Here is the summary from this week’s Monday Economic Report:
The Institute for Supply Management’s (ISM) Purchasing Managers’ Index showed a surprisingly strong gain in new orders and production in February. This report suggested that some of the weaknesses experienced in the second half of 2012 were beginning to dissipate, signaling a pickup in manufacturing activity to begin 2013. But across-the-board fiscal budget cuts, persistent challenges overseas (particularly in Europe) and higher energy costs stand in the way. Nonetheless, the ISM index was one of several indicators released last week showing modest improvements in the sector. Some regional data from the Chicago and Richmond Federal Reserve Banks also indicated stronger growth in February.
That does not mean that the U.S. economy has fully turned a corner, as evidenced by several key data points. The reality is more nuanced than that. First and foremost, real gross domestic product (GDP) was revised upward from shrinking by 0.1 percent in the fourth quarter of 2012 to growing by the same amount at the beginning of this year. Sharp reductions in defense and business inventory spending subtracted from growth, outweighing modest gains in business fixed investment and consumer spending. In addition, regional manufacturing data are quite mixed. While some regionals show improvement, as noted above, others continue to struggle. The Kansas City Federal Reserve Bank’s manufacturing survey, for instance, reported a significant contraction in activity in February, with worries about budget sequestration and poor weather top of mind. Similarly, the Dallas Federal Reserve Bank observed slower growth and reduced optimism last month.
Consumer confidence appears to have rebounded from the declines seen in December and January. Higher payroll taxes significantly influenced the decrease in January. In surveys from both the Conference Board and the University of Michigan, sentiment increased in February, with Americans generally more positive about the economic outlook. This is true despite the many headwinds that exist. With that said, it remains to be seen whether this confidence translates into higher purchases. Personal spending fell for durable goods in January and remained flat for nondurables. The larger headline on the personal income front, though, was the massive shift in dividend and other payments in December in advance of the fiscal cliff deal. This led to a large increase in personal income in December, followed by a large decrease in January. Beyond this story, though, weaknesses in the manufacturing sector slowed wage and salary growth in the second half of 2012, continuing into January.
This week, the focus will be on international trade and employment. Several surveys tended to show manufacturing employment growth lagging behind stronger activity in new orders and production. Indeed, many businesses are waiting for a more solid economic footing before making the commitment to begin hiring again, or to pick up the pace of hiring. The consensus is for roughly 150,000 nonfarm payroll workers to be added in February, with slow growth in manufacturing hiring similar to that of the past couple months. On the export front, recently improving economic conditions in many of our largest trading partners could translate into increased sales.
Chad Moutray is the chief economist, National Association of Manufacturers.
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