The Chicago Federal Reserve Bank said that its National Activity Index (NAI) increased from -0.23 in June to -0.15 in July. Despite the marginal improvement, this was the fifth consecutive month with an index reading below zero. Negative numbers indicate that the U.S. economy is growing below its historical trend, and when the 3-month moving average falls below -0.70, the risk of recession is increased. The 3-month moving average improved has risen from -0.30 in May to -0.24 in June to -0.15 in July.
For its part, manufacturing provided a slight drag to growth in July, subtracting 0.10 points from the NAI. Manufacturing production declined 0.1 percent in July, continuing a sluggish trend in output that also lowered capacity utilization. At the same time, housing continued to reduce the index, even as the sector has rebounded over the past couple years, primarily because residential activity remains below its potential. In July, both housing starts and permits were higher than the month before, but higher mortgage rates have dampened growth rates somewhat.
In contrast to these factors, some positives in the economy include employment (adding 0.06 points) and sales (adding 0.04 points), among others. Nonfarm payrolls rose by 162,000, and the unemployment rate fell to 7.4 percent. Nonetheless, hiring growth continues to be weak, with the increase in payrolls less than expected and manufacturing employment soft. While manufacturers added 6,000 additional workers, the sector would have experienced its fifth consecutive decline in employment had it not been for gains in the auto sector.
Meanwhile, the new orders component was heavily influenced by the sharp jump in the Institute for Supply Management’s purchasing managers’ index, up from 50.9 in June to 55.4 in July. This suggested that some of the weaknesses in activity that we saw in the spring months might have dissipated by the summer. Most notably, the index for production skyrocketed from 53.4 to a whopping 65.0, and the new orders index increased from 51.9 to 58.3. This obviously bodes well for growth moving forward, and in general, manufacturers have tended to be cautiously optimistic about sales in the second half of the year.
Chad Moutray is the chief economist, National Association of Manufacturers.