Here is the summary of this week’s Monday Economic Report:
Manufacturers continue to report a pickup in activity, even as the pace of growth has varied in the different reports that have come out in the past week. On the more optimistic side, the Institute for Supply Management’s (ISM) Purchasing Managers’ Index (PMI) edged slightly higher from 56.2 in September to 56.4 in October. New orders and production remain the strongest elements of the ISM analysis, with both measures indicating strong growth from August to October and an improvement from May’s contraction. Overall, respondents to the ISM survey were mostly upbeat in their outlook. Hiring, however, experienced some easing, with other measures echoing that finding. Automatic Data Processing (ADP) found that just 5,000 manufacturing workers were added in October.
Other data suggest that manufacturing growth has been spottier than the ISM report’s upbeat assessment. While overall industrial production rose 0.6 percent in September, the bulk of that gain stemmed from rebounding output for utilities. Manufacturing production increased a much more modest 0.1 percent, with durable goods activity rising 0.5 percent but nondurable goods output off 0.3 percent. September’s increase extended the progress from August, with year-over-year growth of 2.6 percent. Yet, weaknesses persist in the broader sector.
Meanwhile, sentiment surveys from Markit and the Dallas Federal Reserve Bank noted some easing in perceptions, most likely temporarily due to the government shutdown. Interestingly, the Dallas survey’s weakened outlook did not carry through to other activity measures. Manufacturers in the district reported increases in output, sales, shipments, utilization and capital spending. This was true despite the drop in optimism.
Consumer sentiment also continued to slide. The Conference Board reported that consumer confidence fell sharply from 80.2 in September to 71.2 in October. This mirrors similar data from the University of Michigan and Thomson Reuters released the previous week. The political stalemate in Washington was a large factor in the increased pessimism, dampening Americans’ outlook. Fortunately, with the government shutdown over (at least for now), confidence should pick up again moving forward. Even before the budget impasse, however, retail sales numbers were showing signs of decelerating. Retail spending declined 0.1 percent in September. The year-over-year rate has fallen from 6.0 percent in June to 3.2 percent in September. However, September’s decrease was mainly attributable to slower auto sales for the month, with more modest increases in the wider market.
The other big headline last week was the Federal Reserve Board’s decision to keep its current monetary policies in place. Unlike the previous month’s Federal Open Market Committee (FOMC) meeting, a decision was not anticipated this time around. The Federal Reserve is not expected to start tapering its asset purchases until its December meeting, or perhaps more likely at either the January or March meetings next year. Either way, short-term interest rates should stay near zero until the unemployment rate reaches 6.5 percent and/or longer-term inflation expectations exceed 2.5 percent. This should mean that the Federal Reserve will pursue “highly accommodative” policies for throughout all or most of 2014. Of course, minimal pricing pressures allow the Federal Reserve to continue such actions. Core consumer and producer prices have kept below the Federal Reserve’s stated target of 2 percent for much of the past year.
This week, we will get two key measures of health on the U.S. economy, both of which were delayed due to the government shutdown. On Thursday, we will get our first read of third-quarter real GDP. My prediction is for growth of 1.9 percent in the third quarter, which is near the consensus estimate. That would be below the 2.5 percent real GDP growth rate in the second quarter, but in line with the 1.8 percent growth rate experienced in the first half of the year. In short, we continue to experience modest economic growth. On Friday, we will get new jobs numbers from the Bureau of Labor Statistics. I do not expect the figures to be much different than last week’s ADP report, which found that 130,000 nonfarm payroll workers were added in October.
Other highlights this week include new data on consumer credit, consumer sentiment, factory orders, job postings and personal spending. In addition, the latest edition of the Global Manufacturing Economic Update will be released on Friday.
Chad Moutray is the chief economist, National Association of Manufacturers.
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