Recent data have shown economic activity slowing in most areas of the country. Two economic indicators released this morning tend to echo this.
First, the Federal Reserve Bank of Philadelphia’s Business Outlook Survey observed a contraction in the manufacturing sector for the third consecutive month. The composite index of general business conditions edged slightly higher from -16.6 in June to -12.9 in July, but this was the third month of negative attitudes. Only 18.7 percent of respondents said that they felt that business activity was increasing; whereas, nearly one-in-three believed it was decreasing.
In some special questions, businesses were asked about the demand for manufactured products over the past two months. Thirty percent of them said that demand was higher, compared to nearly 37 percent saying it was lower.
Third quarter production was on expected to be negative for 46.6 percent of them. When asked about reasons for declining demand, the top reasons cited included economic uncertainty (65 percent), uncertainty around taxes and regulations (52 percent), seasonal factors (39 percent), and slowing exports (22 percent).
Given these downbeat comments, it should not be a surprise that July’s components were negative across-the-board. New orders, shipments, inventories, and employment were all contracting. New orders – a proxy of future activity – did improve somewhat, from -18.8 to -6.9, with the pace of decline for shipments also slowing. This pessimistic attitude reduced the still-positive expectations of the next six months, somewhat differing from the special questions discussed earlier. The various measures of future production were all growing, albeit at a slower pace. Capital spending and net hiring eased significantly, though.
Meanwhile, the Conference Board reported that its index of leading indicators dropped 0.3 percent in June, reversing the 0.4 percent increase of May. This suggests weaker economic growth in the months ahead. Manufacturing activity provided mixed contributions to the index. The increased average workweek of production workers was offset by reduced new orders. The other drags on this measure were reduced building permits, lower equity prices, and reduced consumer confidence. Credit availability helped to provide a cushion for future growth.
At the same time, the Coincident Economic Index – which examines the current state of the economy – rose 0.2 percent in June, the same pace as in May. Increased manufacturing and trade sales and industrial production provided the largest lifts to this index, with nonfarm payrolls and personal income levels also making positive contributions.
Overall, these two indicators point to weaknesses in the macroeconomy. Softness in the manufacturing sector, in particular, helped to drag down the leading indicators and has reduced the optimism of business leaders and consumers. Uncertainty surrounding the economy and future tax and regulatory policies are central to this slower growth. This is further proof that we need to act on the fiscal cliff sooner rather than later.
Chad Moutray is chief economist, National Association of Manufacturers.
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