The Federal Reserve Bank of Dallas reported that manufacturing production has picked up, with the production index increasing from 5.5 in May to 15.5 in June. Approximately three out of five respondents said that their overall activity levels did not change, but those suggesting higher production levels rose. Similar findings were observed for capacity utilization, new orders, shipments, and employment. The pace of capital spending also rose slightly. In terms of pricing pressures, these have eased significantly.
The jump in manufacturing activity mirrored attitudes toward the larger macroeconomy. The index of general business activity improved from -5.1 last month (contraction) to 5.8 this month (expansion). Nonetheless, it did not change their views about their own company’s outlook by much, as this index edged marginally higher from 4.7 to 5.5.
Even with improvements in the current economic environment, the forward-looking indices show a degree of cautious optimism moving forward. On the one hand, nearly all of the measures reflect an expectation of higher output and employment six months from now. For instance, the expected production index rose from 31.6 to 33.0, with only 9.2 percent of respondents anticipating a decline in activity moving ahead.
Yet, the composite indices for the company outlook and general business activity declined somewhat, reflecting recent anxieties. Indeed, the sample comments seem to back this up, with discussions about recent “softness” in the market, “hesitation to move forward” on new projects, U.S. fiscal challenges, and the November elections. Perhaps reflecting this, the forward-looking measures for employment and capital spending reflect some easing, even as they continue to show expansion for both.
Meanwhile, other economic indicators tend to highlight why so many manufacturers are concerned about growth. The latest of these comes from the Chicago Federal Reserve Bank, which observed a sharp drop-off in economic activity in May. Its National Activity Index fell from 0.08 in April to -0.45 in May. In this index, zero values suggest that the macroeconomy is growing at its historical rate. Lower manufacturing production, which was down 0.4 percent, last month, was one of the contributing factors to the declining figure. Consumer spending and housing were also drags on the index, with employment measures neutral.
The lower figure for May helped to bring down the three-month moving average to -0.34. Values below -0.70 indicate an increased risk for recession. While a recession is not likely at this point, the pace of growth has certainly slowed considerably in the past three months. This was the third consecutive month of negative index values.
Chad Moutray is chief economist, National Association of Manufacturers.
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