Below is the summary from this week’s Monday Economic Report:
The U.S. and global economies have slowed considerably in the past few months. Industrial production fell 1.2 percent—stronger than expected—in August, with broad-based declines in manufacturing activity across almost all major sectors. Capacity utilization was also lower. Falling export sales might explain some of this reduction, with manufactured goods exports declining significantly in July. While the overall trade balance remained unchanged for the month, this was mainly due to a near-equal reduction in both goods imports and exports. Slower trade activity is a sign of a weaker global economic environment—never a good thing for manufacturers.
The Federal Reserve Board cited downward economic risks as the primary reason for its pursuit of another round of quantitative easing. By purchasing $40 billion in mortgage-backed securities each month for the foreseeable future, it hopes to lower long-term interest rates. To the extent that it allows individuals to purchase a new home or refinance their mortgages, it could boost the ailing economy. Equity markets have reacted favorably to it as expected, but its benefits might take some time to materialize. The key takeaway at this point, however, is the Fed’s acknowledgement that the economic recovery has stalled, necessitating its actions.
Modest inflation has accommodated the Fed’s moves. With price increases below the Fed’s stated target of 2 percent, it feels that it has the leeway to maneuver. The latest price data seem to support this, with core consumer and producer inflation below 2 percent. Nonetheless, higher energy and food costs have pushed both of them higher in August. The cost of raw materials for manufacturers rose 1.2 percent for the month.
Sentiment surveys released last week were mostly mixed. Consumers and small businesses reported increased levels of optimism, but with continuing levels of concern. The top problem for smaller firms was taxes—a reference to the impending fiscal abyss and the economic challenges that will stem from higher taxes and reduced government spending. Similarly, according to the latest NAM/IndustryWeek Survey of Manufacturers, nearly 79 percent of respondents cited uncertainties related to the political climate as their primary challenge. The number of manufacturers saying that they were “somewhat negative” in their outlook doubled since June’s survey, and forecasts for sales, employment and capital investment were cut dramatically.
This week, we will see if the housing market’s recent gains will sustain themselves. Housing permits exceeded 800,000 in July. Overall, residential construction has been a bright spot this year, aided by low interest rates and improving conditions, but still challenged by excess inventories and the financial struggles of would-be homebuyers. Other data will focus on the manufacturing health in the New York and Philadelphia regions, with both of them reporting contracting activity of late.
Chad Moutray is chief economist, National Association of Manufacturers.
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