Here is the summary for this week’s Monday Economic Report:
In the first five months of 2013, manufacturing production has been virtually unchanged, according to the Federal Reserve Board, and capacity utilization in the sector edged lower from 76.4 percent in December to 75.8 percent in May. Production among manufacturers increased 0.1 percent in May, or up 1.7 percent year-over-year. The latest NAM/IndustryWeek Survey of Manufacturers predicted that the annual pace of production activity should increase to 2.8 percent by the fourth quarter of 2013. Manufacturing production will need to pick up for that to be true. Manufacturing export numbers have been soft, with higher taxes and across-the-board spending cuts dampening demand.
Regarding the NAM/IndustryWeek survey, manufacturers anticipate sales to increase 2.7 percent on average over the course of the next year. While this is higher than the 2.3 percent growth rate observed three months ago, it is below the 4.3 percent pace of 12 months ago. Larger businesses were more optimistic about sales and their company’s outlook than their small and medium-sized counterparts, with all respondents predicting sluggish hiring growth over the next year. The top concern, cited by 82.2 percent of respondents, was the rising cost of health insurance. The average health insurance premium increase in 2013 was 8.6 percent, with a 13.9 percent jump on average anticipated for 2014. The 2014 numbers suggest just how much uncertainty there is regarding insurance rates, with the perception they will go up significantly. I spoke about this survey and the general state of manufacturing on CNBC’s “Squawk Box” last Tuesday.
On the positive side, retail sales rose 0.6 percent in May, boosted by higher spending on motor vehicles. Auto sales grew 1.8 percent for the month and 8.5 percent over the past 12 months, continuing to provide significant contributions to the manufacturing sector and the larger economy. Non-auto sales were also mostly higher. Despite this gain, the University of Michigan’s latest consumer confidence numbers edged slightly lower in June, but the longer-term trend suggests that Americans remain more positive today than they were at the beginning of the year. Likewise, small business owners were more optimistic in the most recent National Federation of Independent Business (NFIB) survey, with improved sales expectations lifting spirits higher. Still, these surveys—including our own—tend to report persistent weaknesses in the marketplace, with index readings below where they should be. The NFIB survey states that economic uncertainties and the political climate are reasons given by those not ready to expand.
This week, markets will be focused on what the Federal Open Market Committee (FOMC) decides to do. There is much anticipation that the FOMC will start to “taper” its quantitative easing program as soon as this summer, lowering its “highly accommodative” asset purchases down from the current $85 billion each month to something lower than that. The latest producer price index data continue to support the view that inflationary pressures have been kept to a minimum, even with the 0.5 percent increase in May. The year-over-year rate continues to stay below the 2 percent goal stated by the Federal Reserve Board, allowing the FOMC to concentrate on measures to boost economic growth.
The other headlines this week will center on housing and manufacturing activity. Housing permits exceeded 1 million in April for the first time since June 2008, even as new residential construction activity declined. The expectation is that housing starts will increase again in May, rising from the 853,000 level seen in April and moving closer to the 1 million mark again. At the same time, we will get a sense of how manufacturers are faring from the New York and Philadelphia Federal Reserve Banks, and Markit will release early estimates of manufacturing activity for the United States, China and the Eurozone. These measures have had weaknesses of late, so it will be interesting to see if there has been progress in the past month. (For more on worldwide trends, see the latest Global Manufacturing Economic Update.) Aside from these releases, other new reports out next week include the latest data on consumer prices, leading indicators and state employment.