Here is the summary from this week’s Monday Economic Report:
Some of the indicators released last week helped confirm the belief that the U.S. economy has started 2013 on a stronger-than-expected note. First, industrial production rose 0.8 percent in February, led by strong demand for automobiles and other goods. This was a decent turnaround from much weaker numbers in January, with all but three major manufacturing sectors experiencing higher production. Second, retail sales rose a surprisingly healthy 1.1 percent in February. While much of that growth stemmed from higher gasoline prices and higher motor vehicle sales, the data suggested modest growth overall, with Americans continuing to make modest gains in purchases despite headwinds from higher taxes and fiscal uncertainties.
At the same time, those headwinds appear to be having some negative impacts. Industrial production was increasing at a 5.1 percent year-over-year pace at this point last year; today, that rate is 2 percent. That example can be replicated in so many of the recent indicators. For instance, the NAM/IndustryWeek Survey of Manufacturers reported an uptick in optimism in the latest survey, with sales expected to grow 2.3 percent over the next year. That represents an improvement from three months ago (when the rate was 1.0 percent), and the percentage of respondents who were positive about their own company’s outlook rose from about 52 percent in December to roughly 70 percent today. But this is a come-down from the stronger pace of nearly 5 percent growth in annual sales expected in March of last year (when approximately 89 percent were positive in their outlook). Clearly, more work still needs to be done to get the economy moving.
The New York Federal Reserve Board’s Empire State Manufacturing Survey found that conditions in its district had stabilized somewhat, with its composite index of activity showing expansion for two straight months (after six months of contraction). There was some easing, though, in the pace of new orders and shipments, and employment growth remains sluggish. Still, there is cautious optimism for the months ahead. Similarly, the National Federation of Independent Business’ Small Business Optimism Index edged slightly higher in February, even as sales and earnings remain subpar and smaller firms continue to worry about the economy and overall political environment.
The other big trend observed in last week’s reports was the pickup in prices, mainly due to higher energy costs. Both the consumer and producer price indices experienced solid increases in February. One has to wonder if these higher costs might have contributed to the decline in consumer sentiment, as noted in the preliminary data from the University of Michigan and Thomson Reuters. Nonetheless, overall core inflation – which excludes food and energy prices – continues to be in the Federal Reserve Board’s acceptable range, with prices rising at or less than 2 percent on an annual basis.
With pricing pressures in check, at least for now, the Federal Open Market Committee is expected to keep its current expansionary monetary policies in place at this week’s meeting. Improvements in the U.S. economy should provide some fodder to the debate, but with persistent challenges and growth still below its potential, we should not expect any changes in Fed policy. One area that has benefited from the Federal Reserve’s policy of low interest rates has been the residential sector. We should expect more positive news on the front with the latest housing starts figures, which will be released tomorrow. Other items to watch this week include the latest state employment data and the most recent manufacturing survey from the Philadelphia Federal Reserve Bank.
Chad Moutray is the chief economist, National Association of Manufacturers.