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Kansas City Fed: Manufacturing Activity Expanded for the Seventh Straight Month in July

The Kansas City Federal Reserve Bank said that manufacturing activity has expanded every month so far in 2014, picking up slightly in July from June. The composite index of general business conditions rose from 6 in June to 9 in July. The pace of growth accelerated in many of the key indicators, including new orders (up from 8 to 12), production (up from 2 to 11), shipments (up from 2 to 14) and employment (up from 1 to 8). One-third of survey respondents said that their production had increased in the month.

There were two negatives in the report, as well. The average workweek (down from 7 to -3) shifted into its first contraction in six months. The percentage of those taking the survey who noted a reduced workweek increased from 12 percent in June to 17 percent in July, enough to tip the diffusion index. In addition, new export orders (up from -11 to -6) continued to fall, albeit at a slower pace of decline for the month. This measure has been in contraction territory in 8 of the past 12 months, indicating weakness on the trade front in the Kansas City Fed’s district.

Nonetheless, there continue to be encouraging signs for the months ahead. The forward-looking composite index increased from 12 to 15, with relatively strong growth anticipated over the next six months. Manufacturers in the region expect higher new orders (up from 14 to 24), production (up from 17 to 23), shipments (up from 20 to 28), employment (up from 14 to 23) and capital expenditures (up from 23 to 25) at rather healthy rates of growth. In fact, over 40 percent predict increased sales, output and shipments, with more than one-third seeing additional hiring and capital spending. Yet, the sample comments also suggest frustrations with attracting qualified workers. Exports are predicted to grow just modestly (unchanged at 6).

Respondents expect pricing pressures to remain elevated, with nearly half of those taking the survey saying that raw material prices should increase over the next six months. Still, 24 percent felt that input costs for them might fall, and the diffusion index for this measure (down from 49 to 46) eased slightly in July.

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

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Continued Progress in China and the U.S., with Europe and Japan Growing More Modestly

The HSBC Flash China Manufacturing Purchasing Managers’ Index (PMI) expanded for the second straight month in July, rebounding from softness from January through May. The headline index rose from 50.7 in June to 52.0 in July, its highest level since March 2011. The underlying data were mostly higher, including new orders (up from 51.8 to 53.7), output (up from 51.8 to 52.8) and exports (up from 50.6 to 52.7). The sales pace was the fastest since January 2011, and each of these measures are a sign that recent stimulative actions taken by the Chinese government have had a positive impact. Some downsides in the PMI survey contracting hiring rates for the 16th consecutive month (up from 48.7 to 49.5) and slightly accelerated raw material prices (up from 50.8 to 52.9).

Meanwhile, Japanese manufacturing activity also expanded for the second straight month, but it eased slightly in July. The Markit/JMMA Flash Japan Manufacturing PMI declined from 51.5 to 50.8. The recent uptick in activity has materialized as the Japanese economy has recovered from an increased in taxes that went into effect on April 1st. Still, manufacturers in the country cannot cheer yet, as output growth came to a halt in July (down from 51.8 to 50.0, or neutral). Other indicators were mixed. Export sales (up from 49.0 to 51.6) and employment (up from 49.8 to 50.8) both shifted to positive growth, but the pace of new orders decelerated somewhat (down from 52.0 to 51.1).

In other news, the Markit Flash Eurozone Manufacturing PMI edged marginally higher, up from 51.8 to 51.9. The Flash Eurozone PMI Composite PMI was up more strongly, increasing from 52.8 to 54.0, suggesting healthier growth in the service sector. For manufacturers, the data suggest slightly faster growth in production (up from 52.8 to 53.0) and exports (up from 52.4 to 52.7), but the pace of growth for new orders (51.9) and employment (50.3) were unchanged.

Overall, these figures provide a limited degree of encouragement for the manufacturing sector in Europe, which has worried of late about slow economic and income growth. It is also still clear that the data vary on country-by-country basis, with German manufacturing activity (up from 52.0 to 52.9) accelerating in July but with French manufacturers noting yet another deterioration in sales and output. Indeed, the French economy remains in a rut, with manufacturing activity positive in just three months since January 2013.

Closer to home, the Markit Flash U.S. Manufacturing PMI decreased from 57.3 to 56.3. Despite the slight easing in July, manufacturing activity continues to grow at relatively decent rates. Through the first seven months of 2014, the top-line index has averaged 55.9, stronger than the 53.5 average noted for 2013 as a whole. The July data show both new orders (down from 61.7 to 59.8) and output (down from 61.0 to 60.4) growing at a healthy paces, albeit with some deceleration for the month. Yet, hiring growth remains more modest (down from 53.8 to 52.1) and export sales (down from 50.9 to 50.6) were just barely growing, suggesting that there remains room for improvement.

Flash data give us an advance estimate of manufacturing activity incorporating “approximately 85% of the usual monthly survey replies,” with the final PMI data for the month released on August 1.

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

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Richmond Fed: Manufacturing Activity Expanding at a Modest Pace

The Richmond Federal Reserve Bank said that manufacturing activity grew at a modest pace, expanding for the fourth straight month. The composite index of general business conditions edged slightly higher, up from 4 in June to 7 in July. Note that historical data in the Richmond Fed survey were revised in this edition to reflect new seasonal adjustments.

Despite the improved top-line figure, the underlying data were largely mixed. The biggest positive was hiring, with the employment index up from 4 to 13. This was the fastest pace of hiring growth since December, which was encouraging. Wage (up from 12 to 16) and shipments (up from 2 to 3) were also higher. Yet, new orders (5) expanded at the same pace, and both capacity utilization (down from 7 to 4) and the average workweek (down from 5 to 3) decelerated somewhat for the month.

Still, manufacturers in the Richmond Fed’s district were mostly upbeat about the next six months, with forward-looking measures increasing in July for many indicators. For instance, new orders (up from 27 to 34), shipments (up from 24 to 36), capacity utilization (up from 18 to 29), employment (up from 12 to 19) and capital expenditures (up from 18 to 19) were all higher, with each suggesting relatively healthy paces of growth.

Inflationary pressures have picked up a bit for the month, but remain mostly in-check. Manufacturers in the region said that prices paid for raw materials grew 1.99 percent at the annual rate in July, up from 1.47 percent in June. Looking ahead six months, respondents expect input costs to increase an annualized 1.89 percent, up only marginally from 1.84 percent the month before.

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

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Consumer Prices Ease a Bit in June, Still Reflect an Acceleration in the Second Quarter

The Bureau of Labor Statistics reported that consumer prices increased 0.3 percent in June, easing a bit from the 0.4 percent growth rate seen in May. Still, it is clear that prices have accelerated in the second quarter, led by higher food and energy costs. The annualized rate of growth in the second quarter was 3.5 percent, a substantial jump from the 1.8 percent annual pace seen in the first quarter. Of course, this figure perhaps overstates the significance of the last three months, with the consumer price index up 2.1 percent over the past 12 months. Even there, though, the year-over-year rate has jumped from being just 1.1 percent in February.

In the June data, the largest jump in consumer prices came from energy, up 1.6 percent for the month and building off of the 0.9 percent increase in May. Indeed, the price of West Texas intermediate crude has increased from an average of $97.63 per barrel in December to $100.80 in March to $105.79 in June. Much of the latest rise in prices has stemmed from Middle Eastern turmoil, particularly in Iraq at that time. Energy costs have risen 2.8 percent in the past three months alone, primarily from higher gasoline prices.

Meanwhile, food prices were up 0.1 percent, its slowest pace of growth in four months. In fact, prices of food for the home were unchanged in June, the first non-positive growth figure in six months. Higher prices for meats and eggs were offset by some easing in the costs of bakery items, cereals, dairy products and fruits and vegetables. Nonetheless, the cost of food for the consumer has risen 1.8 percent over the past six months, something that Americans are bound to notice in the grocery aisle.

Outside of food and energy, core consumer inflation decelerated in June to 0.1 percent growth in June. Over the past 12 months, core consumer prices have risen 1.9 percent, unchanged from May but up from 1.6 percent in January. In June, the largest increases were seen in airfare, apparel, housing, medical care and tobacco.

While pricing pressures have definitely picked up in the second quarter, the year-over-year pace still remains mostly in-line with the Federal Reserve Board’s stated goals. They will no-doubt continue to watch inflation numbers closely, but the Federal Open Market Committee (FOMC) is unlikely to deviate from its current monetary policy trajectory at next week’s meeting.

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

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Monday Economic Report – July 21, 2014

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

With more and more data starting to trickle in for June, we are seeing some definite trends taking shape. One positive is that the manufacturing sector continues to expand, suggesting that the rebound from winter-related softness earlier in the year has mostly continued. Manufacturers also tend to be mostly upbeat about the second half of this year—a sign of optimism that is encouraging. Yet, there were also indicators suggesting that the pace of activity slowed somewhat in June, most notably in the industrial production, housing starts and retail sales numbers that were released last week.

Indeed, manufacturing output in June increased at its slowest rate since January, with relatively mixed news overall. Nondurable goods production edged higher, up 0.1 percent, but output from nondurable goods manufacturers declined by 0.3 percent. Monthly declines in production in such sectors as apparel, machinery and motor vehicles nearly offset output gains for aircraft, furniture, metals and plastics, and rubber products. Longer-term trends remain reassuring, even if they still leave room for improvement. Over the past 12 months, manufacturing production has increased 3.5 percent, a decent figure overall and progress from the much slower pace of just 1.5 percent in January. Durable goods output has risen by a healthy 5.5 percent year-over-year, whereas nondurable goods activity was a less robust 1.5 percent in the past year.

Housing starts in June were also weaker than expected, down from an annualized 985,000 in May to 893,000 in June. Starts were lower for both single-family and multifamily units. There have been suggestions that rain might have attributed to the weaker construction activity, with storms preventing some units from breaking ground. Yet, single-family starts have struggled for some time, down 4.3 percent over the past 12 months. On the positive side, single-family housing permits rose for the second straight month, up from 615,000 to 631,000 at the annual rate for the month. This could suggest stronger growth in the housing market in the coming months for single-family homes. Along those lines, homebuilder confidence increased to its highest point since January, with better expectations for sales over the next six months.

Meanwhile, surveys out last week reported multiyear highs in the pace of manufacturing activity. New orders and shipments were up sharply in surveys from the New York and Philadelphia Federal Reserve Banks. Hiring also picked up in both regions, and raw material costs remained elevated relative to prior months. More importantly, manufacturers in each survey said they were optimistic that sales, output, employment and capital spending would increase over the next six months. In fact, the Philadelphia Federal Reserve report found that 56.1 percent of its respondents anticipated higher new orders, with 60.4 percent predicting increased shipment levels. In addition, the Manufacturers Alliance for Productivity and Innovation (MAPI) reported that the business outlook rose for the sixth consecutive quarter on accelerated sales domestically and abroad. Shipments and capital spending were also anticipated to grow strongly moving forward.

On the consumer front, Americans continue to be cautious in their purchase decisions. Retail spending increased 0.2 percent in June. This was the slowest pace since January, and it was below expectations. Reduced auto sales contributed to this lower figure. Despite the slower activity levels in June, the year-over-year pace continues to grow at decent levels, up 4.3 percent over the past 12 months. Preliminary consumer confidence data also indicate some nagging anxieties in the economy, according to the University of Michigan and Thomson Reuters. The Consumer Sentiment Index unexpectedly decreased from 82.5 in June to 81.3 in July, and consumer attitudes have not changed much since December. Much of July’s decrease stemmed from weaker expectations about the future economy. However, higher gasoline prices might have also been a factor. Indeed, the producer price index increased in June largely on higher energy costs.

This week, we will get additional insights on the health of manufacturing worldwide. Markit will release preliminary purchasing managers’ index reports for China, Japan, the Eurozone and the United States for July. We will be looking for continued progress in Asia and the United States and we hope a reversing of the easing in activity in Europe. The Kansas City and Richmond Federal Reserve Banks will also report on their latest manufacturing surveys. Beyond these releases, the Bureau of Economic Analysis will publish real GDP data by industry for the first quarter; given the 2.9 percent drop in real GDP during the first quarter, we would anticipate minimal contributions to growth from the manufacturing sector. Other highlights include the latest data on consumer prices, durable goods orders and existing and new home sales.

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

manufacturing production growth - jul2014

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University of Michigan: Consumer Confidence Slipped Somewhat in July

The University of Michigan and Thomson Reuters said that preliminary data on consumer confidence slipped somewhat in July. The Consumer Sentiment Index unexpectedly decreased from 82.5 in June to 81.3 in July. The consensus expectation had been for a slight gain. Over the course of the last eight months (December to July), the index has averaged 81.8. In essence, after consumer attitudes recovered from the government shutdown in December, they have not really moved that much. The April reading of 84.1 is the one outlier in that time frame.

Looking specifically at the July data, it is clear that the drop in consumer sentiment in the month stemmed from weaker expectations about the future economy. The forward-looking component has declined from 74.7 in April to 71.1 in July. In contrast, views about the current economic environment were more mixed, with an improvement in July (up from 96.6 to 97.1) but with slightly weaker perceptions than seen in April (98.7).

This nuanced perception could be influenced by the competing news about the health of the U.S. economy, with disappointing data on real GDP growth in the first quarter perhaps outweighing better labor market headlines of late. Either way, it suggests that consumers continue to remain cautious.

We will get final data on July consumer sentiment from the University of Michigan on August 1. The Conference Board will also release its June survey data on consumer confidence on July 29.

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

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MAPI: Manufacturing Activity Continued to Improve in the Second Quarter

The Manufacturers Alliance for Productivity and Innovation (MAPI) said that its Composite Business Outlook Index rose from 69 in March to 71 in June. Indeed, this was the sixth consecutive quarterly gain in the manufacturing outlook, up from 55 in December 2012. Index readings over 50 indicate expansion, and as such, these data suggest mostly positive trends in the sector. The pace of new orders (up from 71 to 78) and export sales (up from 60 to 67) accelerated, and profit margins edged higher (up from 66 to 70).

In terms of investment, manufacturers completing the MAPI survey said that they were increasing their capital spending levels both in the U.S. (up from 59 to 67) and abroad (up from 59 to 64). At the same time, the rate of research and development spending slowed slightly in this survey (down from 69 to 67), albeit a still-healthy paces.

Yet, the forward-looking indicators provided mixed news. Prospective shipments within the U.S. eased slightly (down from 88 to 87) but are still expected to grow relatively strongly. Similarly, export shipments also decelerated somewhat (down from 81 to 76). Overall, the data indicate that there is still room for improvement. The percentage of respondent companies that were operating at above 85 percent capacity dropped from 35.7 percent to 30.0 percent.

Overall, though, these data support the notion that manufacturing activity continues to improve, mirroring similar findings from other indicators. As reported last month, MAPI has a generally upbeat outlook for this year. They predict that manufacturing production will increase by 3.2 percent and 4.0 percent in 2014 and 2015, respectively, suggesting accelerating growth from the 2.6 percent pace of 2013.

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

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Philly Fed: Manufacturing Activity Expanded at Fastest Pace in Over 3 Years

The Federal Reserve Bank of Philadelphia said that manufacturing activity expanded at its fastest pace in over three years (March 2011). The Business Outlook Survey’s composite index of general business activity increased from 17.8 in June to 23.9 in July. The shift stemmed largely from a drop in the percentage of manufacturers in the Philly Fed district who said that conditions had worsened, down from 18.6 percent to 8.9 percent. This helped to push the overall diffusion index higher in July, with roughly one-third of the respondents noting improvements for the month in overall conditions.

The pace of new orders (up from 16.8 to 34.2) and shipments (up from 15.5 to 34.2) were both up significantly in this report. Hiring (up from 11.9 to 12.2) and the average employee workweek (up from 7.3 to 12.5) continued to move in the right direction. One downside was elevated costs for raw materials, with nearly 36 percent of those taking the survey saying that input costs were increased in the month.

Over the course of the next six months, manufacturers in Philly Fed district were overwhelmingly upbeat about future activity. In fact, 56.1 percent of survey respondents said that they anticipate increased sales, and 60.4 percent predict higher shipment levels. Moreover, even as the indices edged a bit lower in July, roughly one-third of those completing the survey said that they planned to add workers and over one-quarter were going to increase their capital expenditures in the next six months.

In a couple special questions, 38.6 percent of manufacturing respondents noted increased exports over the past year, with just 7.0 percent saying that they had moderate decreases. The region exported mainly intermediate products (39.6 percent), with final business products (24.5 percent), capital goods (18.9 percent) and final consumer products (11.3 percent) also important components.

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

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Housing Starts Were Unexpectedly Lower in June

The Census Bureau and the U.S. Department of Housing and Urban Development said that housing starts unexpectedly declined for the second straight month. Starts dropped from an annualized 985,000 in May to 893,000 in June. This was down from the faster pace of 1,063,000 in April; although, that figure appears to be a bit of an outlier. Excluding April, the average rate of new housing starts through the first half of 2014 was 930,600. Even with that in mind, June’s pace was disappointing and a sign that the housing market remains weaker than we would prefer.

Indeed, new housing starts were off for both single-family (down from 632,000 to 575,000) and multi-family (down from 353,000 to 318,000) units.The pace for single-family starts was the lowest level since November 2012, highlighting some persistent softness in the residential construction market so far this year. While the longer-term trend remains positive, single-family housing starts have fallen 4.3 percent over the past 12 months.

Meanwhile, housing permits data also fell, down from 1,005,000 units at the annual rate in May to 963,000 in June. Unlike the starts figures, however, there were some encouraging signs. Single-family permitting rose for the second straight month, up from 597,000 in April to 615,000 in May to 631,000 in June. This could suggest stronger growth in the housing market in the coming months for single-family homes. At the same time, multi-family units have been weaker, pulling the headline figure lower. Multi-family permitting dropped from 462,000 to 390,000 to 332,000 over the same three months, with the most recent pace being the slowest in 10 months.

Overall, June’s housing numbers were quite discouraging. There was optimism a couple months ago that residential activity was beginning to pick up after weakness since last summer, and the consensus expectation had been for housing starts to exceed one million again in June. Yet, the housing market continues to underperform through the first six months of this year. Financial difficulties in obtaining credit (particularly for first-time home buyers) and economic uncertainties remain obstacles for some. Still, I continue to predict housing starts of 1.1 million by year’s end, and we can put some hope in the single-family housing permits figures and the possibility of improved activity moving forward.

For its part, the Housing Market Index (HMI) from the National Association of Home Builders (NAHB) and Wells Fargo, released yesterday, suggested that builders were more upbeat of late. The HMI increased from 49 in June to 53 in July, the first time the index has surpassed the all-important threshold of 50 since January. When the HMI exceeds 50, it indicates that more home builders are positive than negative in their views of the market. More importantly, the index of single-family sales increased from 53 to 57, with expected sales over the next six months rising from 58 to 64.

As such, NAHB Chief Economist David Crowe was more positive in his assessments of the housing market, with recently better jobs numbers boosting sentiment. He said, “As employment increases and those with jobs feel more secure about their own economic situation, they are more likely to feel comfortable about buying a home.” Hopefully, this improvement in home builder confidence helps to foreshadow better sales in the months ahead.

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

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Manufacturing Production Expanded More Slowly in June

Manufacturing production increased 0.1 percent in June, its slowest pace since January’s weather-induced decline. In general, manufacturers continue to expand upon the softness earlier in the year, with year-over-year growth of 3.5 percent in June, up from 1.5 percent in January. However, the year-over-year rate was slightly lower than the 3.7 percent pace experienced the month before. Similar trends were seen with manufacturing capacity utilization, which declined from 77.2 percent in May to 77.1 percent in June. While lower for the month, it still represented progress from the 75.5 percent rate seen in January.

In June, the sector-by-sector data were largely mixed, with durable goods output up 0.1 percent but nondurable goods production off by 0.3 percent. Sectors with the greatest monthly growth included furniture and related products (up 1.4 percent), fabricated metal products (up 1.2 percent), primary metals (up 1.2 percent), plastics and rubber products (up 1.2 percent), aerospace and miscellaneous transportation equipment (up 1.1 percent) and nonmetallic mineral products (up 1.0 percent).

In contrast, food, petroleum and coal products (down 2.7 percent); apparel and leather products (down 1.3 percent); beverage and tobacco products (down 0.6 percent); machinery (down 0.5 percent); and motor vehicles and parts (down 0.3 percent) had lower production in June.

On a year-over-year basis, durable goods production has risen by a healthy 5.5 percent in June, an increase from 5.4 percent observed in May. Nondurable goods activity was up a less robust 1.5 percent over the past 12 months, down from 2.1 percent the month before. The largest gains in production over the past year were seen in the following sectors: plastics and rubber products (up 7.5 percent), motor vehicles and parts (up 6.8 percent), fabricated metal products (up 6.2 percent), machinery (up 6.1 percent), furniture and related products (up 5.9 percent), primary metals (up 5.9 percent) and nonmetallic mineral products (up 5.8 percent).

Meanwhile, overall industrial production rose 0.2 percent in June, slower than the 0.5 percent increase in May. On a year-over-year basis, industrial production has grown 4.3 percent. Mining accounted for the largest jump in output, up 0.8 percent for the month and 9.7 percent year-over-year. Utility output declined for the fifth straight month, down 0.3 percent in June but up 1.8 percent year-over-year. Total capacity utilization was unchanged at 79.1 percent.

In conclusion, manufacturers continued to expand output, with the sector recovering from softness earlier in the year. Yet, growth slowed in June, and we would like to see improvements coming from a broader base of the manufacturing sector. In general, manufacturers are cautiously upbeat about production in the second half of this year, but for those projections to materialize, we need to see stronger growth in the U.S. and globally. For that reason, policymakers should focus on those initiatives which will keep the economy growing moving forward.

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

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