Here is the summary for this week’s Monday Economic Report:
The manufacturing sector received a bit of good news last week with new data suggesting that the sector has improved in June and July from the weaknesses during the spring. Both the Empire State Manufacturing Survey from the New York Federal Reserve Bank and the Business Outlook Survey from the Philadelphia Federal Reserve Bank showed gains in their July reports, with mostly higher activity levels. Respondents were also cautiously optimistic about the second half of 2013, with nearly 60 percent of those taking the Philly Fed survey anticipating higher sales in the next six months. However, employment still lags behind. While the hiring measures in these surveys indicated positive growth, it was only up slightly, and in the Empire State study, the average workweek was down on net.
For its part, the Federal Reserve Board concurred with this assessment. The Beige Book reported that manufacturing activity was picking up in almost all of its districts. The one exception was the Kansas City Fed, where severe weather disruptions contributed to the decline in production in its June survey. At the same time, the Federal Reserve reported that industrial production grew 0.3 percent in June, an improvement from May’s flat reading and April’s decline of 0.3 percent. Manufacturing production has had small gains during the past two months. Manufacturing production is up just 0.4 percent during the first six months of 2013, or perhaps more positively, up 1.8 percent over the past 12 months. Still, soft demand has dampened sales and output. Ideally, we would like to see industrial production growth of 4 percent or greater.
In his semiannual congressional testimony, Federal Reserve Chairman Ben Bernanke said, “The economic recovery has continued at a moderate pace in recent quarters despite strong headwinds created by federal fiscal policy.” Moreover, he added, “The economy remains vulnerable to unanticipated shocks, including the possibility that global economic growth may be slower than currently anticipated.” With that in mind, he reiterated his view that the Federal Open Market Committee will maintain its “highly accommodative” policies for the foreseeable future—something that would not be altered by possibly scaling back its asset purchases later this year. For its part, the latest Consumer Price Index data—much like the producer price reports released the week before—show that core inflation is under control, with year-over-year rates below the Federal Reserve’s stated target of 2 percent. However, the significant increase in energy costs during the past few weeks have caused prices at both the consumer and producer level to accelerate, which the Federal Reserve will continue to monitor.
As noted in last week’s report, interest rates have also been on the rise. The average 30-year fixed-rate mortgage, according to Freddie Mac, was 4.37 percent last week, a full percentage point higher than the first week of May. We would expect that higher mortgage rates would dampen some of the enthusiasm for housing (even with rates that are still historically low). Indeed, new residential construction and permits in June declined sharply. Fortunately, much of the decrease was in the highly volatile multifamily unit segment, with single-family starts off less dramatically. Moreover, new housing permits for single-family units edged slightly higher, perhaps indicating that the housing recovery will continue its upward ascent, even with some downward pressure from higher rates. From the homebuilder perspective, the Housing Market Index (HMI) suggests that builders remain very confident, with the index up six points in July.
This week, we will see if the improvements in manufacturing activity were limited to just a few reports, or if it is more broad-based. New durable goods orders, with preliminary numbers out on Thursday, are expected to show modest gains in June. In addition, sentiment surveys from the Kansas City and Richmond Federal Reserve Banks will be out, with the former hopefully showing recoveries from weaker storm-related data in June. Internationally, we will also get Flash Purchasing Managers’ Index (PMI) data from Markit for both Europe and China, both of which contracted in their last reports. Look for continued slowness in China and for Europe’s recession to produce yet another negative PMI reading for July (which would be its 24th consecutive monthly sub-50 figure). Other data of note include Flash PMI data for the United States, the Chicago Fed’s National Activity Index and a final consumer sentiment statistic from the University of Michigan and Thomson Reuters.