Eurozone Real GDP
Eurostat reported flat real GDP growth in the second quarter for the Eurozone, the slowest pace since the first quarter of 2013. Since emerging from a deep recession in mid-2013, Europe has grown slowly, prompting deflationary worries and dampening what would otherwise have been a psychological boost. In the 18-member Eurozone, real GDP has expanded 0.7 percent over the past 12 months. Germany (down 0.2 percent) and Italy (down 0.2 percent) were among the countries in the second quarter with declining economic growth, with French growth holding steady for the second consecutive quarter. In contrast, the United Kingdom has been one of the bright spots, with 0.8 percent growth in the second quarter and 3.1 percent growth year-over-year.
Given the sluggishness of recent income and economic activity growth in the Eurozone, we have also seen prices increase very slowly, up just 0.4 percent in July and down from 0.5 percent in June. This has prompted the European Central Bank to be more aggressive, and the latest data suggest even more monetary stimulus in the months ahead.
In the manufacturing sector, industrial production declined by 0.3 percent in the Eurozone in June. It has decreased in three of the past four months. On a year-over-year basis, industrial output remained unchanged since June 2013 in the 18-member Eurozone. This represents a significant deceleration in the past two months, down from 1.8 percent in April. We will get our first look at August purchasing managers’ index (PMI) data on the 21st, but this data suggest weaknesses for the month. The Markit Eurozone Manufacturing PMI report in July provided mixed news, with activity expanding for 13 straight months but growth continuing to ease over the course of this year.
Overall, these data show that Europe’s economic challenges are still not behind them, with activity slowing over much of this year. For manufacturers, this has meant cautious consumption and slowing production for both durable and nondurable goods. Energy production has declined by the largest amount year-over-year (down 3.4 percent), and tensions with Russia could present even greater downside risks for the continent as temperatures start to cool in the fall and winter months.
Manufacturing production increased 1.0 percent in July, its fastest pace since February’s post-weather rebound earlier in the year. The jump in output helped to lift the year-over-year pace of manufacturing production to 4.9 percent, its fastest annual rate since June 2012. As such, it illustrates the sector’s recovery in output since the winter months, with the year-over-year pace up from 1.5 percent in January.
Meanwhile, manufacturing capacity utilization increased from 77.2 percent in June (and just 75.5 percent in January) to 77.8 percent in July. This suggests that utilization rates for manufacturers have nearly reached their pre-recessionary levels, with July’s rate the highest level since February 2008.
Looking at sectoral performance, durable and nondurable goods output were both higher, up 1.7 percent and 0.3 percent, respectively. The increase stemmed largely from motor vehicle production, which increased by a whopping 10.1 percent in July, recovering from flatness seen in June. On a year-over-year basis, motor vehicles and parts output has risen 21.9 percent. This reflected the sizable gain in 2014, but it was also a function of softness in 2013 due to the sector gearing up for a new model year.
Other sectors with notable increases in July included apparel and leather (up 1.8 percent), textile and product mills (up 1.7 percent), furniture and related products (up 1.4 percent), petroleum and coal products (up 1.3 percent), nonmetallic mineral products (up 1.0 percent), primary metals (up 1.0 percent), machinery (up 0.9 percent) and computer and electronic products (up 0.8 percent). In contrast, just 3 of the 19 major sectors had declining production for the month: miscellaneous durable goods (down 0.8 percent); food, beverage and tobacco products (down 0.3 percent); and plastics and rubber products (down 0.3 percent).
On a year-over-year basis, durable goods production has risen by a healthy 8.2 percent since July 2013, with nondurable goods output up 2.1 percent. The five sectors with the fastest growth over the past 12 months include: motor vehicles and parts (up 21.9 percent), furniture and related products (up 9.2 percent), machinery (up 8.3 percent), plastics and rubber products (up 7.4 percent) and nonmetallic mineral products (up 7.3 percent).
Meanwhile, overall industrial production rose 0.4 percent in July, equaling the increase seen in June. It was the sixth straight monthly gain in production following January’s weather-induced decline. Since January, industrial output has risen 3.0 percent, with 5.0 percent growth year-over-year. Mining production increased 0.3 percent, but utility output continues to soften, down 3.4 percent for the month. Total capacity utilization increased from 79.1 percent in June to 79.2 percent in July, its highest rate since June 2008.
Job Openings and Labor Turnover Survey
The Bureau of Labor Statistics said that manufacturing job openings increased for the fourth straight month in June, rising to its highest level since June 2012. After bottoming out at 203,000 job postings in June 2013, the pace has edged upward over the past 12 months, now reaching a two-year high (up from 292,000 in May to 303,000 in June). That is a positive development. With that said, the increase in June stemmed entirely from the durable goods sector (up from 175,000 to 186,000). Job openings in the nondurable goods sector remained unchanged for the month at 117,000. Each figure reflected progress from earlier in the year.
The Job Openings and Labor Turnover Survey (JOLTS) data also show an increase in net hiring in June, rising to its fastest pace since November. The number of manufacturing hires grew from 240,000 to 259,000. At the same time, manufacturing separations—including layoffs, quits and retirements—expanded from 228,000 to 238,000. Overall, net hiring (or hires minus separations) in the manufacturing sector increased from 12,000 in May to 21,000 in June.
Meanwhile, job postings accelerated strongly in June for the larger economy, as well. Total job openings have risen from 4,577,000 in May to 4,671,000 in June. This marks a slight uptick from the 3,874,000 pace observed in January, reaching its highest level since February 2001. Similarly, net hiring in the overall economy rose from 208,000 in May to 283,000 in June. In June, employers posted more openings for construction, government, manufacturing, professional and business services and retail trade.
NFIB Small Business Survey
The National Federation of Independent Business (NFIB) said that small business confidence edged higher in July, bouncing back after dropping slightly in June. The Small Business Optimism Index increased from 95.0 in June to 95.7 in July. While the index remains below the 96.6 reading observed in May (its highest level since September 2007), it has averaged 95.6 over the past four months (April to July). This represents an upward trend, with the first quarter (January to March) averaging 93.0. As such, it suggests that small business owners have become somewhat more positive over the past few months.
Much of the data supports this finding. The percentage of respondents saying that the next three months are a “good time to expand” increased from 7 percent to 10 percent, matching the level observed in May. Net sales expectations dropped marginally, from 11 percent to 10 percent. However, these data also suggest that the sales outlook has improved so far in 2014 with a year-to-date average of 10.9 percent, up from an average of 3.8 percent for all of 2013. In July, capital expenditure plans (up from 24 percent to 25 percent) also increased.
Nonetheless, the Small Business Optimism Index remains below 100, indicating that the sector continues to experience subpar growth and sentiment. Survey respondents suggest that economic conditions and the political climate discourage expansion. Along those lines, small business owners cited taxes and government regulations as the top problems they face, with each garnering 22 percent. These are followed by poor sales (13 percent) and the inability to attract workers (10 percent).
NY Fed Empire State Manufacturing Survey
The Empire State Manufacturing Survey from the New York Federal Reserve Bank said that businesses expanded strongly for the sixth straight month in August. Yet, while growth rates remain at decent levels, the pace of expansion eased somewhat for the month. The composite index of general business conditions declined from 25.6 in July, which was a four-year high, to 14.7 in August. Given the loftiness of July’s figure, it should probably not be much of a surprise that the index came back down to earth. The good news was that much of July’s increases were sustained, with 31.4 percent saying that conditions were better and 51.9 percent suggesting that they remained the same in August.
The underlying data were mixed. On the positive side, the growth rate for shipments (up from 23.6 to 24.6) and the average employee workweek (up from 2.3 to 8.0) both picked up, reflecting increased activity levels. At the same time, new orders (down from 18.8 to 14.1) and hiring (down from 17.1 to 13.6) decelerated slightly, even as they remained at decent growth levels. Pricing pressures remained elevated (up from 25.0 to 27.3), with nearly 30 percent of survey respondents suggesting that input costs were higher in August.
Meanwhile, manufacturers in the New York Fed’s district were significantly more optimistic about the next six months. The forward-looking composite index jumped from 28.5 to 46.8, its highest level since January 2012. Roughly 60 percent of those taking the survey said they anticipate higher sales and output levels in the months ahead, with approximately 30 percent planning to hire more workers and invest in additional capital expenditures. Still, the average workweek is predicted to be unchanged six months from now, and 46.6 percent feel that raw material prices should increase.
Producer Price Index
The Bureau of Labor Statistics reported that producer prices for final demand goods and services increased 0.1 percent in July, slowing from the 0.4 percent gain seen in June. Specifically, producer prices for final demand goods held steady for the month, with food prices up 0.4 percent but energy costs down 0.6 percent. The increase in food costs stemmed largely from higher prices for meats and shellfish; however, there was some relief from recent price gains for produce. On the energy side, producers have benefited from lower prices for natural gas and petroleum of late. For instance, the cost of West Texas intermediate crude oil declined from a recent peak of $107.95 per barrel on June 20 to $98.23 on July 31.
Beyond food and energy, core prices for final demand goods rose 0.2 percent in July. Apparel for women, girls and infants; commercial furniture; industrial chemicals; light motor trucks; pharmaceuticals; and transformers and power regulators saw the largest increases. However, declines in prices for floor coverings, gold and platinum jewelry, pet food, sanitary paper products, tires and x-ray equipment offset these somewhat.
On an annual basis, producer prices for final demand goods and services rose 1.7 percent over the past 12 months. This fell for the third straight month, off from the 2.1 percent pace observed in April. Likewise, core inflation—which excludes food and energy costs—increased 1.6 percent over the past 12 months, down from 2.0 percent in May.
Overall, this suggests that inflationary pressures have eased slightly over the past couple months. While we have seen some acceleration in producer prices since the beginning of the year, costs remain below the Federal Reserve’s stated threshold of 2 percent. This indicates the inflation remains in check, at least for now, and the recent deceleration should ease the pressure on the Federal Open Market Committee to expedite its plans to normalize rates. Of course, the final decision to raise short-term rates will hinge on economic data in the months to come.
The Census Bureau reported that retail sales leveled off in July. Since declining due to winter weather in December and January, retail spending had rebounded in the spring months, but it has since slowed significantly. Over the course of the past 12 months, retail sales have risen 3.7 percent, down from a 4.7 percent pace experienced in April. As such, it appears that consumers have become more cautious in their spending this summer even as we have continued to see relatively modest gains so far in 2014.
Motor vehicle sales (down 0.2 percent) declined for the second month in a row. Excluding auto sales, retail spending was up just 0.1 percent, indicating broader weaknesses. Bright spots included miscellaneous store retailers (up 0.9 percent), clothing and accessory stores (up 0.4 percent), health and personal care stores (up 0.4 percent), food and beverage stores (up 0.3 percent), food services and drinking places (up 0.2 percent) and sporting goods and hobby stores (up 0.2 percent).
Yet, these gains were largely offset by spending declines for department stores (down 0.7 percent), motor vehicle and parts dealers (down 0.2 percent), electronics and appliance stores (down 0.1 percent), furniture and home furnishings stores (down 0.1 percent) and nonstore retailers (down 0.1 percent).
On a year-over-year basis, segments with the fastest retail sales growth were health and personal care stores (up 7.3 percent), food services and drinking places (up 6.2 percent), motor vehicle and parts dealers (up 6.0 percent), nonstore retailers (up 5.9 percent) and building material and garden supply stores (up 5.1 percent).
University of Michigan Consumer Sentiment
The University of Michigan and Thomson Reuters released preliminary data showing that consumer confidence slipped again in August. The Consumer Sentiment Index decreased from 81.3 in July to 79.2 in August, its lowest level in nine months and off significantly from the recent high of 84.1 in April. The average reading year-to-date in 2014 is 81.5, up marginally from the 79.2 average of 2013 as a whole.
Interestingly, as the University of Michigan’s data has reflected less optimism on the part of consumers of late, a similar report from the Conference Board had its consumer confidence measure reaching a pre-recession high in July. As such, these competing data points show the complex thinking of the American consumer right now, with economic data showing rebounding activity from earlier in the year but also with nagging worries about future growth.
Indeed, the August University of Michigan data reflect this nuance. The index for present conditions improved (up from 97.1 to 99.6), but the forward-looking expectations measure dropped significantly (down from 71.1 to 66.2). The latter measure hit its lowest level since the government shutdown last fall. It is possible that Americans are reacting to geopolitical events in this survey.
We will get final data on August consumer sentiment from the University of Michigan on August 29. The Conference Board will also release its survey data on consumer confidence on August 26.