Reduced Manufacturing Activity in November Providing a Drag to Macroeconomic Indices

By December 22, 2011Economy

Two indices released today provide mixed news on the larger economy, with reduced manufacturing activity in November weighing heavily on both of them.


First, the National Activity Index from the Chicago Federal Reserve Bank dropped from -0.11 in October to -0.37 in November. The largest driver of the decline was the 0.2 percent drop in industrial production which was reported last week. Housing remained a drag on the index despite some improved housing starts figures; whereas, higher employment figures helped to lift it.


Overall, the National Activity Index shows an economy which is growing below its historical trend. The three-month moving average is currently -0.24, which is unchanged from the previous month. Values under -0.70 suggest that the economy might be in a recession. While economic growth has moved away from the recessionary risk zone in recent months, it is also clear that weaknesses remain.


Second, the Conference Board’s Leading Economic Index rose 0.5 percent in November, lower than the 0.9 percent growth rate observed in October. As with the Chicago release, manufacturing indicators provided a drag to the index, including a reduced average workweek for production workers and fewer manufacturing new orders for consumer goods and materials. Nondefense capital goods spending, on the other hand, provided a slight boost.


There were a number of bright spots, though. Higher building permits and increased consumer expectations were both real positives for this forward-looking index. In addition, expansionary monetary policies are providing ample liquidity to the markets, with both monetary aggregates and the interest rate spread contributing greatly to this figure.


The Coincident Index, which looks at the current economic environment, rose 0.1 percent. For this index, higher nonfarm payrolls, personal income and manufacturing and trade sales were offset by lower industrial production numbers.


Nonetheless, despite the drag on these indices provided by the manufacturing sector, the real story here is one of continued growth moving into 2012. There were several positives observed in these data, with the drop in industrial production having a large sway in moving both the National Activity Index and the Leading Economic Index lower.


Yet, the larger picture for the next few months should be more optimistic than these numbers might portray. Improvements in housing, employment and consumer confidence are welcome signs, and most estimates of manufacturing production for 2012 show moderate growth of around 3 percent.

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