The Federal Reserve Bank of Kansas City said that manufacturing activity bounced back in May, after slowing in March and April. The composite index had fallen from 13 in February to 9 and 3 in March and April, and it rose to 9 in May.

This is a positive sign, as it suggests a renewal in production and new orders after some spring weaknesses. The index for new orders, for instance, shifted from a contraction (-8) to modest growth (10) for the month.  New export orders picked up slightly.

With that said, employment has not yet picked up to reflect the rebound in manufacturing activity in the other figures. The pace of job growth slowed from 12 to 8, with the average workweek still contracting. The workweek index increased from -10 to -2.

The more-optimistic current sentiment also carried through to expectations about the next six months. The forward-looking composite index rose from 12 to 17, with a number of key activity measures showing strong growth predicted for the second half of this year. As an example, expected shipments jumped from 22 to 40, mirroring numbers for production, new orders, employment and capital expenditures. Pricing pressures, which have eased over the past few months, are expected to pick up moving forward.

Overall, it appears that the regional surveys of manufacturing activity are split, with some reporting improvements and others noting weaknesses in the current environment. Kansas City appears to be rebounding like New York, while Philadelphia and Richmond have observed a slowing of growth. Chicago has seen flat growth in its most recent figure. Next week, we will get a sense of what is happening in Texas. 

Chad Moutray is chief economist, National Association of Manufacturers.

The Census Bureau reported that durable goods orders rose 0.2 percent in April, a slight improvement after March’s 3.7 percent decline. Excluding transportation orders, though, makes a difference. Without transportation, new orders would have fallen by 0.6 percent. Indeed, the strongest gains in April were seen in nondefense aircraft (up 7.2 percent) and motor vehicles (up 5.6 percent).

Outside of transportation, the report mostly observed weaknesses in the sector for new orders. Some of the greatest losses in new orders occurred among defense aircraft (down 34 percent), communications equipment (down 16.9 percent), computers (down 3.1 percent), machinery (down 2.8 percent) and fabricated metals (down 2 percent). One of the sectors bucking this trend was primary metals, whose new sales rose 1.7 percent.

As a result, core capital goods orders (e.g., nondefense capital goods excluding aircraft) were down 1.9 percent in April. This follows a 2.2 percent drop in March. The longer-term trend has been more favorable, with core capital goods up 2 percent year-over-year. The challenge is that new orders are a proxy of new activity, and this suggests weaknesses in durable goods activity in the next month or so.

Meanwhile, shipments of durable goods rose 0.7 percent. Many of the same trends can be seen in the shipments data, with transportation lifting the overall figure. Excluding transportation, durable goods shipments fell 0.3 percent. Still, this was the fifth consecutive month of rising shipment volume. Inventories rose by 0.3 percent, continuing their long streak of gains, with unfilled orders dropping by 0.1 percent.

Chad Moutray is chief economist, National Association of Manufacturers.

The Richmond Federal Reserve Bank said that growth in manufacturing activity slowed in May. The composite index of manufacturing activity is now 4, down from 14 April. As such, it follows similar findings from the Philadelphia Fed released last week showing weaknesses in the current environment.  Unlike the Philly survey, however, manufacturing activity remains positive, but the pace of growth has eased.

In the Richmond survey, the slowdown is reflected in several of the components. Manufacturers are seeing shipments, new orders and capacity utilization shift from growth in April to essentially being flat in May. For example, the index for new orders declined from 13 to 1 for the month. With new orders being a proxy for future activity, this is a concern, at least for the next month or so.

With that said, the outlook for the next six months remains positive. Various measures of manufacturing activity remain solidly positive, suggesting strong growth expectations for the second half of 2012. The forward-looking new orders index rose from 29 to 30. Similarly, shipments and capital spending numbers were strong.

It is perhaps because of these upbeat expectations that employment variables did not dip in May. The number of employees and average workweek indices both moved higher for the month. As such, manufacturers in the Richmond region have evidently stepped up hiring.

Pricing pressures continue to moderate. Manufacturers are currently reporting price increases for raw materials of 2.3 percent on average at the annual rate, down from 2.71 percent last month. The average price increase for final goods, though, was 0.98 percent.

Chad Moutray is chief economist, National Association of Manufacturers.

Economists with the National Association for Business Outlook expect for real GDP to grow 2.4 percent on average in 2012, with 2.8 percent growth expected next year. This is unchanged from the February survey and reflects an economy that is expanding modestly.

With that said, there were improvements in the forecasts for consumption, housing and vehicle sales. Manufacturing is also expected to fare better, with the median growth in industrial production up 4.1 percent in 2012. This is higher than the 3.5 percent increase anticipated in the previous survey.

In terms of employment, the panelists anticipate 188,000 additional nonfarm payroll jobs on average each month this year. This is slightly above the 170,000 gain predicted in the February survey, with business economists expecting the unemployment rate to fall to 8 percent in the fourth quarter of this year.

There were some areas that we were weaker. Business investment – particularly nonresidential structures and purchases of equipment and software – are expected to grow somewhat slower than what was previously predicted. In addition, the respondents anticipate a wider trade deficit and a slower growth rate for corporate profits.

For the most part, the NABE outlook mirrors those of other economists, including the Federal Reserve. I continue to expect real GDP to grow by 2.5 percent this year, with industrial production up 4 percent.

In other news, the Chicago Federal Reserve’s National Activity Index rose from a revised -0.44 in March to +0.11 in April. Higher industrial production was largely responsible for the positive swing, with activity up 1.1 percent in April, as reported last week. Other contributors to the gain include income and sales, orders, and inventories.

The three-month average for the National Activity Index now stands at -0.06. Numbers around zero suggest that the U.S. economy is growing at its historical trend, so this figure indicates that it is near that goal. More importantly, it indicates that the risk of recession is minimal.   

Chad Moutray is chief economist, National Association of Manufacturers.

Below is my Monday Economic Report for the Week of May 21.

Most reports on manufacturing activity last week echoed a familiar theme. The sector remains a bright spot in the U.S. economy. Higher production and new orders helped to lift the Conference Board’s measures of the current and forward-looking indices. While the overall Leading Economic Index (LEI) fell by 0.1 percent, this was primarily due to lower housing permits and other factors. Industrial production rose 1.1 percent in April—its fastest pace since December 2010—with motor vehicle activity up significantly. On a year-over-year basis, manufacturing production has risen 6 percent. Mining and utility industries also experienced strong gains for the month, and overall capacity utilization now stands at its highest point since spring 2008. This is encouraging news.

Other data reflected similar sentiments. The Federal Reserve Bank of New York observed manufacturing activity in its region bouncing back in May after a disappointing April, especially among shipments. The housing market appears to be back on track to have a slow but steady improvement in this still-depressed sector. Seasonal variations can explain at least part of the previous month’s decline, with the latest data consistent with the positive numbers seen earlier in the year. These same seasonal adjustments—brought about because of the warmer-than-normal winter—also affected retail sales figures. Building materials sales dropped 1.8 percent, reversing March’s 2.7 percent gain. Overall, though, retail sales continue to grow modestly, with Americans continuing to spend.

Not all of the news last week was good, however. The Philadelphia Federal Reserve Bank’s survey on manufacturing activity reflected a surprisingly downbeat assessment. Several key indicators showed contractions, including new orders and employment, and respondents were less positive about future production. It remains to be seen if the Philly survey represents an outlier or not; its next survey will be closely watched (much as it was after a similarly disappointing report last August). In other news, it’s looking increasingly likely that Greece might exit the euro, which could have profound consequences on the global economy and increase everyone’s anxiety levels.

This week, the Federal Reserve Banks of Kansas City and Richmond will release manufacturing sentiment surveys for their regions. Hopefully, their assessments reflect higher production and new orders, similar to the industrial production and Empire State survey out last week. In addition, new data on durable goods orders will hopefully also show increased activity.

Chad Moutray is chief economist, National Association of Manufacturers.

The two economic indicators released today were disappointing, showing continued weakness even as other data points show some improvements in manufacturing and the overall economy.

The Philadelphia Federal Reserve announced a surprisingly downbeat assessment in the May version of its Business Outlook Survey. The composite index fell from 8.5 in April to -5.8 in May. Several components reflect contracting activity, including new orders, inventories, prices received, employment and hours worked. Shipments data were the lone holdout, with a slight uptick in the growth rate.

This increased level of pessimism carried through to the forward-looking indicators as well. Manufacturers in the Philly region expect the growth rate to ease somewhat. The expectations composite index of general business activity plummeted to 15 in May from 33.8 in April. While new orders and shipments expectations remain strong, it is with a little less gusto. Still, only 15 percent of respondents expect new orders to decline in the next six months. (continue reading…)

The Federal Reserve Board reported that industrial production rose 1.1 percent in April, its fastest pace since December 2010. After falling in March by 0.6 percent, this represents a healthy turnaround. The numbers were lifted by strong showings in the utilities and mining industries, which were up 4.5 percent and 1.6 percent. Overall capacity utilization for all industries has risen to 79.2 percent, its highest level since the spring of 2008.

Manufacturing production increased 0.6 percent, aided by a 1.3 percent rise in durable goods production. Nondurable goods manufacturers experienced a 0.2 percent decline in production in April. Manufacturers have produced 5.8 percent more on a year-over-year basis. Meanwhile, manufacturers’ capacity utilization increased to 77.9 percent, essentially on par with the February reading of 78 percent.

Motor vehicle sales were the largest bright spot in the manufacturing sector, with production up 3.9 percent in April. This continues a steady gain for the auto sector, which has seen a 27.1 percent increase in activity since April 2011. Other sectors with higher production in April include furniture and related products (up 2.4 percent), computer and electronic products (up 1.6 percent), miscellaneous durables (up 1.5 percent) and aerospace (up 1.1 percent).

The largest declines were seen in petroleum and coal products (down 2.6 percent) and wood products (down 1.4 percent). In each case, though, the year-over-year production numbers were higher for 16 of the 19 major manufacturing sectors. Those lagging in production over the past 12 months include the printing and support, paper and apparel and leather sectors. (continue reading…)

The Census Bureau and the U.S. Department of Housing and Urban Development reported that housing starts rose from a revised 699,000 in March to 717,000 in April. As such, new residential construction has bounced back from its decline in March, putting it back on the pace seen in January and February which had 720,000 and 718,000 housing starts, respectively.  This continues a slow-but-steady upward ascent in housing figures as the market begins to improve. Housing starts in April 2011, for instance, stood at 552,000 annualized units.

Unlike past months when multi-family construction dominated, both single-family and multi-family units increased in April. There are currently 492,000 and 225,000 new residential construction projects under way, at annual rates. Single-family housing starts, though, are still below their levels of December and January. This suggests that there is still room for more improvement.

Fortunately, single-family housing permits have also been on the rise, and while overall permits declined, single-family unit permits rose from 466,000 to 475,000. Total housing permits fell from 769,000 to 715,000 units, mostly from a decrease in multi-family permits. Still, the March figure appears to be an outlier, possibly from seasonal factors due to warmer weather. The current housing permits number is equivalent to the level of February, and the longer-term trend is positive.

This observation was also seen in the National Association of Home Builders (NAHB) and Wells Fargo report which was released yesterday. The Housing Market Index (HMI) rose from 25 in April to 29 in May, its highest level since 2007. Like the housing starts figures, the decline in April appears to be due to seasonal factors, as the HMI stood at 28 in both March and February. Improvements were seen in all regions except the West, with expected sales and potential buyer traffic up.

NAHB Chief Economist David Crowe, while elated about progress in the housing market, also cautioned that structural challenges still haunt the sector. He said, “The pace of this emerging recovery could be stronger were it not for the significant impediments that the market continues to face with regard to builder and consumer access to credit, inaccurate appraisals, and more recently, rising materials prices.”

Indeed, it will take some time before we are able to see a full recovery in this all-important sector, with many regions continuing to suffer from excess inventory, high proportions of the population in upside-down mortgages, and high turn-down rates for would-be home buyers. With that said, both the housing starts and NAHB figures show that there are signs of life in the housing market, which is highly encouraging.

The New York Federal Reserve Bank’s Empire State Manufacturing Survey bounced back in May after a disappointing April. The composite index of general business conditions jumped from 6.6 in April to 17.1 in May, nearing the levels that it achieved earlier in the year. Equally important to perceptions about the larger economy, the various subcomponents were higher across-the-board, reflecting modest growth among manufacturers.

The largest increase occurred in the index for shipments, which rose from 6.4 to 24.1. The shift in the monthly shipment figures was the result of nearly 47 percent of respondents saying that their shipments were higher this month than last.

Other measures also increased, but less dramatically. The index for new orders, for instance, rose from 6.5 to 8.3. Inventories, the number of employees and the average workweek were all higher, as well.

Interestingly, though, manufacturers in the New York region were less optimistic about the next six months than in past surveys. The forward-looking general business conditions index fell from 43.1 to 29.3 for the month. This mirrored similar drops in new orders, shipments, employment and capital expenditures.

With that said, it is hard to get too worked up over this, especially since nearly half of respondents expect for new orders to be higher. In addition, these index levels still suggest a relatively brisk pace of growth moving forward. The drop, though, does suggest increased anxieties.

Those taking the survey were also asked about pricing pressures. They said that input prices grew by 3.6 percent on average over the past year, with a 3.5 percent gain expected this year. This reflects a degree of moderation, though, from the 8.1 percent increase that respondents cited in May 2011 at the height of a run-up in raw material and energy prices. As for selling prices, they are growing around 2 percent.

Chad Moutray is chief economist, National Association of Manufacturers.

The Census Bureau reported that retail sales rose 0.1 percent in April, following strong gains in the first three months of the year. At least some of this pullback could be due to the unseasonably warm winter, which resulting in construction occurring earlier in the year than normal. As evidence of this, retail sales of building materials dropped 1.8 percent in April, a reversal from the 2.7 percent gain in March.

Other sectors with declining sales included clothing and accessories (down 0.7 percent), gasoline stations (down 0.3 percent) and general merchandise (down 0.1 percent). Nonetheless, there were areas of strength, too. The strongest monthly sales growth occurred with nonstore retailers (up 1.1 percent), furniture and home furnishings (up 0.7 percent), sporting goods and hobbies (up 0.7 percent), motor vehicle and parts (up 0.5 percent) and food service and drinking places (up 0.4 percent).

Year-over-year growth in retail sales currently stands at 6.4 percent, a slower pace than in past months. Six months ago in October, the annual rate of growth for retail sales was 8 percent.

These numbers suggest modest growth in retail sales overall. The slower pace in April was mostly due to seasonal factors as well as lower gasoline prices. So, it is important not to read too much into the easing of retail sales figures. Americans continued to grow their spending in other categories, with nonstore retailers leading the way.

Chad Moutray is chief economist, National Association of Manufacturers.