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Monday Economic Report – April 14, 2014

Here is a summary of this week’s Monday Economic Report:

In the minutes of its March Federal Open Market Committee (FOMC) meeting, the Federal Reserve Board highlighted the negative impact of weather events on first-quarter growth. Winter storms hampered business investment, construction, consumer spending and manufacturing production. Nonetheless, the Federal Reserve still anticipates real GDP growth of between 2.8 and 3.0 percent in 2014, faster than last year’s 1.9 percent expansion. While this reflects a slight downgrade in the outlook for the year from the last forecast, it continues to suggest that the economy will regain its momentum moving forward. The Federal Reserve also predicts growth of 3.0 to 3.2 percent in 2015. The International Monetary Fund’s World Economic Outlook, which was released last week, mirrors these figures in its own forecasts for the United States.

The highlight of the FOMC minutes was the background discussion among participants regarding future monetary policy actions. The Federal Reserve largely feels that the U.S. labor market has a lot of “slack” in it, which is not reflected by the 6.7 percent unemployment rate. Despite improvements in the unemployment rate, weaknesses continue, with the participation rate near 30-year lows and high rates of both underemployment and part-time employment. While some FOMC members feel there has been sufficient economic progress to warrant less stimulative monetary policy measures, the majority view the current labor market as sufficiently weak enough to continue the Federal Reserve’s highly accommodative actions for the foreseeable future. The Federal Reserve will continue to reduce its long-term asset purchases, but short-term interest rates will likely not rise until next year at the earliest. Inflationary pressures remain modest, providing the Federal Reserve with some wiggle room to do its stimulative measures.

The most recent Job Openings and Labor Turnover Survey (JOLTS) data suggest the labor market for manufacturers remains soft. The number of manufacturing job openings declined for the third month in a row in February. Postings have been lower since peaking in November, and the December to February time frame mirrored the weather-related weaknesses seen in other data. Net hiring was also lower in those three months, with 2,000 more separations than hires in February. Still, the manufacturing sector has added an average of 12,125 workers each month since August, mirroring the uptick in demand and production that we have seen since that point. We are hopeful that hiring begins to accelerate again in the coming months.

Looking at the sentiment surveys last week, businesses and consumers were more upbeat. The California Manufacturing Survey from Chapman University reported rising expectations for new orders and production for the second quarter, but with employment growth remaining soft. Both durable and nondurable goods activity were anticipated to expand modestly in the current quarter. Likewise, small business owners in the National Federation of Independent Business’ (NFIB) survey were more optimistic about future sales, and those saying the next three months were a good time to expand edged marginally higher. Still, earnings remained weak, and the percentage suggesting they would bring on more workers moved lower. The University of Michigan and Thomson Reuters also noted improved consumer sentiment, a welcome gain after three months of dampened enthusiasm.

This week will be a busy one on the economic front, specifically with new reports on housing starts and industrial production. We hope to move beyond the weather-related weaknesses from earlier this year, and March’s manufacturing output numbers are expected to show a continued rebound. Similarly, housing starts moved slightly higher in February, but permits surpassed the 1 million mark for the first time since November; yet, rising interest rates, financial challenges for potential buyers and low inventory remain concerns. Other highlights this week include new data on consumer prices, leading indicators, manufacturing surveys from the New York and Philadelphia Federal Reserve Banks and state employment.

Chad Moutray is the chief economist, National Association of Manufacturers. Note that General Electric Chief Economist Marco Annunziata will prepare the Monday Economic Report for April 21.

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Global Manufacturing Economic Update – April 11, 2014

Here is the summary for this month’s Global Manufacturing Economic Update:

In its latest World Economic Outlook, the International Monetary Fund (IMF) now predicts global GDP growth of 3.6 percent in 2014 and 3.9 percent in 2015. The forecast for this year was essentially unchanged from the outlook in October, and it suggests that the global economy continues to recover. Global growth in 2013 was 3.0 percent. The IMF projects U.S. growth of 2.8 percent this year and 3.0 percent next year, up from 1.9 percent last year. Europe is another area where the IMF sees progress this year—albeit quite modestly—with real GDP growth of 1.2 percent in 2014 and 1.5 percent in 2015, with the continent emerging from its deep two-year recession. Despite the slightly better data overall, the IMF worries about low inflation in advanced economies, structural challenges in emerging markets and geopolitical risks.

The IMF also notes that China’s economy continues to decelerate, with real GDP growth of 7.5 percent in 2014 and 7.3 percent in 2015. This is consistent with recent data, which show activity in the manufacturing sector slowing down. The HSBC China Manufacturing Purchasing Managers’ Index (PMI) has contracted for three straight months with falling levels of new orders and output. On the positive side, export sales appeared to pick up a bit in March. Next week, we will get new data for industrial production, fixed-asset investment and retail sales. Each has eased significantly in recent reports. Still, even with these slower rates, the outlook for China remains strong overall, and China has already begun to put stimulative measures in place to boost the economy further. As noted in the past report, the Bank of China has also supported a depreciation of the yuan in the past few months, but it asserts that its actions have been mainly to fend off speculators.

Weaknesses in China and Russia have also weighed heavily on manufacturing activity figures for emerging markets. The HSBC Emerging Markets Manufacturing PMI fell below 50 for the first time since July as demand and production stagnated. Nonetheless, outside of China and Russia, the picture for emerging markets was somewhat more positive. Several countries continued to experience modest growth rates, albeit with a slower pace than the month before in some cases. Two notable strengths among emerging markets hail from Eastern Europe. The Czech Republic and Poland continue to see strong growth in their manufacturing sectors despite some deceleration in March. For instance, the production index in the Czech Republic has now exceeded 60 for two straight months, a sign that output is experiencing healthy gains of late.

In all of Europe, manufacturers report slow-but-steady progress. The Markit Eurozone Manufacturing PMI has now expanded for nine consecutive months, an encouraging sign after the deep two-year recession. France, which had lagged behind many of its peers on the continent, had its manufacturing PMI figure exceed 50 for the first time since July 2011. However, overall economic growth remains modest. The unemployment rate continues to be elevated, even as it fell below 12 percent for the first time in 13 months. Weak income growth has caused many to worry about possible deflationary concerns. Annual inflation rates in the Eurozone have fallen from 1.7 percent in March 2013 to 0.5 percent in March 2014, and producer prices declined in February. Aware of these trends, the European Central Bank (ECB) held interest rates steady and said it was prepared to pursue quantitative easing, if necessary, to stimulate the economy further.

Meanwhile, the U.S. trade deficit widened in February due to a decrease in goods exports and an increase in service-sector imports. Manufactured goods exports in the first two months of 2014 were 0.6 percent lower than during the same time period last year, which was disappointing. Nonetheless, we continue to be optimistic that better economic growth rates abroad will lead to improvements on the export front. Fortunately, four of our top five markets for U.S.-manufactured goods notched year-to-date increases in the first two months relative to last year, including Mexico, China, Japan and Germany.

Efforts to move forward U.S.–European and Asian–Pacific negotiations continue, and the World Trade Organization (WTO) is heading to the next stage of implementing the recently completed Trade Facilitation Agreement. On the legislative side, Export-Import (Ex-Im) Bank reauthorization efforts continue, while manufacturers keep pressing for congressional action on key trade legislation, such as Trade Promotion Authority (TPA) and the Miscellaneous Tariff Bill (MTB).

Chad Moutray is the chief economist, National Association of Manufacturers.

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Federal Reserve Participants Focused on Slack in the Economy at their March FOMC Meeting

The Federal Reserve Board released the minutes of its March 18-19 Federal Open Market Committee (FOMC) meeting. While we already had the statement from this meeting, the minutes allow us to know the inner deliberations of the Committee. The participants debated, for instance, the degree to which there was “slack” in the labor market, with some feeling that the reduced unemployment rate masked continuing weaknesses (e.g., low participation rate, high rates of underemployment and part-time employment) while others felt that some of these weaknesses mirrored larger demographic trends.

FOMC members also spent some time focusing on the impact of global events on the U.S. economy.  The recent deceleration in real GDP growth in China “had already put some downward pressure on world commodity prices, and a couple of participants observed that a larger-than-expected slowdown in economic growth in China could have adverse implications for global economic growth.” The participants also discussed the events of the Ukraine and the negative impact of possible geopolitical events.

One of the more controversial – in some circles – aspect of the March FOMC meeting was the dropping of the 6.5 percent target in its forward guidance. That target had been part of their guidance since the December 2012 FOMC meeting. There were discussions about replacing the 6.5 percent target with another number. (Narayana Kocherlakota, the president of the Federal Reserve Bank of Minneapolis, dissented from the final statement and later suggested that he felt the target should have been 5.5 percent.) In the end, the majority of participants voted to approve the switch from a “quantitative” to a “qualitative” target, which would be data dependent but still provide the FOMC with flexibility to act when it needed to.

The FOMC also voted to continue tapering its long-term and mortgage-backed security purchases from $65 billion each month to $55 billion each month. The minutes go on to say the following: “Members again judged that, if the economy continued to develop as anticipated, the Committee would likely reduce the pace of asset purchases in further measured steps at future meetings.”

In general, FOMC members wanted the public to know that it would maintain a highly accommodative stance on monetary policy for the foreseeable future. While tapering of long-term assets will continue at future meetings, short-term interest rates will stay near zero throughout 2014, and it is likely that they will not start to increase the federal funds rate until sometime in 2015.

Chad Moutray is the chief economist, National Association of Manufacturers.

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California’s Manufacturing Sector Expected to Improve in the Second Quarter

Manufacturing activity in California is expected to improve in the second quarter, according to the A. Gary Anderson Center for Economic Research at Chapman University. The composite purchasing managers’ index (PMI) increased from 56.2 in the first quarter (January) to 58.5 in the second quarter (April). Indeed, manufacturers largely anticipate increased paces for production (up from 60.5 to 64.4) and new orders (up from 55.8 to 60.9). Roughly half of the respondents in the survey said that they thought sales and output would be higher in the second quarter.

Employment growth remained soft (down from 55.6 to 53.3). Looking at the specific responses, 24.1 percent felt that their employment levels would increase in the second quarter, with 11.4 percent saying that it would be lower. However, the bulk of responses (64.5 percent) said that their hiring levels would be unchanged for the quarter. One positive, of course, was that net hiring was positive, albeit only modestly so.

The PMI for nondurable goods (up from 56.7 to 58.2) advanced more than the one for durable goods industries (up from 58.1 to 58.3), which increased only marginally. Each was lower than it was one year ago, however, when durable and nondurable goods firms had index values of 60.3 and 60.9, respectively.

Overall, these data show that manufacturers in California see demand and production picking up this quarter. That is a good thing, but it is also worth noting that the pace of growth remains below the pace observed in mid-2013. Moreover, manufacturers in Orange County were less positive this quarter than in the last (down from 64.1 to 58.5) on slower new order and employment growth.

Chad Moutray is the chief economist, National Association of Manufacturers.

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Manufacturing Job Postings and Hiring Data Were Weaker in February

The Bureau of Labor Statistics said that manufacturing job openings declined for the third month in a row in February. After peaking at 298,000 in November, the number of job postings in the sector has continued to move lower, with 250,000 openings recorded in February. Weather has negatively impacted overall economic activity over much of this period, and it is possible that winter conditions hampered employment growth, as well. Nonetheless, this is a trend that will hopefully reverse with coming data, and it reverses what had been upward movement from May to November of last year (up from 203,000 to 298,000).

Net hiring has followed a similar pattern and was also lower in February for the third straight month. Manufacturers added 234,000 workers in February, down from 244,000 in January. At the same time, the number of separations – including layoffs, quits, and retirements – fell from 242,000 to 236,000 for the month. As such, net hiring (or hires minus separations) shifted from a net gain of 2,000 in January to a net loss of 2,000 in February. This was well below the net hiring rate of 41,000 observed in November, illustrating the current softness in the labor market.

In contrast, employment numbers in the larger economy improved in February. Total job openings increased from 3,874,000 in January to 4,173,000 in February. This was the fastest pace for job postings since January 2008. Likewise, net hiring in the month in the nonfarm business sector rose from a rather weak 97,000 in January to 203,000 in February. While manufacturers hired fewer workers in the month, there were notable increases for retail trade, leisure and hospitality, and government.

Chad Moutray is the chief economist, National Association of Manufacturers.

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Small Business Confidence in March Recovered Some of its February Decline

The National Federation of Independent Business (NFIB) said that small business confidence in March recovered some of its February decline. The Small Business Optimism Index increased from 91.4 in February to 93.4 in March, but it had fallen from 94.1 in January. Sentiment among small firm owners has generally moved higher over the course of the past year, with quite a bit of volatility. For instance, just over the past six months, the Index has ranged from 91.6 to 94.1, with the government shutdown, weather and persistent uncertainties dampening optimism at times.

Despite the higher headline figure, the underlying data were largely mixed. On the positive side, the percentage of firms saying that the next three months were a “good time to expand” increased from 6 percent to 8 percent, returning it to the level recorded in January but still below December (10 percent). Of those saying that it was not the right time for expansion, the economy was the primary reason.

Still, “poor sales” – a proxy for the current economy – was not listed as the “single most important problem.” Instead, the top concern was a tie between taxes and “red tape,” with each cited by 21 percent of respondents. This was followed by poor sales (14 percent), the cost of insurance (10 percent), and the quality of labor (9 percent). Indeed, the net percentage of respondents saying that they expect higher sales in the next three months rose from 3 percent to 12 percent, reflecting a pickup in sentiment.

Nonetheless, earnings figures remain weak overall, and the employment and capital spending data were less positive. Small business owners said that the hiring slightly declined in March, with the net percentage planning to bring on new workers in the next three months down from 12 percent in January to 7 percent in February to 5 percent in March. Hopefully, the uptick in optimism on sales will reverse this trend in the coming months. Meanwhile, capital spending has edged marginally lower, with capital expenditure plans essentially unchanged so far this year.

Chad Moutray is the chief economist, National Association of Manufacturers.

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Revolving Credit Declined for the Second Straight Month in February

The Federal Reserve Board said that U.S. consumer credit outstanding rose 6.4 percent in February. Total consumer credit was $3.130 trillion, with $854.2 billion in revolving credit and $2.275 trillion in nonrevolving credit.

Over the course of the past 12 months, consumer credit has risen 5.6 percent, but that tells only part of the story. Nonrevolving credit, which includes auto and student loans, increased 7.7 percent over that time frame. However, revolving credit, which includes credit cards and other lines of credit, was up just 0.5 percent. In general, it suggests that Americans have been hesitant to use their credit cards when making purchases since the recession. Along those lines, revolving loans have declined in the first two months of 2014, down 0.3 percent from $856.8 billion in December.

Overall, growth in consumer credit has stemmed largely from increases in nonrevolving debt, especially for auto and student loans. For instance, student and motor vehicle loans increased 8.3 percent and 8.5 percent, respectively, using non-seasonally adjusted data in 2013.

Chad Moutray  is the chief economist, National Association of Manufacturers.

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Monday Economic Report – April 7, 2014

Here is the summary for this week’s Monday Economic Report:

Manufacturers appear to be recovering from softness in the first two months of the year, mainly due to the number of severe winter storms. The Institute for Supply Management (ISM) reported that its Purchasing Managers’ Index (PMI) edged higher, up from 53.2 in February to 53.7 in March. Production began expanding again, with the pace of new orders and exports picking up slightly. Despite some degree of progress in March, sentiment remains lower than just a few months ago. PMI values averaged 56.3 in the second half of last year, with sales and output measures exceeding 60—indicating strong growth—each month from August to December.

Likewise, new factory orders increased 1.6 percent in February, partially offsetting the sharp declines in December and January. Beyond autos and aircraft, however, durable goods sales were just barely higher, suggesting more needs to be done for broader growth in the sector. Meanwhile, the Dallas Federal Reserve Bank’s manufacturing survey reflected a rebound in activity consistent with other Federal Reserve districts. Texas manufacturers remain positive about sales, output, hiring and capital spending moving forward. For example, more than half of respondents anticipate increased demand over the next six months. Still, some cited regulatory, pricing pressure, workforce and foreign competition concerns.

On the hiring front, Friday’s jobs numbers provided mixed news for manufacturers. The sector lost 1,000 workers in March, mainly due to declines in nondurable goods industries. This was particularly disappointing given consensus expectations that were closer to the ADP’s estimates, which had a gain of 5,000 workers for the month. Yet, revisions to January and February data provided some comfort, adding 15,000 more employees than original estimates. As a result, the longer-term trend for manufacturing did not change much despite March’s lower figure. Manufacturers have added more than 600,000 workers since the end of the recession, and since August, the sector has generated an average of 12,125 net new jobs per month. Another positive in this report was that the average number of hours worked and average compensation both rose, findings that mirror the rebound in overall activity.

Meanwhile, the latest international trade figures were also disappointing. The U.S. trade deficit widened from $39.28 billion in January to $42.30 billion in February. This was the highest deficit since September and the result of a decrease in goods exports and an increase in service-sector imports. Petroleum exports were also marginally lower. The numbers were particularly discouraging given that manufactured goods exports in January and February of this year were 0.6 percent lower than the first two months of last year. Still, outside of softness in our goods exports to Canada, the other top-five export markets for U.S.-manufactured goods registered increases year-to-date in 2014 relative to 2013. In addition, there remains cautious optimism that export sales will improve in the coming months.

This week, the focus will be on the release of the minutes from the March Federal Open Market Committee (FOMC) meeting. The minutes will provide additional insights on the internal debates that led the Federal Reserve Board to continue tapering but to also change its forward guidance for short-term interest rates. On Friday, the release of producer price data should continue to show that overall inflation remains minimal. Other highlights include the latest data on consumer confidence, job openings, small business optimism and wholesale trade.

Chad Moutray is the chief economist, National Association of Manufacturers.

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Manufacturing Employment Dropped by 1,000 in March; Revisions Add 15,000 to January and February

Manufacturing employment dropped by 1,000 in March, its first monthly decline in eight months. While this was disappointing, the good news was that manufacturers added 15,000 workers more than previously estimated in January and February, according to the latest Bureau of Labor Statistics revisions. Since August, the manufacturing sector has averaged 12,125 additional workers each month, a sign that the rebound that we have seen since the beginning of the third quarter has resulted in a pickup in hiring. Since the end of 2009, manufacturers have added 602,000 employees, or 7.3 percent of the 8.2 million workers created during that time.

Still, the fact that manufacturers shed 1,000 workers in February was surprising, particularly given consensus estimates that were closer to the ADP estimates released on Wednesday. In March, durable goods firms added 8,000 employees on net, with nondurable goods entities losing 9,000 workers. Miscellaneous durable goods (up 3,000), machinery (up 2,500), nonmetallic mineral products (up 2,100), and transportation equipment (up 1,800) were examples of sectors with increased hiring for the month. Perhaps notably, motor vehicle employment was unchanged.

Yet, these gains were more than offset by declines in hiring for food manufacturing (down 4,600), plastics and rubber products (down 3,700), fabricated metal products (down 2,600), and apparel (down 700), among others.

On the positive side, the average number of hours worked and compensation both increased – a sign that the sector has begun to rebound in terms of overall activity. Average weekly earnings in the manufacturing sector rose from $1,008.17 in February to $1,016.40 in March. At the same time, the typical manufacturing employee worked 41.1 hours, with 3.5 hours of overtime on average. This was up from 40.8 regular hours and 3.4 overtime hours the month before.

In the larger economy, nonfarm payroll growth was in-line with consensus estimates, up 192,000 in March. This was down from a revised 197,000 in February. Moreover, it was close to the average of 190,385 workers added each month in 2013. In general, this suggests that the U.S. economy has rebounded from the falloff in hiring activity seen starting in December, when nonfarm payroll growth was just 84,000. Winter weather has been a factor, but it appears that we have started to move beyond it.

The unemployment rate was unchanged at 6.7 percent. The labor force participation rate edged slightly higher, up from 63.0 percent in both January and February to 63.2 percent in March. Meanwhile, the number of workers employed part-time for economic reasons also rose somewhat, up from 7.2 million to 7.4 million.

In conclusion, manufacturing employment declined unexpectedly in March. Given the recent rebound in new orders and production seen in other economic indicators, the consensus had been for modest gains last month. Still, revisions to January and February were comforting, and the longer-term trend continues to support the lift in manufacturing activity and hiring seen since August. Over the past eight months, the sector has added 12,125 workers on average each month, a nice turnaround from the weaknesses seen last spring.

At the same time, these numbers indicate that there is more work to do for stronger economic growth in the coming months. Manufacturers remain mostly upbeat about demand, output, and employment gains for 2014, but uncertainties continue to persist. As a result, manufacturers want policymakers to adopt pro-growth measures that will help to ensure that their optimistic assessments can come to fruition.

Chad Moutray is the chief economist, National Association of Manufacturers.

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U.S. Trade Deficit Widened Further in February

The Bureau of Economic Analysis and the Census Bureau said that the U.S. trade deficit rose from $39.28 billion in January to $42.30 billion in February. This was the highest deficit since September, and it was the result of a decrease in goods exports (down from $133.75 billion to $131.72 billion) and an increase in service sector imports (up from $38.49 billion to $39.29 billion).

The increased goods trade deficit (up from $59.50 billion to $61.73 billion) was almost evenly distributed by petroleum and non-petroleum factors. Petroleum exports declined somewhat (down from $12.34 billion to $11.09 billion), but petroleum imports also decreased slightly (down from $31.68 billion to $31.03 billion).

Looking specifically at goods exports by sector, the February numbers were mostly lower. The exceptions were the consumer goods (up $1.19 billion) and automotive vehicles and parts (up $96 million) sectors. These gains were more than counterbalanced by lower export levels for industrial supplies and materials (down $2.67 billion), non-automotive capital goods (down $894 million), and foods, feeds and beverages (down $18 million).

Growth in manufactured goods exports continue to disappoint. Exports in the first two months of 2014 were $182.75 billion using non-seasonally adjusted data. This was down 0.6 percent from the $183.78 billion observed for January and February 2013. As such, it indicates that manufactured goods exports remain soft despite some economic progress abroad in recent months, continuing a trend that we saw last year.

In 2013, manufactured goods exports rose 2.4 percent, decelerating from the 5.7 percent annual growth rate observed in 2012. It is also well below the 15 percent rate that would be needed to double exports by 2015, as outlined in the President’s National Export Initiative. Hopefully, cautious optimism for better worldwide growth rates will produce improved manufactured goods exports moving forward.

On the positive side, goods exports to our five largest export trading partners were mostly higher year-to-date. For instance, Mexico (up from $35.61 billion to $37.50 billion), China (up from $18.69 billion to $20.24 billion), Japan (up from $10.18 billion to $10.88 billion), and Germany (up from $7.65 billion to $8.22 billion) all notched increases in exports in the first two months of this year relative to last year. The lone holdout was our largest trading partner, Canada (down from $46.35 billion to $46.15 billion), which had marginal declines.

Chad Moutray is the chief economist, National Association of Manufacturers.

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