Monday Economic Report - March 14, 2016

A Publication of the National Association of Manufacturers

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

Even with somewhat better data recently, manufacturers continue to face headwinds, including a strong U.S. dollar, reduced commodity prices and global economic volatility. The latest NAM quarterly survey echoes these concerns. In this survey, 56.6 percent of manufacturers were either somewhat or very positive about their own company’s outlook, representing the fifth consecutive easing in sentiment, down from 91.2 percent in the fourth quarter of 2014. The current figure was the lowest since the fourth quarter of 2012, when manufacturers were worried about the fiscal cliff.

Trade seems to be a factor. Manufacturers who were positive about export sales are more upbeat in their outlook while those with negative trade expectations are more downbeat. Along those lines, 61.5 percent said that the recent slowdown in global growth had slowed their international sales, up from 57.9 percent in the previous survey.

Sales expectations have decelerated significantly over the past year, much as it was for the monthly survey of small business owners, which fell to a two-year low in February. Manufacturers anticipate sales will grow just 0.4 percent over the next 12 months, down sharply from 4.5 percent in December 2014 and 1.4 percent in the past report. Production numbers were comparable, with business leaders expecting 0.5 percent growth over the next 12 months, down from 1.4 percent in December’s survey.

With much slower demand and output growth, the data also indicate that manufacturers anticipate hiring and capital spending to pull back, down 0.4 percent and 0.3 percent, respectively, over the next 12 months. In each case, this was the first negative reading for this measure since December 2012, mirroring the headline index. Nonetheless, the current data suggest that manufacturing production should grow 0.9 percent at the annual rate over the next two quarters, using a predictive model.

In addition, the Federal Reserve will also likely keep interest rates unchanged at its March 16–17 meeting, but analysts will be looking for clues about the April 26–27 or June 14–15 meetings. More than 70 percent of manufacturers completing the NAM survey felt that the Federal Reserve should be patient when it comes to short-term rate increases. This was up from 55.2 percent in the last survey. These respondents agreed that the Federal Open Market Committee should wait until incoming data show sufficient progress, particularly in manufacturing, before considering additional hikes.

This week, we will get a number of important economic indicators on the current state of the manufacturing sector. The Federal Reserve will release February industrial production data, and we will be looking to see if manufacturing output can extend the rebound in January. Production growth has decelerated significantly over the past year, with continued softness in activity overall. Along those lines, the New York and Philadelphia Federal Reserve Banks will report manufacturing sentiment for their regions, with both looking to expand in March after contracting in February.

Beyond manufacturing, consumer spending and construction have been bright spots in the economy, but they have pulled back somewhat recently. We will get new data on retail sales and housing starts on Tuesday and Wednesday, respectively. Other highlights include the latest data on consumer confidence, consumer and producer prices, homebuilder sentiment, job openings, leading indicators and state employment.

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

Economic Indicators

Last Week's Indicators (Summaries Appear Below)

Monday, March 7
None

Tuesday, March 8
NFIB Small Business Survey

Wednesday, March 9
NAM Manufacturers’ Outlook Survey
Wholesale Trade

Thursday, March 10
None

Friday, March 11
None

This Week's Indicators

Monday, March 14
State Employment Report

Tuesday, March 15
NAHB Housing Market Index
New York Fed Manufacturing Survey
Producer Price Index
Retail Sales

Wednesday, March 16
Consumer Price Index
FOMC Monetary Policy Statement
Housing Starts and Permits
Industrial Production

Thursday, March 17
Conference Board Leading Indicators
Job Openings and Labor Turnover Survey
Philadelphia Fed Manufacturing Survey

Friday, March 18
University of Michigan Consumer Sentiment

Summaries for Last Week's Economic Indicators

NAM Manufacturers’ Outlook Survey
Even with somewhat better data recently, manufacturers continue to face headwinds, including a strong U.S. dollar, reduced commodity prices and global economic volatility. The latest NAM quarterly survey echoes these concerns.

In this survey, 56.6 percent of manufacturers were either somewhat or very positive about their own company’s outlook, representing the fifth consecutive easing in sentiment, down from 91.2 percent in the fourth quarter of 2014. The current figure is the lowest since the fourth quarter of 2012, when manufacturers were worried about the fiscal cliff.

Trade seems to be a factor. Manufacturers who were positive about export sales are more upbeat in their outlook, while those with negative trade expectations are more downbeat. Along those lines, 61.5 percent said that the recent slowdown in global growth had slowed their international sales, up from 57.9 percent in the previous survey.

Sales expectations have decelerated significantly over the past year. Manufacturers anticipate sales will grow just 0.4 percent over the next 12 months, down sharply from 4.5 percent in December 2014 and 1.4 percent in the past report. Production numbers were comparable, with business leaders expecting 0.5 percent growth over the next 12 months, down from 1.4 percent in December’s survey.

With much slower demand and output growth, the data also indicate that manufacturers anticipate hiring and capital spending to pull back, down 0.4 percent and 0.3 percent, respectively, over the next 12 months. In each case, this was the first negative reading for this measure since December 2012, mirroring the headline index. Nonetheless, the current data suggest that manufacturing production should grow 0.9 percent at the annual rate over the next two quarters, using a predictive model.

Rising health care and insurance costs, cited by 73.9 percent of respondents, represented the top business challenge. Manufacturers see health insurance costs increasing 7.6 percent over the next 12 months. Small and medium-sized firms anticipate premiums to jump faster in the next year than large manufacturers do, at 8.6 percent and 5.5 percent, respectively. The business climate is also a major factor, with 73.0 percent noting tax and regulatory concerns as being first and foremost on their minds. Indeed, manufacturers continue to be frustrated with the lack of comprehensive tax reform and with a perceived regulatory assault on their businesses.

With some of the current challenges in mind, more than 70 percent felt that the Federal Reserve should be patient when it comes to short-term rate increases. This was up from 55.2 percent in the last survey. These respondents agreed that the Federal Open Market Committee should wait until incoming data show sufficient progress, particularly in manufacturing, before considering additional hikes.

NFIB Small Business Survey
The National Federation of Independent Business reported that sentiment among small business owners fell to a two-year low in February. The Small Business Optimism Index dropped from 93.9 in January to 92.9 in February. The decline over the past two months has come mainly from a concern over sales. The net percentage of respondents expecting sales to increase over the next three months decreased from 7 percent in December to 3 percent in January to zero in this latest release. The sales outlook has trended lower since peaking at 19 percent in December 2014. Along those lines, the net percentage believing that the next three months would be a good time to expand dropped from 10 percent in January to 8 percent in February, matching its reading from December and down from 13 percent one year ago, largely on economic concerns.

On the labor front, small business owners have pulled back on hiring somewhat. The net percentage adding to their workforce over the past three months decreased from 1 percent to -3 percent in this report, its lowest level since July 2013. Still, hiring plans were only slightly off from last month, with the net percentage expecting to hire more workers in the next three months edging down from 11 percent to 10 percent. Job openings followed a similar pattern. Those respondents with positions that they were unable to fill inched down from 29 percent to 28 percent. Thus, while the data were lower, they were perhaps less discouraging than at first glance.

Capital spending plans mirrored those for employment. In February, 58 percent reported making a capital expenditure in the past six months, down from 61 percent in January, and the percentage planning an expenditure in the next three to six months was off from 25 percent to 23 percent. Inventory plans, however, remained negative for the fourth straight month. The net percentage planning to increase inventory levels in the next three to six months was unchanged at -1 percent.

Taxes represented the top problem for respondents, cited by 21 percent, followed by government regulations (19 percent), the quality of labor (12 percent), poor sales (11 percent) and the cost and availability of insurance (10 percent).

Wholesale Trade
The Census Bureau reported that wholesale sales fell 1.3 percent in January, declining for the fourth straight month. This was reflective of the softer levels of demand in recent months, with durable and nondurable goods sales off 1.9 percent and 0.8 percent, respectively. Indeed, sales were down in a number of major categories, led by decreases in petroleum (down 6.9 percent), computer equipment (down 6.4 percent), furniture (down 5.3 percent), professional equipment (down 4.1 percent) and electrical equipment (down 3.0 percent). In contrast, sales were higher for groceries (up 1.4 percent), apparel (up 1.1 percent), miscellaneous nondurable goods (up 0.9 percent) and hardware (up 0.8  percent).

Meanwhile, wholesale inventories rose 0.3 percent in January, rebounding from being unchanged in December. On a year-over-year basis, inventories were up 2.0 percent, with nondurable goods inventories up 5.9 percent but durable goods stockpiles off 0.4 percent. Moreover, the inventory-to-sales ratio increased to 1.35 on the weaker sales data, up from 1.30 in June.

Questions or Comments?

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

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