Here is the summary for this week’s Monday Economic Report:
Suddenly, in the midst of decent and cautiously optimistic U.S. growth, world economic markets have begun to focus on the banking crisis in Cyprus. With GDP of around $25 billion, Cyprus has seen its problems once again bring Europe’s sovereign debt challenges to the forefront of economic discussion. Cypriot lawmakers have struggled to find a way to bail out their banking system, particularly after attempts to tax depositors failed. The deal announced over the weekend was negotiated so that Cyprus could remain in the European Union. It was that prospect that has sent equity markets lower last week, particularly in Europe, on fears of how the crisis in Cyprus might spread to other countries.
Of course, Cyprus is not Europe’s only problem. The Eurozone is mired in a prolonged recession. As we have discussed in the monthly Global Manufacturing Economic Update, real GDP and employment continue to decline in the continent, with weaknesses even in Germany, its largest country. The Markit Flash Eurozone Purchasing Managers’ Index (PMI) dropped from 47.8 in February to 46.5 in March. This measure has contracted every month since July 2011. This latest report states that sales, output and hiring were all lower, and the prospects for improvements in April do not look good.
The data stand in contrast to what we are seeing elsewhere. Markit Flash PMI data for China and the United States reflect continuing, albeit modest, growth in manufacturing activity in both countries. In its Federal Open Market Committee (FOMC) statement last week, the Federal Reserve Board noted recent progress in many economic indicators, which had “paused” at the end of last year due to the fiscal cliff and weather-related concerns. Even with these improvements, the Federal Reserve continues to worry about slow economic growth and elevated unemployment rates. As such, it will continue to make purchases of $85 billion in long-term and mortgage-backed securities for the foreseeable future. In the short term, the Federal Reserve will be closely watching the impact of across-the-board budget cuts and the debt ceiling debate, both of which could put a dent in real GDP growth in the second quarter of 2013.
Much of last week’s other data tended to echo the indicators that we have seen so far this year. The Philadelphia Federal Reserve Bank’s manufacturing survey noted that sales and general attitudes about the economy were growing for the first time since December, albeit only slightly. This suggests that the economic environment was stabilizing but not experiencing much growth. Likewise, while the Conference Board’s Leading Economic Index indicated decent growth in the past three months, manufacturing’s contributions have been mixed, mainly due to conflicting signals on new orders. On the housing front, data were more encouraging, with permits reaching a new four-and-a-half-year high. However, according to the National Association of Home Builders, builder confidence has slowed, even as the residential sector remains a bright spot. Housing starts have risen almost 28 percent since February 2012.
Regional manufacturing surveys from Chicago, Dallas, Kansas City and Richmond will dominate this week’s economic data. Given the recent pickup in activity in other indicators, we should see some progress, much as we did in the Philadelphia Federal Reserve data discussed above. The largest headlines will come from the second revision to fourth-quarter real GDP, which should show growth of around 0.5 percent (up from the original estimate of -0.1 percent and the first revision of 0.1 percent). Other highlights include new data on personal income and spending, durable goods orders and consumer confidence.
Chad Moutray is the chief economist, National Association of Manufacturers.
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