Below is the summary from this week’s Monday Economic Report:
Economic indicators released last week show that manufacturers are increasingly nervous. The latest NAM/IndustryWeek Survey of Manufacturers found that the percentage of respondents reporting their company’s outlook was positive has dropped from almost 89 percent in March to roughly 52 percent today. Business leaders are frustrated with the political process, and more than 84 percent cited the prospects of the fiscal cliff as their top concern. These worries are fueling manufacturers’ uncertainties, with about 42 percent saying that they have reduced or slowed down capital spending and 36 percent noting reduced or no hiring. In fact, the expected hiring and investment rates for the next 12 months have turned negative for the first time since 2009.
Nonresidential fixed business investment was a drag on growth in the recent revision to real GDP for the third quarter—a trend that is not likely to change in the fourth quarter. Moreover, the Institute for Supply Management’s (ISM) Purchasing Managers’ Index (PMI) reflected a contraction in November for the fourth time in the past six months. To be fair, Hurricane Sandy played an important role in reducing activity for the month, but it was not the only factor producing weakness. We have seen a more sluggish manufacturing sector since the summer, with slowing global sales and economic uncertainty weighing heavily on everyone’s minds. Similarly, employment growth has also been weak over this time frame, with manufacturers shedding 26,000 workers since July, according to the Bureau of Labor Statistics (BLS).
Up until now, these impacts have mostly been seen at the business level. While manufacturing optimism has diminished, consumer confidence rose throughout the fall months, which helped push up spending. Consumers accounted for 37 percent of the real GDP growth in the third quarter, and recent holiday sales figures have reflected decent growth. November’s vehicle sales numbers also showed strong gains (although they were boosted by auto replacements stemming from Hurricane Sandy). However, the University of Michigan’s Consumer Sentiment Survey showed a large decline in confidence, with its index down from 82.7 in November to 74.5 in December. It appears that consumers are finally starting to ponder the prospects of the fiscal cliff and its implications for the larger economy. As the media has increased its coverage of the fiscal cliff over the past month, the drop should not be surprising.
This week, we will get more clues about the current state of the manufacturing sector and the larger economy. The Federal Open Market Committee will likely stick with its current stimulative monetary policies at its December meeting. On the data front, the Fed will release industrial production numbers on Friday, which are expected to show modest growth at best, especially given current weaknesses. Tomorrow, the Commerce Department will announce export figures, and we will see if recent improvements overseas have yielded gains in worldwide sales. (For more on international trends, see the latest Global Manufacturing Economic Update.) Other highlights for the week include indicators on consumer and producer prices, job openings, retail sales and small business sentiment.
Chad Moutray is chief economist, National Association of Manufacturers.
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