced crude oil prices and weak demand for our products abroad. On this latter point, preliminary data suggest that the goods trade deficit widened in January, continuing a trend that led to a 6.1 percent decline in U.S.-manufactured goods exports in 2015. Sentiment surveys from the Kansas City and Richmond Federal Reserve Banks indicated contracting levels of manufacturing activity once again in those districts in February, with new orders and shipments remaining in negative territory. The Kansas City report has contracted for 12 straight months. Meanwhile, the Markit Flash U.S. Manufacturing PMI fell to its slowest pace in more than three years in February, with activity in the Eurozone also easing to a one-year low. Despite these worrying reports about the current state of the manufacturing sector, business leaders remain cautiously positive about the next six months.  

After four straight months of contracting activity, the ISM Manufacturing Purchasing Managers’ Index, which comes out on Tuesday, will be closely watched for signs of a possible rebound in February. Despite the negative reading in the previous report, new orders were stronger in January than in November and December. The Dallas Federal Reserve Bank will publish its most recent manufacturing survey, with lower energy prices and a stronger dollar challenging that region. Beyond these releases, the other main headline will come from the February jobs numbers, out on Friday. In January, manufacturers added 29,000 workers on net—much stronger than anticipated—although hiring growth has been soft over the past year. Other economic highlights this week will be the latest data on construction spending, factory orders and shipments and international trade.

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

Economic Indicators

Last Week's Indicators (Summaries Appear Below)

Monday, February 22
Markit Flash PMIs for the United States and Eurozone

Tuesday, February 23
Conference Board Consumer Confidence
Existing Home Sales
Richmond Fed Manufacturing Survey

Wednesday, February 24
New Home Sales

Thursday, February 25
Durable Goods Orders and Shipments
Kansas City Fed Manufacturing Survey

Friday, February 26
Gross Domestic Product (Revision)
International Trade in Goods (Preliminary)
Personal Income and Spending
University of Michigan Consumer Sentiment

This Week's Indicators

Monday, February 29
Dallas Fed Manufacturing Survey

Tuesday, March 1
Construction Spending
ISM Manufacturing Purchasing Managers’ Index

Wednesday, March 2
ADP National Employment Report

Thursday, March 3
Factory Orders and Shipments
Productivity and Costs (Revision)

Friday, March 4
BLS National Employment Report
International Trade Report

Summaries for Last Week's Economic Indicators

Conference Board Consumer Confidence
The Conference Board reported that consumer sentiment waned again in February, with Americans nervous in their economic outlook. The Consumer Confidence Index dropped from 97.8 in January to 92.2 in February, its lowest level in seven months. Since June of last year, the data have been highly volatile, ranging from a low of 91.0 in July to 102.6 in September, with the latter being the second-highest reading since the recession. (The index peaked at a post-recessionary high of 103.8 in January 2015.) The high degree of change from month to month indicates just how anxious the public is right now, with recent financial market volatility likely dampening perceptions in this report. In February, consumers were less upbeat in their assessments of the current (down from 116.6 to 112.1) and future (down from 85.3 to 78.9) economy.

Respondents to this survey are often swayed by pocketbook issues, including worries about labor market prospects, and this release is no different. The percentage suggesting that jobs were plentiful declined from 23.0 percent to 22.1 percent, with those saying that jobs were hard to get rising from 23.6 percent to 24.2 percent. In a similar fashion, the percent expecting their incomes to increase in the coming months decreased from 18.6 percent to 17.2 percent, with those predicting declining incomes increasing from 10.7 percent to 12.5 percent.

Durable Goods Orders and Shipments
The Census Bureau reported that new durable goods orders rose 4.9 percent in January, rebounding from the 4.6 percent decline in December. Indeed, the $237.5 billion figure for new orders in January was not much different than the $237.4 billion figure in November, making December’s reading a bit of an outlier. Still, over the longer term, manufacturing activity remains quite soft. New orders for durable goods products have increased 1.8 percent over the past 12 months. Yet, much of that has come from transportation equipment orders. Excluding transportation, year-over-year growth for new orders would have been down 0.6 percent since January 2015. This suggests broader weaknesses outside of the transportation sector.

Motor vehicles and parts orders were up 3.0 percent in January, with year-over-year growth of 10.7 percent. As such, it continues to be one of the brighter spots among durable goods sectors. Defense and nondefense aircraft orders were also up sharply in January, recovering from sizable declines in December. Among other sectors, the largest monthly gains in new orders were in machinery (up 6.9 percent), fabricated metal products (up 1.6 percent), computers and electronic products (up 0.8 percent) and primary metals (up 0.7 percent). New orders for core capital goods (or nondefense capital goods excluding aircraft) were up 3.9 percent. At the same time, demand for core capital goods has been quite weak over the past year, with new orders down 2.8 percent since January 2015.

Meanwhile, durable goods shipments also recovered from a soft December, up 1.9 percent in January after a decline of 1.6 percent in the prior report. Nondefense aircraft orders were a large part of this rebound (and also a significant contributor to December’s decline), with shipments of motor vehicles also seeing healthy gains, up 3.1 percent. Excluding transportation, shipments eked out a gain of just 0.2 percent, suggesting a more mixed picture. Sectors with positive growth in shipments in January included fabricated metal products (up 1.5 percent), electronic equipment and appliances (up 0.4 percent) and primary metals (up 0.2 percent). In contrast, shipments were lower for computers and electronic products (down 0.5 percent) and other durable goods (down 0.7 percent).

On a year-over-year basis, durable goods shipments increased 0.9 percent. However, much like the new orders data discussed above, shipments declined 0.9 percent when transportation equipment was excluded.

Existing Home Sales
The National Association of Realtors® reported that existing home sales edged slightly higher, up 0.4 percent from an annualized 5.45 million units in December to 5.47 million units in January. After sales activity dipped in October and November, the data indicate that the market for existing homes has started 2016 on a strong note. January’s pace was the highest in seven months, and more importantly, existing home sales have grown 11.0 percent over the past 12 months, up from 4.93 million in January 2015. In this report, single-family sales rose 1.0 percent (up from 4.81 million to 4.86 million), whereas condominium and co-op sales were off 4.7 percent (down from 640,000 to 610,000). On a year-over-year basis, however, both categories were higher, up 11.2 percent and 8.9 percent, respectively.

Sales of existing homes were higher in the Midwest and Northeast in January, but sales were down in the West. Inventories increased marginally, up from 3.9 months of supply in December to 4.0 months in January. However, this was an improvement from November’s 5.0 months of supply. The median home price in this report was $213,800, or 8.2 percent higher than the year before.

Gross Domestic Product (Revision)
The Bureau of Economic Analysis reported that real GDP growth was revised slightly higher in the fourth quarter, up 1.0 percent at the annual rate instead of the earlier estimate of 0.7 percent. Despite the marginally better figure, the underlying headline remains the same: the U.S. economy slowed to a crawl at the end of 2015. Real GDP in the fourth quarter decelerated from 3.9 percent and 2.0 percent growth in the prior two quarters, respectively. Moreover, the easing at the end of the year reflected drags from business investment, inventory replenishment, net exports and state and local government. On the other hand, consumer spending was one of the bright spots in this report, albeit with Americans holding back from stronger spending due to economic anxieties. Personal consumption expenditures rose an annualized 2.0 percent in the fourth quarter, down from the prior estimate of 2.2 percent and slowing from 3.0 percent in the third quarter.

Personal consumption expenditures added 1.38 percentage points to the headline figure, with 0.42 percent coming from goods spending and 0.96 percent stemming from services. The largest drag came from net exports, which subtracted 0.25 percent from real GDP. This was an improvement from the 0.47 percent drag in the earlier estimate, as goods imports shifted from an increase of 0.6 percent to a decline of 1.2 percent in this revision. Nonetheless, goods exports were down 5.8 percent at the annual rate in the fourth quarter, illustrating the significant headwinds manufacturers faced from the strong dollar and sluggish economic growth in key markets. Indeed, U.S.-manufactured goods exports fell 6.1 percent last year, and the U.S. dollar has appreciated more than 22 percent since June 2014 against major currencies.

Meanwhile, fixed investment was essentially flat in the fourth quarter, growing just 0.1 percent. Nonresidential fixed investment declined 1.9 percent, pulled lower by reduced spending on structures and equipment, down 6.6 percent and 1.8 percent, respectively. This was mostly offset, however, by strength on residential spending, up an annualized 8.0 percent in the fourth quarter. As a whole, gross private domestic investment subtracted 0.12 percentage points from real GDP in the quarter, mostly from slower inventory replenishment. However, this was better than the 0.41 percent drag reported in the prior estimate, as inventory spending was not as bad as previously reported.

International Trade in Goods (Preliminary)
Preliminary data from the Census Bureau suggest that the goods trade deficit widened to its highest level in five months in January. The balance of goods traded increased from a deficit of $61.51 billion in December to $62.23 billion in January. This was the result of a decline in goods exports (down from $120.17 billion to $116.80 billion) that more than offset a decrease in goods imports (down from $181.69 billion to $179.03 billion). Goods exports were down across the board, including reductions for capital goods (down $1.20 billion), industrial supplies (down $916 million), foods, feeds and beverages (down $383 million), consumer goods (down $332 million) and automotive vehicles (down $127 million).

Final data on international trade for January will be released on March 4. Note that the U.S. trade deficit is also assisted by a surplus in service-sector activity, which was $19.16 billion in December. The final data will also include breakouts for petroleum trade, with lower crude oil prices likely impacting the above numbers, and for manufactured goods.

Kansas City Fed Manufacturing Survey
The Kansas City Federal Reserve Bank reported that manufacturing activity in its district has declined for 12 straight months. The composite index of general business conditions fell from -9 in January to -12 in February, its lowest level since April 2009. Reduced crude oil prices, the strong dollar and weaknesses abroad have pressured the sector’s performance. The data were negative across the board, including new orders (up from -27 to -15), production (unchanged at -8), shipments (down from -7 to -11), exports (down from 1 to -6), employment (down from -7 to -20) and the average employee workweek (down from -7 to -14). Half of all respondents said that they experienced no change in new orders for the month, with 30 percent noting declining sales. As such, it should not be a surprise that manufacturers in the region remained anxious.

With that said, manufacturing leaders in the district were cautiously positive in their outlook for the next six months, but not overwhelmingly so. The forward-looking composite index edged down from 5 to 4. At the same time, new orders (up from 13 to 15), production (up from 14 to 16) and shipments (up from 18 to 20) are expected to increase at decent rates in the months ahead, which should provide some encouragement. Yet, other indicators reflect ongoing softness in the market. For instance, the labor market is anticipated to remain weak, including hiring (down from 5 to 3) and the average workweek (up from -8 to 1), and capital spending is seen declining (down from -1 to -9). Exports are also predicted to be slightly negative over the next six months (down from 2 to -1).

Markit Flash PMIs for the United States and Eurozone
The Markit Flash U.S. Manufacturing PMI fell to its slowest pace in more than three years in February, a sign that challenges hitting the sector have not yet abated. The composite measure declined from 52.4 in January to 51.0 in February, and in general, manufacturing activity has decelerated across the past year, down from 55.1 in February 2015. On the positive side, new orders (down from 53.6 to 51.7), output (down from 53.2 to 51.3) and employment (down from 52.8 to 51.5) expanded somewhat, just not as far as we might prefer, with the rate of growth slowing in February for each. On the other hand, exports returned to negative territory after two months of progress (down from 51.1 to 49.1), a sign of just how much the stronger dollar and weaknesses abroad have dampened international demand and overall sentiment.

Meanwhile, European manufacturers have also reported slower growth on global headwinds. The Markit Flash Eurozone Manufacturing PMI decreased from 52.3 to 51.0, its slowest pace in 12 months. As such, manufacturing activity decelerated for the second straight month, down from 53.2 in December, which had been its fastest pace since April 2014. The underlying data were lower across the board in February, including new orders (down from 53.0 to 51.6), output (down from 53.4 to 51.9), exports (down from 52.3 to 51.1) and hiring (down from 52.1 to 50.9). Much like the U.S. data, however, the silver lining is that each measure continues to experience positive growth. This is encouraging, especially given the fact that European data have trended generally in the right direction of late.

More than anything, this report shows that Europe is not immune to the softening in manufacturing activity seen worldwide. This includes France (down from 50.1 to 49.6) and Germany (down from 52.3 to 50.2). German manufacturing growth was essentially stagnant, at its lowest level since November 2014, whereas the French data contracted for the first time in six months.

New Home Sales
The Census Bureau and the U.S. Department of Housing and Urban Development reported that new home sales fell 9.2 percent in January. This was the slowest pace in four months, with sales down from 544,000 units at the annual rate in December to 494,000 in January. To be fair, warmer-than-normal temperatures probably boosted the December figure, with an average of 502,667 units sold in 2015 as a whole. Severe winter weather in January was likely a factor in the slower activity levels in January, although the largest declines were in the West, with a slight pickup in sales in the South.

With the sales pace dropping, the supply of homes on the market rose, up from 5.1 months of supply in December to 5.8 months in January. The median price for a new home sold in January was $278,800, a decline of 4.5 percent from one year earlier.

Personal Income and Spending
The Bureau of Economic Analysis reported that personal spending increased 0.5 percent in January, its strongest monthly gain since May. This represented a nice improvement after personal consumption expenditures rose just 0.1 percent in December. The jump in January stemmed mostly from an increase in durable goods spending, up 1.2 percent, with nondurable goods purchases unchanged in this report. Spending on services was also higher, up 0.6 percent. On a year-over-year basis, personal spending has risen 4.2 percent since January 2015, up from 3.2 percent in the prior release. This suggests that personal spending has rebounded somewhat after slowing at the end of 2015, bottoming out at 3.0 percent in October.

At the same time, personal incomes also increased 0.5 percent in January, up from 0.3 percent in December. This was the fastest monthly gain in incomes in seven months. Personal incomes have grown 4.3 percent year-over-year, up from 4.0 percent in December. This indicates decent growth in incomes, albeit slower than the 4.9 percent pace in January 2015. Meanwhile, total manufacturing wages and salaries increased from $806.0 billion in December to $813.8 billion in January. These have generally trended in the right direction, even with recent softness in the sector, up from the $780.9 billion and $801.8 billion averages of 2014 and 2015, respectively.

The saving rate was unchanged at 5.2 percent in January. This was just marginally above the 5.1 percent average in 2015 as a whole, but higher than the 4.8 percent rate in May.

In other news, the personal consumption expenditure (PCE) deflator increased 0.1 percent in January despite falling energy costs (down 2.9 percent). The increase came mainly from a rise in core inflation, with the PCE deflator excluding food and energy up 0.3 percent. Yet, pricing pressures continue to remain minimal for now, with the PCE up 1.3 percent year-over-year and core inflation increasing 1.7 percent over the past 12 months.

Richmond Fed Manufacturing Survey
The Richmond Federal Reserve Bank reported declining manufacturing activity on net once again in February, ending two months of slightly positive gains. The composite index of general business activity decreased from 2 in January to -4 in February, with many of the key subcomponents drifting lower for the month, including new orders (down from 4 to -6), shipments (down from -6 to -11), capacity utilization (down from 0 to -5) and the backlog of orders (down from 4 to -14). As such, manufacturers in the district continue to struggle on global headwinds and economic anxieties, dampening overall demand and production. Yet, hiring continued to expand modestly (unchanged at 9), which provided some encouragement.

Along those lines, manufacturers in the region were mostly upbeat about the next six months. Forward-looking measures for new orders (up from 28 to 31), shipments (down from 34 to 31), capacity utilization (down from 29 to 17), employment (down from 23 to 19) and capital spending (up from 22 to 25) remained relatively healthy, even with some easing in this report in some cases. This would indicate that business leaders expect stronger growth moving forward. Still, the average workweek is predicted to expand only slightly (down from 14 to 5), perhaps suggesting some cautiousness in this optimism.

Meanwhile, inflationary pressures remained quite minimal. Manufacturers in the region said that prices paid for raw materials grew just 0.16 percent at the annual rate in February, down from 0.59 percent in January. Moving forward, raw material prices are expected to continue to remain low, down from 1.38 percent at the annual rate six months from now in the last report to 1.18 percent this time.

University of Michigan Consumer Sentiment
The University of Michigan and Thomson Reuters reported that consumer confidence fell to its lowest level in three months in February. The Consumer Sentiment Index declined from 92.0 in January to 91.7 in February. This was better than the preliminary estimate of 90.7, which was released a few weeks before. Nonetheless, the decrease in February suggests that recent financial market volatility and lingering anxieties about the overall economy have spooked Americans. Indeed, consumer confidence has remained mostly subpar since reaching a post-recessionary high of 98.1 in January 2015.

Respondents showed less confidence in forward-looking expectations (down from 82.7 to 81.9), but the assessments of the current economic environment ticked higher (up from 106.4 to 106.8). It was this latter component that led to the improvement in the headline index from preliminary data, as it was originally pegged at 105.8.

Questions or Comments?

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

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