Monday Economic Report: 52813

A Publication of the National Association of Manufacturers
Monday Economic Report

May 28, 2013
Monday Economic Report Graph

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Manufacturing activity worldwide has slowed noticeably. Flash Purchasing Managers' Index (PMI) data for China and the Eurozone both reflect contracting levels for new orders, exports and employment. Europe's problems continue to deepen. Even with some slight easing of declining sales, May's manufacturing PMI data mark the 22nd consecutive month of declining activity for the continent. Beyond falling activity levels, manufacturers have also reported the need to reduce the selling price for their goods. The news that China had once again slipped into negative territory was a little surprising, suggesting its economic growth has slowed again. Over the course of the next few weeks, international PMI data will come in, allowing us to see the widespread softness in the manufacturing sector. The most recent JPMorgan Global Manufacturing PMI suggested that growth worldwide was modest at best.

The Markit Flash U.S. Manufacturing PMI declined slightly from 52.0 in April to 51.9 in May, falling from 56.1 in January. One of the largest factors in May's decline was the decrease in new export orders. Output and hiring also slowed, and domestic new orders have decreased since the beginning of the year. At the same time, the Chicago Federal Reserve Bank's National Activity Index (NAI) declined in April, largely on weaknesses in industrial production in the early months of 2013.

New durable goods orders in April were up 3.3 percent, but with highly volatile data in the first four months of the year (largely due to wide swings in aircraft orders). Even with April's gain, durable goods orders have fallen 2.6 percent from their December levels. In addition, the Kansas City Fed's monthly manufacturing survey reflected a very small gain in manufacturing activity in May, its first positive response since September. While measures for production, shipments and new orders were all higher for the month, the data and its supporting comments suggest there are still some areas of caution, including export sales, hiring, the inability to pass along cost increases and concerns about upcoming regulations.

This week, we will learn even more about the current health of the manufacturing sector with regional reports from the Chicago, Dallas and Richmond Federal Reserve Banks. The Chicago Fed's Midwest Manufacturing Index has reflected stronger growth than many of its regional peers, due mainly to strength in the auto sector. However, in general, the regional surveys have found a high degree of softness, with contracting levels already noted in the New York and Philadelphia Districts. Beyond these surveys, the largest headline of the week will come from the revision of the GDP figure for the first quarter of 2013 on Thursday. It is not expected to change much from the earlier estimate of 2.5 percent growth. Other highlights include data on consumer confidence and personal spending.

Chad Moutray
Chief Economist
National Association of Manufacturers

P.S.""If you have not already done so, please take a moment to complete the latest NAM/ IndustryWeek Survey of Manufacturers . This 18-question survey is an important gauge to see how manufacturing sentiment might have changed since March's survey. It also includes special questions on health care and the Affordable Care Act. To complete the survey, click here . Responses are due by Friday, May 31. As always, all responses are anonymous.

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Economic Indicators

Last Week's Indicators:
(Summaries Appear Below)

Monday, May 20
Chicago Fed National Activity Index
NABE Outlook Survey

Tuesday, May 21

Wednesday, May 22
Existing Home Sales

Thursday, May 23
Kansas City Fed Manufacturing Survey
Markit Flash PMIs for the United States,
Eurozone and China

New Home Sales

Friday, May 24
Durable Goods Orders

This Week's Indicators:

Monday, May 27

Tuesday, May 28
Conference Board Consumer Confidence
Chicago Fed Midwest Manufacturing Index
Dallas Fed Manufacturing Survey
Richmond Fed Manufacturing Survey

Wednesday, May 29

Thursday, May 30
Gross Domestic Product (Revision)

Friday, May 31
ISM-Chicago Business Barometer
Personal Income and Spending
University of Michigan Consumer Sentiment (Revision)

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Human Resources Policy

Chicago Fed National Activity Index
The Chicago Federal Reserve Bank reported that the NAI declined from -0.23 in March to -0.53 in April . Negative numbers in the NAI suggest that the U.S. economy is below its historical growth rate, and April's lower figure indicates a worsening of that trend during the past month. Lower industrial production data were a large factor in the lower index value, with output down 0.5 percent in April. This built off of declines in three of the first four months of 2013, with production-related indicators in the NAI subtracting 0.34 points in the index.

Employment provided a neutral contribution to the NAI, with nonfarm payrolls up by 165,000 workers and manufacturing hiring unchanged. While housing permits exceeded 1 million for the first time since June 2008, new housing starts fell to 853,000 in April. The longer-term trend is positive, particularly with the permits data; yet, residential construction still remains below historical averages. As such, consumption and housing indicators subtracted 0.17 points from the NAI in April, down from -0.15 in March.

The data are quite volatile. Therefore, it is important to look at the three-month moving average, which declined slightly from -0.05 in March to -0.04 in April. This was the second straight month with the three-month average below zero. Nonetheless, the negative figures here are less severe than the monthly average. The U.S. economy is underperforming, as this measure indicates, but the data suggest that the risk of recession is still low. (When the three-month moving average falls below -0.70, the likelihood of a recession is high.) Improvements in production in the coming months should lead to better readings in this index, hopefully bringing growth back above the historical trend.

Durable Goods Orders

New durable goods orders were up 3.3 percent in April, somewhat reversing the 5.9 percent decline observed in March . The data have been highly volatile so far in 2013, up one month and then down the next largely on wide swings in aircraft orders. Nonetheless, even with April's gain, durable goods orders were $222.56 billion, down from $228.45 billion at the end of 2012.

As noted, defense and nondefense aircraft orders were up significantly in April, the reverse of what was true in March. Excluding transportation orders, new orders increased 1.3 percent, suggesting some broader strength beyond airplanes. Some of the other sectors with higher sales levels in April included communications equipment (up 5.7 percent), machinery (up 1.9 percent), motor vehicles (up 1.9 percent) and fabricated metal products (up 1.2 percent). The computer and related products sector was one of the few areas of weakness, down 3.7 percent.

Meanwhile, shipments of durable goods declined by 0.6 percent in April, the third decrease in the past four months. Year-to-date, shipments have fallen 0.8 percent, reflecting some of the recent weaknesses in manufacturing, both domestically and globally. Nondefense and defense aircraft shipments were both down appreciably. However, even with their values excluded, durable goods shipments still fell by 0.4 percent. Other sectors with decreased shipments in April included computers and electronic products (down 2.9 percent) and machinery (down 1.3 percent). In contrast, the largest gains were in the motor vehicle and parts (up 2.0 percent) and fabricated metal products (up 1.9 percent) sectors.

Existing Home Sales

The National Association of Realtors® reported that existing home sales rose 0.6 percent, up from 4.94 million annualized units in March to 4.97 million units in April . While single-family sales grew 1.2 percent, condo sales were down 3.3 percent. Both categories are up year-over-year, however, with increases of 11.0 percent and 11.3 percent, respectively, between April 2012 and April 2013. Similarly, every region saw higher sales except the Midwest, but on an annual basis, these gains were more broad-based across the country, with the largest increases in the South (up 18.7 percent).

With more homes going on the market in the springtime, the average number of months of supply on the market increased from 4.7 to 5.2. Nonetheless, inventory levels are still constrained, down 13.6 percent from one year ago. Lawrence Yun, the National Association of Realtors® chief economist, said, "The robust housing market recovery is occurring in spite of tight access to credit and limited inventory. Without these frictions, existing home sales easily would be well above the 5 million unit pace."

April's median home price was $192,800, up from $173,700 one year ago and $183,900 in March. Relatively strong demand combined with limited inventory growth could be fueling higher sales prices, which have risen 11.0 percent year-over-year.

Kansas City Fed Manufacturing Survey

The Kansas City Federal Reserve Bank reported that manufacturing activity in its District turned positive for the first time since September . The composite index improved from -5 in April to 2 in May. Even as other regional sentiment surveys showed some progress earlier this year, the Kansas City Fed survey continued to reflect more pessimism. It now appears to be one of the few indicating slight growth, with surveys from the New York and Philadelphia Fed Banks reporting contractions last week.

Measures of production, shipments and new orders were all higher for the month. The new orders index, for instance, shifted from being unchanged in March and April to modest growth (an index reading of 6) in May. Looking ahead six months, manufacturers are somewhat more upbeat about additional activity, with this cautious optimism increasing the forward-looking composite index from 4 to 11.

However, not all news was positive. Export sales continue to be negative (for the 12th consecutive month), and hiring and the average workweek were both headed in the wrong direction. The index for the number of employees dropped from -3 to -7. Recognizing these weaknesses, Chad Wilkerson, Kansas City Fed vice president and economist, said, "Activity remains at only about year-ago levels, and firms are having difficulty passing cost increases through." He said this even as he recognized the achievement of gains after seven months of declines.

Several respondents commented on their inability to pass along costs increases. A few commenters focused on slower manufacturing activity. One individual said, "We had a better month last month, but it was still very much lower than we should be this time of the year." In addition to those comments, there were also those who focused on policy. As one company executive added, "Customers comment on the uncertainty of future health care costs and federal taxes. Both issues are creating too much uncertainty for many companies to spend discretionary dollars."

Markit Flash PMIs for the United States, Eurozone and China

The latest Markit PMI data reflect slower manufacturing activity worldwide in May, continuing April's trend. Last month, the Chinese economy surprisingly slowed, with the HSBC China Manufacturing PMI falling from 51.6 in March to 50.4 in April. The Flash measure has fallen further to 49.6 in May, its first contraction since October. A decline in new orders, with the sales index down from 51.7 to 49.5, mainly fueled the decrease in the larger index. Exports, employment and inventories were also lower. However, overall manufacturing output was only off slightly (down from 51.1 to 51.0), with very modest growth.

While the Chinese decline was unexpected, the European data have been in contracting levels since August 2011, and Europe is not expected to emerge from its recession anytime soon. Nonetheless, the Markit Flash Eurozone Manufacturing PMI did improve somewhat from 46.7 in April to 47.8 in May, even as it remains in contraction for the 22nd consecutive month. The pace of new orders (including exports) and output slowed, helping to ease the rate of decline. However, the bottom line is production and employment in the manufacturing sector are falling. The survey also indicates that selling prices among manufacturers are also decreasing, with deflation occurring each month so far in 2013.

In contrast to China and Europe, manufacturing activity in the United States is growing, albeit very slowly. The Markit Flash U.S. Manufacturing PMI edged marginally lower from 52.0 in April to 51.9 in May, decelerating for the fourth straight month. This easing appears to have erased the stronger growth that we saw in the United States at the beginning of the year, when the PMI was 56.1.

New domestic orders picked up slightly (even as they have declined from recent months), with its index rising from 51.8 to 52.8. Exports pulled the larger PMI index lower in May. The index for new export orders declined from 52.2 (modest growth) to 49.4 (a slight contraction). Meanwhile, the pace of growth for output and employment both slowed down for the month, but was still higher.

Overall, however, manufacturing activity has slowed worldwide. Even with U.S. data showing growth, the pullback in new orders and output since the beginning of the year are noticeable. The new orders index in January was 57.7, putting May's 52.8 reading in perspective. Slower growth in export sales, higher payroll taxes and other challenges have dampened growth domestically.

NABE Outlook Survey
Business economists expect real GDP growth of 2.4 percent in 2013, with slightly faster growth of 3.0 percent in 2014 . The May Outlook Survey from the National Association for Business Economics (NABE) found that output estimates for this year and next have not changed from what was predicted in February's survey.

Beyond the headline figure, some key GDP components saw improvements. Specifically, respondents expect improved consumer spending (2.3 percent in 2013), residential investment (15.0 percent), nonresidential structure investment (4.6 percent) and business inventories (up by $45 billion). Regarding the housing sector growth rate, new residential starts are expected to average 1 million in 2013, rising to 1.18 million in 2014. In contrast to these positive contributors to real GDP, shrinking government budgets should fall by 2.3 percent in 2013 and 0.9 percent in 2014, suggesting that they will continue to weaken growth.

Industrial production should increase 3.1 percent in 2013 and 3.5 percent in 2014, suggesting a pickup from the most recent year-over-year growth rate of 1.3 percent.

Businesses are expected to add 168,000 nonfarm payroll workers per month in 2013, increasing to 198,000 per month in 2014. This modest growth in hiring, however, is not anticipated to bring the unemployment rate down much from its current 7.5 percent rate, with business economists forecasting the unemployment rate to average 7.1 percent in 2014.

On financial matters, pricing pressures should be modest, up 1.8 percent in 2013 and 2.0 percent in 2014. These numbers are slightly lower than what was forecast in February, most likely due to lower energy costs. They are also consistent with the Federal Reserve's stated goal of keeping inflation at or below 2 percent. Oil prices are predicted to average $93 per barrel in 2013 and $95 per barrel next year.

New Home Sales

The Census Bureau and the U.S. Department of Housing and Urban Development announced that new single-family residential sales rose from an annualized 444,000 units in March to 454,000 units in April . This represented a 2.3 percent increase for the month, with a 29.0 percent gain in the past 12 months. New home sales mirrored other housing market indicators, with robust growth in the past year helping to propel the U.S. economy. The 454,000 units observed in this report represented the fastest pace since July 2008.

Regionally, the data were mixed for the month, with higher sales reported in the South and West and fewer noted in the Northeast and Midwest. On a year-over-year basis, however, there were increases across-the-board, especially in the South and West.

There were 4.1 months of supply on the market in April, which is unchanged from the month before, and the median home price was $271,600. That represented an 8.3 percent increase in the median home price from March, or 14.9 percent from April 2012.

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Questions or comments? Please contact Chad Moutray at