Monday Economic Report - June 20, 2016

A Publication of the National Association of Manufacturers

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

There were numerous economic indicators out last week, but financial markets pivoted on news from the Federal Reserve and the prospects for a possible “Brexit” vote in the United Kingdom on June 23 for Britain to possibly leave the European Union.

As expected, the Federal Open Market Committee did not change short-term interest rates at its June 14–15 meeting, and in new economic projections, participants reduced their outlook for this year, down from 2.2 percent growth in real GDP in March to 2.0 percent now. Inflation is also predicted to remain in-check, something that was supported by the most recent consumer and producer price data, even with a pickup in costs due to higher energy prices. More importantly, the committee appeared to support a more gradual increase of the federal funds rate. I would expect the Federal Reserve to hike short-term rates again either at its July 26–27 or September 20–21 meetings, with the projections suggesting just one or two increases in 2016. Notably, Federal Reserve Bank of St. Louis President James Bullard made headlines on June 17 with a paper that suggested uncertainty and sluggish economic growth might mean just one interest rate increase in the next two and a half years. While he is just one vote on the committee, his views are interesting nonetheless.

Turning to manufacturing, there were mixed reports out last week on the sector. On the one hand, the NAM Manufacturers’ Outlook Survey found that respondents were slightly more upbeat today than three months ago, even as they grapple with continuing economic challenges. Indeed, 61.7 percent of manufacturers were either somewhat or very positive about their own company’s outlook, up from 56.6 percent in March. Despite some progress, activity remains well below ideal levels. For instance, manufacturers anticipate sales to grow 1.6 percent over the next 12 months, up from 0.4 percent in March but down sharply from 4.5 percent in December 2014. Hiring and capital spending plans also improved, but with relatively soft expectations, growing 0.2 percent and 0.6 percent, respectively, in the next year. Meanwhile, surveys from the New York and Philadelphia Federal Reserve Banks also reflected better sentiment in June, albeit with ongoing weaknesses, particularly in the latter.

On the other hand, manufacturing production data for May were disappointing, much like the recent jobs numbers, which found the sector had lost 35,000 workers year-to-date. The sector has faced significant headwinds, including a strong U.S. dollar, sluggish growth abroad and still low commodity prices. Looking more specifically at the May data, manufacturing production declined 0.4 percent in May, falling for the second time in the past three months. Durable goods output fell 0.7 percent for the month, pushed lower by a strong decline in motor vehicles and parts and other segments, with nondurable goods production unchanged. The bottom line was that manufacturing production has edged down 0.1 percent over the past 12 months. As such, output has essentially been stagnant since May 2015. Manufacturing capacity utilization has also declined over that time frame, down from 75.5 percent one year ago and 75.2 percent in April to 74.8 percent in May. This was the lowest level since February 2014.

In other news, new housing starts fell 0.3 percent, down from an annualized 1,167,000 in April to 1,164,000 in May. This was not far from the year-to-date average of 1,157,000 units, and yet, the data were somewhat disappointing in that we would hope to see a pickup in activity by this point in the year. Along those lines, builder confidence edged higher in June to a five-month high, and we would still expect to see better housing starts moving forward, building to 1.24 million units by year’s end. In addition to residential construction, consumer spending has been a bright spot in the U.S. economy, even as Americans have pulled back somewhat from even stronger growth at the end of last year and beginning of this year. The good news was that retail sales increased 0.5 percent, stronger than expected, extending the 1.3 percent rebound in April. Moreover, retail spending has increased modestly over the past 12 months, up 2.5 percent since May 2015.

We will get additional insights this week on the health of the global economy. Markit will release Flash Manufacturing Purchasing Managers’ Indexes (PMIs) for the United States and the Eurozone. In addition, a survey from the Kansas City Federal Reserve Bank and new data on durable goods orders and shipments will add to our knowledge about U.S. manufacturing activity. Other highlights include new figures for consumer confidence and leading indicators as well as new and existing home sales.

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

Economic Indicators

Last Week's Indicators (Summaries Appear Below)

Monday, June 13
None

Tuesday, June 14
NFIB Small Business Survey
Retail Sales

Wednesday, June 15
FOMC Monetary Policy Statement
Industrial Production
NY Fed Manufacturing Survey
Producer Price Index

Thursday, June 16
Consumer Price Index
NAHB Housing Market Index
NAM Manufacturers’ Outlook Survey
Philadelphia Fed Manufacturing Survey

Friday, June 17
Housing Starts and Permits
State Employment Report

This Week's Indicators

Monday, June 20
None

Tuesday, June 21
None

Wednesday, June 22
Existing Home Sales

Thursday, June 23
Chicago Fed National Activity Index
Conference Board Leading Indicators
Kansas City Fed Manufacturing Survey
Markit Flash Manufacturing PMIs for the United States and Eurozone
New Home Sales

Friday, June 24
Durable Goods Orders and Shipments
University of Michigan Consumer Sentiment (Revised)

Summaries for Last Week's Economic Indicators

 

Consumer Price Index
The Bureau of Labor Statistics reported that consumer prices rose 0.2 percent in May. While it was slower than the 0.4 percent gain in April, it marked the third straight monthly increase in consumer costs. Higher energy costs have helped to buoy growth in consumer prices, up 1.2 percent in May or 5.7 percent over the past three months. With that said, energy prices have declined over the past year as a whole, down 9.8 percent, and they have generally helped to keep a lid on larger pricing pressures over that time frame. Food costs have also been quite modest over the past year, up just 0.7 percent since May 2015, which has helped. In May, food prices were off 0.2 percent, with costs down mostly across-the-board but largely reversing the 0.2 percent gain in April. On a year-over-year basis, the consumer price index increased 1.1 percent, unchanged from the prior release but accelerating from 0.4 percent six months ago.

Core consumer prices were boosted by strong gains for apparel, medical care and shelter and transportation services, but costs were lower for new and used vehicles and household furnishings. Excluding food and energy costs, consumer prices have risen 2.2 percent since May 2015, exceeding 2.0 percent for the sixth consecutive month. While core inflation has picked up recently, overall pricing pressures remain modest and under control for now, providing the Federal Reserve some flexibility even as it decides when to raise short-term interest rates once more.

FOMC Monetary Policy Statement
As expected, the Federal Open Market Committee (FOMC) did not change short-term interest rates at its June 14–15 meeting. Prior to the release of disappointing employment numbers for May, the Federal Reserve had positioned itself to begin hiking rates at its June meeting, with two increases anticipated in 2016. The jobs report shifted those expectations to either the July 26–27 or the September 20–21 FOMC meetings. Along those lines, the press release has the following to say about the timing of future moves:

The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

In the latest economic projections, FOMC participants said that “the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up.” On this latter point, they noted the declining unemployment rate and better retail spending data. With that said, Federal Reserve officials see real GDP growing 2.0 percent in 2016, down from an outlook of 2.2 percent in March, and the unemployment rate was seen falling to 4.7 percent, which happens to be the current rate. In terms of inflation, the Federal Reserve predicts core price increases of 1.7 percent this year.

Housing Starts and Permits
The Census Bureau and the U.S. Department of Housing and Urban Development reported that new housing starts fell 0.3 percent, down from an annualized 1,167,000 in April to 1,164,000 in May. This was not far from the year-to-date average of 1,157,000 units, and yet, the data were somewhat disappointing in that we would hope to see a pickup in activity by this point in the year. Along those lines, builder confidence edged higher in June to a five-month high, and we would expect to see better housing starts moving forward, building to 1.24 million units by year’s end, according to current forecasts. Indeed, residential construction remains one of the brighter spots in the economy, even with starts not changing much in the May data. Housing starts have increased 9.5 percent over the past 12 months.

Single-family starts were slightly higher, up from 762,000 to 764,000. If you exclude February’s 845,000 pace, which appears to be an outlier, the year-to-date average would be 763,000 units—on par with May’s rate. This suggests that single-family activity has not moved all that much this year. At the same time, multifamily starts declined from 405,000 to 400,000. Even with some easing, new construction for multifamily residences has improved from earlier in the year, up from 353,000 in January.

Meanwhile, housing permits increased from 1,130,000 to 1,138,000, a four-month high but still somewhat underwhelming. Permits are often a proxy for future activity, and in that light, the gain was encouraging. Yet, the increase stemmed largely from the highly volatile multifamily segment, with single-family permitting remaining more sluggish than we would prefer. Multifamily permitting was up from 389,000 to 412,000, but permits for single-family homes dropped from 741,000 to 726,000.

Industrial Production
Overall, manufacturing production data for May were disappointing, much like the recent jobs numbers, which found the sector had lost 35,000 workers year-to-date. There are signs that better days might be coming, including promising figures for housing and retail sales and in recent sentiment surveys. Along those lines, the Institute for Supply Management’s Manufacturing PMI has now expanded for three straight months. In addition, demand and shipments rebounded in June in some regional surveys. Still, the manufacturing sector remains challenged by a strong U.S. dollar, sluggish growth abroad and still low commodity prices.

Looking more specifically at the May data, manufacturing production declined 0.4 percent in May, falling for the second time in the past three months. Durable goods output fell 0.7 percent for the month, with nondurable goods production unchanged. The largest declines were in motor vehicles and parts (down 4.2 percent), printing and support (down 1.7 percent), wood products (down 1.3 percent), machinery (down 1.0 percent), apparel and leather (down 0.9 percent) and nonmetallic mineral products (down 0.8 percent). In contrast, segments with increased production in May included miscellaneous durable goods (up 1.3 percent), computer and electronic products (up 0.6 percent), primary metals (up 0.6 percent), paper (up 0.4 percent), food, beverage and tobacco products (up 0.3 percent) and electrical equipment and appliances (up 0.2 percent).

The bottom line was that manufacturing production has edged down 0.1 percent over the past 12 months. As such, output has essentially been stagnant since May 2015, highlighting the softness of the sector in light of significant headwinds. Indeed, manufacturing capacity utilization has also declined over that time frame, down from 75.5 percent one year ago and 75.2 percent in April to 74.8 percent in May. This was the lowest level since February 2014.

Meanwhile, total industrial production declined 0.4 percent in May, reversing the 0.6 percent gain in April and falling in three of the past four months. In addition to manufacturing, utilities output was also lower, down 1.0 percent in May. Mining production, however, inched higher, up 0.2 percent, increasing for the first time since August. On a year-over-year basis, industrial production decreased 1.4 percent, with mining and utilities output off 11.5 percent and 0.8 percent, respectively. Capacity utilization decreased from 75.3 percent to 74.9 percent, just shy of the nearly six-year low in March (74.8 percent). 

NAHB Housing Market Index
The National Association of Home Builders and Wells Fargo reported that builder confidence ticked higher again in June. The Housing Market Index rose from 58 in May to 60 in June, its highest level since January. Index readings above 50 indicate that more homebuilders are positive than negative in their assessments of the housing market, a threshold achieved for 24 straight months. In June, homebuilders were more upbeat in every region for the country except the Midwest.

At the same time, the index for expected single-family sales six months from now rose from 65 to 70, its highest level since October. This was an encouraging sign that builders are upbeat about strong activity moving forward.

NAM Manufacturers' Outlook Survey
The latest NAM quarterly survey continued to reflect concerns over continuing economic challenges. However, it also issued rays of encouragement, particularly after the pullbacks in activity in the prior release. In this survey, 61.7 percent of manufacturers are either somewhat or very positive about their own company’s outlook, up from 56.6 percent in March. This ends a five-quarter slide in confidence, down from 91.2 percent in the fourth quarter of 2014, suggesting that respondents are somewhat more upbeat today than three months ago. In that way, the NAM survey responses mirror the stabilization in the Institute for Supply Management’s reports, with manufacturing expanding now for three straight months. The current data suggest that manufacturing production should grow 1.6 percent at the annual rate over the next two quarters.

Despite some progress, activity remains well below ideal levels. For instance, manufacturers anticipate sales to grow 1.6 percent over the next 12 months, up from 0.4 percent in March but down sharply from 4.5 percent in December 2014. As with the past few surveys, the numbers are highly correlated with trade data. Firms that are more upbeat about exports are more positive in their company’s outlook. Overall, respondents expect exports to increase 0.2 percent over the next 12 months, improving from an expected decline of 0.6 percent in the prior survey.

With a pickup in demand, businesses are more comfortable in their hiring and capital spending plans, albeit with still sluggish growth anticipated in the next 12 months. Full-time employment levels are expected to grow 0.2 percent over the next year, an improvement from the decline of 0.4 percent in the prior release. Similarly, expected capital expenditures over the next year improved from a decline of 0.3 percent in March to a gain of 0.6 percent in June. If orders and production continue to improve, we would expect respondents to be more willing to add workers and invest in capital equipment in upcoming surveys.

The top business challenges were an unfavorable business climate and rising health insurance costs, both cited by roughly three-quarters of respondents. More than 98 percent of manufacturers provide health benefits to their workforce, but premium costs are expected to rise 8.3 percent over the next 12 months on average. Nearly 77 percent of respondents said they would support comprehensive business tax reform that would include lower tax rates for both corporations and “pass-through” entities.

Regarding regulations, 82.6 percent of respondents said their company’s total spending on state and federal regulatory compliance had increased in the past few years, with firms devoting 4.3 percent of their total expenditures on average to such endeavors. More importantly, respondents said they would devote more dollars to capital investments and expenditures, human capital, research and development, growth and acquisition and debt reduction and/or increasing the return on investments if their compliance costs were lessened in some way.

NFIB Small Business Survey
The National Federation of Independent Business reported that sentiment among small business owners edged slightly higher in May. The Small Business Optimism Index increased from 93.6 in April to 93.8 in May, its highest level since January. It marked some improvement from March’s two-year low in optimism, even as small firms continue to be concerned about the overall economic outlook. On this latter point, the headline index has remained below 100—the threshold at which the sector grows more strongly—since December 2014. Indeed, demand has been soft for small businesses, with the net percentage reporting higher sales in the past three months dropping from -6 percent to -8 percent. Looking ahead, the net percentage expecting sales to increase in the next three months was unchanged at 1 percent.

Labor market data were mixed. Actual employment growth was negative for the fourth time in the past six months, with the net percentage reporting higher employment in the past three months remaining at -1 percent. Likewise, the percent with job openings they were not able to fill dropped from 29 percent to 27 percent. Yet, respondents were somewhat more positive about the next three months, with the net percentage planning to add workers up from 11 percent to 12 percent, its highest level year-to-date.

There was also a slight improvement in those suggesting the next three months were a good time to expand, up from 8 percent to 9 percent. Nonetheless, this figure remained lower than desired, down from 14 percent one year ago, with economic conditions and the political climate topping the list of reasons why it might not be a good time for expansion. Moreover, the percent making a capital expenditure in the past six months declined from 60 percent to 58 percent, with the percent planning capital spending in the next three to six months decreasing from 25 percent to 23 percent.

The top “single most important problem” was taxes, cited by 23 percent, followed by government regulations (18 percent), poor sales (14 percent) and the quality of labor (13 percent).  

NY Fed Manufacturing Survey
The Empire State Manufacturing Survey expanded again in June, rebounding from softness in May. The composite index of general business conditions improved from -9.0 in May to 6.0 in June, growing for the third time in the past four months. This is a sign that manufacturing activity in the New York Federal Reserve Bank district has stabilized somewhat from where it was in the second half of last year and earlier this year. The pickup in activity stemmed largely from better new orders (up from -5.5 to 10.9) and shipments (up from -1.9 to 9.3) growth. Indeed, more than one-third of respondents said sales were higher in June, up from 22.1 percent in May. Yet, a still sizable number (23.3 percent) noted declining new orders for the month, highlighting ongoing challenges, with 42.5 percent citing no change in demand in June.

The labor market data were less encouraging. The average employee workweek continued to narrow (down from -8.3 to -5.1), albeit at a slower pace than last month, and hiring (down from 2.1 to 0.0) was flat on net. That could turn around, however, if increased activity continues moving forward, which would necessitate more hiring.

Manufacturers in the New York Federal Reserve Bank’s district were more upbeat about the next six months. The forward-looking composite index rose from 28.5 to 34.8, its highest level so far in 2016, with new orders (up from 22.4 to 38.2), shipments (up from 24.4 to 29.1) and capital expenditures (up from 3.1 to 11.2) each improving in this report. Yet, hiring data indicated continuing softness in the labor market in the second half of this year, with the future-oriented index for number of employees contracting for the first time since November 2012 (down from 10.4 to -2.0). The average workweek (down from 5.2 to 2.0) and technology spending (down from 6.3 to 4.1) were also softer than desired.

Philadelphia Fed Manufacturing Survey
The Federal Reserve Bank of Philadelphia reported that manufacturing activity rebounded in June after contracting in both April and May. The composite index of general business activity rose from -1.8 in May to 4.7 in June. It was only the second time in the past 10 months that activity has expanded, highlighting the challenges for the sector across much of the past year. The better headline number might have been a more encouraging sign if it were not for the fact that many other key measures were lower. For instance, new orders (down from -1.9 to -3.0), shipments (down from -0.5 to -2.1) and employment (down from -3.3 to -10.9) pulled further into negative territory. Moreover, the average employee workweek (up from -15.1 to -13.1) continued to shrink at a fairly fast clip, despite a slight easing in the pace of decline in June.

On the positive side, more manufacturers (44.4 percent) expect third-quarter production to increase over second-quarter levels than those predicting decreases (40.3 percent). More than half of those anticipating higher production attributed that gain to seasonal factors. In contrast, business conditions were the top reason cited by those predicting lower production, with 72.5 percent attributing a decrease to economic factors. For those seeing higher production in the third quarter, they will do so by increasing labor productivity (41.9 percent), expanding work hours (29.0 percent) and hiring additional people (22.6 percent). The data suggest a more cautious approach to hiring, leaning more toward productivity growth from the existing workforce. 

Looking ahead six months, manufacturers in the district remain cautiously upbeat about activity in their economic outlook. The forward-looking composite index decreased from 36.1 to 29.8, but remained relatively elevated. Along those lines, more than 45 percent of respondents predict higher levels of new orders and shipments, with one-quarter predicting additional hiring and almost 20 percent planning more capital expenditures.

Producer Price Index
The Bureau of Labor Statistics reported that producer prices for final demand goods and services rose 0.4 percent, extending the 0.2 percent gain in April. At the same time, producer prices for final demand goods jumped 0.7 percent in May, the fastest pace in 12 months. Energy costs rose 2.8 percent in May on higher crude oil prices, which approached $50 per barrel for West Texas Intermediate crude by month’s end, levels not seen since July 2015. At the same time, food costs were up 0.3 percent, offsetting the 0.3 percent decline in the prior report. The rise in food prices in May for goods producers came largely from higher costs for chicken, eggs, fresh and dry vegetables, grains, oilseeds and pork. Despite the rises this month, food costs have trended lower over the past 12 months, down 2.7 percent, with energy prices off 14.2 percent year-over-year.

Producer prices for final demand goods and services have not changed since May 2015. Meanwhile, core inflation inched higher, up from 0.9 percent year-over-year in April to 1.2 percent in May. That was the fastest pace for year-over-year core producer price growth since January 2015, and yet, overall pricing pressures remain under control for now. Indeed, core producer prices have remained below the Federal Reserve’s stated goal of 2 percent for 24 straight months. This frees the Federal Open Market Committee to continue pursuing stimulative monetary policies, albeit with a sense that prices are starting to accelerate somewhat.

Retail Sales
The Census Bureau reported that retail sales increased 0.5 percent, stronger than expected, extending the 1.3 percent rebound in April. This suggests that Americans have begun to open their pocketbooks in the second quarter, following a more cautious stance at the end of last year and in the first quarter of this year. Retail spending has increased modestly over the past 12 months, up 2.5 percent since May 2015. Moreover, reduced gasoline prices (down 9.5 percent year-over-year) pulled the headline number lower. Excluding gasoline, retail sales were up 3.7 percent year-over-year, suggesting that consumers have increased their purchases at a fairly decent pace over the past year. With that said, retail sales excluding gasoline stations have eased somewhat in recent months, down from 4.5 percent year-over-year in December.

Looking specifically at the May data, the largest increase came from gasoline stations (up 2.1 percent), likely the result of higher prices for the month. Indeed, the average price of regular conventional retail gasoline rose from $2.080 per gallon on April 25 to $2.281 a gallon on May 30, a seven-month high, according to the Energy Information Administration. Outside of gasoline, other segments with strong gains in May included nonstore retailers (up 1.3 percent), sporting goods and hobby stores (up 1.3 percent), clothing and accessories stores (up 0.8 percent), food services and drinking places (up 0.8 percent), health and personal care stores (up 0.6 percent), food and beverage stores (up 0.5 percent) and motor vehicle and parts dealers (up 0.5 percent). In contrast, sales were lower for building material and garden supplies (down 1.8 percent), department (down 0.9 percent) and furniture and home furnishings (down 0.1 percent) stores.

On a year-over-year basis, the largest gains in retail spending were for nonstore retailers (up 12.2 percent), health and personal care stores (up 8.3 percent), food services and drinking places (up 6.5 percent), sporting goods and hobby stores (up 5.2 percent), miscellaneous store retailers (up 4.5 percent) and building material and garden supplies stores (up 3.6 percent).

State Employment Report
Florida and North Carolina both created the most net new manufacturing jobs in May, according to the Bureau of Labor Statistics, adding 2,700 workers for the month. New Jersey (up 2,100), Arizona (up 1,800), Connecticut (up 1,200) and Kentucky (up 1,000) also topped the list of manufacturing employment gains in May. Over the past 12 months, Michigan generated the greatest job gains, with manufacturing employment in the state up 11,500 since May 2015. Other states with the fastest job growth year-over-year included Florida (up 10,900), Tennessee (up 10,100), Georgia (up 6,700), Wisconsin (up 4,300) and South Carolina (up 4,100).

The national unemployment rate fell to 4.7 percent, its lowest level since November 2007, with the participation rate declining once again. The lowest unemployment rate in the country was South Dakota at 2.5 percent. A number of states were not far behind, including New Hampshire (2.7 percent), Nebraska (3.0 percent), Vermont (3.1 percent), Hawaii (3.2 percent), North Dakota (3.2 percent) and Colorado (3.4 percent). In contrast, the highest unemployment rates were in Alaska (6.7 percent), Illinois (6.4 percent), Louisiana (6.3 percent), New Mexico (6.2 percent), West Virginia (6.2 percent), the District of Columbia (6.1 percent), Alabama (6.1 percent) and Nevada (6.1 percent).

Questions or Comments?

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

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