Below is the summary from this week’s Monday Economic Report:
Several indicators released last week show slowing sales continuing to hurt manufacturers. The large decline in durable goods orders was the biggest eye-opener. According to advance data from the Census Bureau, durable goods fell by 13.2 percent in August. While fewer new orders in the transportation sector, especially for nondefense aircraft, can mostly explain this decrease, the declines in sales were fairly broad-based. In addition, the Bureau of Economic Analysis revised its estimate of real gross domestic product (GDP) for the second quarter from 1.70 percent to 1.25 percent. As noted in earlier iterations of this figure, the contribution of manufacturing to real output was negligible—a significant turnaround from earlier quarters.
Reduced manufacturing activity largely contributed to the Chicago Federal Reserve Bank’s National Activity Index declining from -0.12 in July to -0.87 in August. Values under zero suggest that the macroeconomy is growing below its historical average, and the latest data indicate considerable weaknesses in the current economic environment. Regional Federal Reserve Bank surveys back this up. Weak sales, slowing global growth, the fiscal abyss and upcoming elections all fueled manufacturers’ uncertainty, which the latest regional data from ISM-Chicago noted. The Chicago Business Barometer indicated a contraction for the first time since September 2009, with new orders dragging the index lower.
Despite these headwinds, consumer sentiment improved in both of the major confidence surveys out last week. Both the Conference Board and the University of Michigan data indicate that Americans’ perceptions regarding future economic growth improved in the past month. This might seem at odds with other surveys. For instance, in the recent small business survey from the NAM and the National Federation of Independent Business, 55 percent of respondents feel that the national economy is worse today than three years ago. Yet, these types of sentiment surveys tend to move with current pocketbook issues, and it is not entirely clear that the average individual perceives the economic threats (e.g., fiscal abyss, budget sequestration) as real, and not just political gamesmanship.
Of course, the real test of consumer sentiment is how it impacts spending. Americans increased their personal spending by 0.5 percent in August, building on July’s strong gains. Higher gasoline prices, however, contributed to much of this increase. Real spending rose just 0.1 percent. Moreover, consumers spent more than they earned, reducing the savings rate from 4.1 percent to 3.7 percent. Personal incomes increased 0.1 percent overall, but for manufacturers, wages and salaries dropped, reflecting recent weaknesses in the sector. One area where spending has been decidedly higher is in the housing sector, with new single-family residential home sales up nearly 28 percent year-over-year. In August, however, new home sales were off slightly.
This week, the two big releases will be the latest Institute for Supply Management (ISM) manufacturing data, which will be released this morning, and the jobs numbers out on Friday. Expect disappointing results for both, with the ISM Purchasing Managers’ Index potentially showing a contraction for four straight months. Likewise, employment growth is expected to be in-line with past months, but hopefully, an improvement from the 15,000 lost manufacturing jobs observed in August.
Chad Moutray is chief economist, National Association of Manufacturers.
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