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After a Strong July, the Pendulum Swung Back for New Durable Goods Orders in August

The Census Bureau said that new durable goods orders plummeted 18.2 percent in August, with the pendulum swinging back after soaring 22.5 percent in July. These large shifts were largely the function of changes in nondefense aircraft sales which measured $16.8 billion, $70.0 billion and $18.0 billion, respectively, in June, July and August. Commercial airplane orders are choppy, with sales usually announced in batches, helping to explain this volatility.

Outside of transportation, the manufacturing data were more encouraging. New durable goods orders excluding transportation rose 0.7 percent in August, rebounding from the decline of 0.5 percent in July. Indeed, we have seen this broader measure of durable goods manufacturing activity improve at a fairly decent rate since the winter months, with 6.8 percent growth year-to-date.

On a sector-by-sector basis, the largest monthly increases in new orders in August were seen in electrical equipment and appliances (up 3.1 percent), computers and electronic products (up 1.7 percent), machinery (up 0.7 percent), other durable goods (up 0.6 percent) and fabricated metal products (up 0.3 percent). In contrast, new orders of motor vehicles and parts (down 6.4 percent), primary metals (down 0.7 percent) and defense aircraft and parts (down 0.6 percent) were lower. Still, motor vehicle and parts sales have risen 6.3 percent year-to-date despite the decline in August.

Meanwhile, durable goods shipments were off 1.5 percent for the month, or if you exclude transportation, shipments edged slightly higher, up 0.1 percent. Since December, durable goods shipments have grown 5.5 percent, reflecting moderately strong gains since the winter. Softer motor vehicle shipments were a drag in August, down 6.7 percent, following a healthy 10.1 percent increase in July. Overall, there were increased shipments for electrical equipment and appliances (up 0.9 percent), primary metals (up 0.5 percent) and other durable goods (up 0.5 percent), but these were offset by decreases for transportation equipment (down 5.1 percent), computers and electronic products (down 0.8 percent) and machinery (down 0.2 percent).

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

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Richmond Fed: Manufacturing Activity Continued to Expand at Fastest Pace in Over 3 Years

The Richmond Federal Reserve Bank said that manufacturing activity continued to expand at its fastest pace since March 2011. The composite index of general business conditions rose from 12 in August to 14 in September. It was the sixth consecutive monthly expansion since the winter-related contractions in both February and March. Indeed, much like other regional surveys, these data show an uptick in demand and production for manufacturers recently, with a mostly upbeat assessment for the coming months.

Looking specifically at current activity, manufacturing leaders in the Richmond Fed district noted increased paces for many of the key measures. This included new orders (up from 13 to 14), shipments (up from 10 to 11), the average workweek (up from 8 to 10) and the number of employees (up from 11 to 17). Regarding hiring, that measure was the highest level observed since December 2010, suggesting that manufacturers in the region are adding new workers at an accelerated pace. The only measure to decelerate slightly in the month was capacity utilization (down from 17 to 13), but it continues to expand at a decent rate.

Manufacturers in the region remain relatively optimistic in their expectations for the next six months, albeit marginally less positive than the month before. Indices for a number of indicators shifted somewhat lower in September but still indicate strong growth ahead. This includes new orders (down from 47 to 37), shipments (down from 43 to 41), capacity utilization (down from 35 to 26), hiring (down from 18 to 17) and the workweek (unchanged at 10). On the positive side, capital expenditures picked up the pace, with the index increasing from 27 to 38. Wages (up from 28 to 35) also accelerated convincingly.

Inflationary pressures picked up once again in September, bucking the trends seen in national pricing data.  Manufacturers in the region said that prices paid for raw materials grew 2.10 percent at the annual rate in September, up from 1.39 percent in August. Yet, looking ahead six months, respondents expect input costs to increase an annualized 2.00 percent, down from 2.05 percent the month before. This suggests that businesses anticipate modest gains in input prices over the course over the next few months, mostly in-line with Federal Reserve projections.

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

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Markit: Chinese Manufacturing Picks Up Slightly, While Europe’s Eases Yet Again

The HSBC Flash China Manufacturing Purchasing Managers’ Index (PMI) edged slightly higher, up from 50.2 in August to 50.5 in September. The Chinese economy nearly stalled in July, and these latest data suggest that there are some signs of stabilization. For instance, this was the fourth consecutive month with expanding manufacturing activity – an improvement from earlier in the year when demand and output were contracting. In August, growth in new orders (up from 51.3 to 52.3) and exports (up from 51.9 to 53.9) accelerated somewhat, but production growth was unchanged at 51.8. One negative continues to be employment (down from 47.4 to 46.9), with hiring contracting for 11 straight months.

If the Chinese economy has rebounded marginally in September, it would be welcome news. Industrial production plummeted from 9.0 percent year-over-year in July to 6.9 percent in August, the slowest pace since December 2008. Fixed asset investments also slowed, down from an annual rate of 17.0 percent to 16.5 percent. Nonetheless, real GDP growth improved from 7.4 percent year-over-year growth in the first quarter to 7.5 percent in the second quarter. The latest data suggest that the annual pace of growth might decelerate further, however.

At the same time, the Markit Flash Eurozone Manufacturing PMI eased yet again, down from 50.7 to 50.5. This was the lowest level observed since July 2013, the first month that the Eurozone emerged from its deep two-year recession. As such, it indicates the extent to which activity in Europe has come to a halt. New orders (down from 50.7 to 49.7) contracted slightly for the first time in 15 months. Output was unchanged at 51.0, and export sales were flat at 51.7. Hiring advanced to a neutral position (up from 49.3 to 50.0). On the closely-watched inflation measures, both input (down from 51.8 to 49.4) and output (down from 50.3 to 49.2) prices moved into negative territory.

There have been persistent worries about deflation on the continent, with the European Central Bank lowering rates recently in the hope of spurring more economic activity and additional lending. As of August, Eurozone inflation had risen just 0.3 percent over the past 12 months, prompting continued worries about deflationary pressures in the economy. The annual inflation pace is down from 1.3 percent in August 2013. Real GDP remained unchanged in the second quarter, down from 0.2 percent growth in the first quarter. Moreover, it has increased just 0.7 percent year-over-year, illustrating just how sluggish the recovery has been.

Meanwhile, the Markit Flash U.S. Manufacturing PMI was unchanged at 57.9, its fastest pace since May 2010. This report continues to show strong growth in manufacturing activity in the U.S., a sign that the sector has regained the robustness seen at the end of 2013. The pace of new orders were unchanged at 60.5, indicating healthy gains, and hiring (up from 54.6 to 56.6) accelerated to its highest level since March 2012. Production (down from 60.7 to 59.9) growth was healthy, and export orders (down from 54.4 to 53.8) expanded modestly despite a slight deceleration in each figure.

Overall, the U.S. data suggest that manufacturers remain upbeat in September about overall activity, with the sector continuing to recover from softness earlier in the year. This data is largely consistent with other indicators, as well.

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

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Monday Economic Report – September 22, 2014

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

Manufacturing production declined unexpectedly in August, led lower by reduced motor vehicle output. This drop was likely the result of automakers’ switching over to a new model year and summer vacations. Indeed, auto production has risen 8.1 percent over the past 12 months, continuing to make it one of the bright spots in the economy. Excluding autos, manufacturing output rose 0.1 percent, suggesting slightly better news for the broader sector. Still, the larger story is the accelerated pace of output seen since the winter months, with the year-over-year pace up from 1.6 percent in January to 4.0 percent in August. Durable and nondurable goods production has increased 5.6 percent and 2.2 percent year-over-year, respectively. Hopefully, the August figures reflect a brief pause before picking up again in September.

Regional sentiment surveys tend to suggest that this might be the case. The Empire State Manufacturing Survey from the New York Federal Reserve Bank said that business conditions rose at their fastest pace in nearly five years, with 46 percent of those taking the survey saying that the environment had improved in the month. At the same time, the Philadelphia Federal Reserve Bank’s Manufacturing Business Outlook Survey found healthy rates of growth in September, even as the pace pulled back slightly from very strong gains in August. Each of these two surveys reported higher levels for new orders and shipments, but they were mixed regarding hiring growth. Nonetheless, manufacturers in both districts were overwhelming upbeat about the next six months, with more than half of respondents predicting sales increases. Moreover, the Philly Fed found that a majority of those taking its survey expect production to increase in the third and fourth quarters.

Meanwhile, housing starts fell from an annualized 1,117,000 units in July to 956,000 in August. To be fair, the July figure—the second fastest pace since November 2007—was likely an outlier, and the pendulum—not unexpectedly—swung back somewhat. Yet, the slowdown in August was still disappointing. On the bright side, while single-family and multi-family unit starts and permits were both down, the highly volatile multi-family segment comprised the bulk of the decline. Looking at a longer time horizon, each has continued a slow, but steady upward trajectory. I continue to expect housing starts to be solidly at 1.1 million by year’s end. Indeed, home-builder confidence was equally optimistic about better figures moving forward, with the Housing Market Index at its highest level since November 2005.

The Federal Reserve Board provided the other major headline from last week. The Federal Open Market Committee (FOMC) began laying out its principles for winding down the extraordinary stimulus that it has pursued since the financial crisis at the end of 2008. The Fed will end its purchases of long-term and mortgage-backed securities after its October FOMC meeting, and the expectation is that short-term interest rates will begin to “normalize” at some point in 2015. The federal funds rate, however, will remain near zero for a “considerable time after the asset purchase program ends,” a statement that some suggest means that normalization will not occur until mid-2015 at the earliest. Fortunately, news that consumer and producer pricing pressures eased in August was likely welcomed at the FOMC because it takes some pressure off of the Fed to act sooner, at least for now. (Inflation has accelerated from where it was earlier in the year, but remains below the Fed’s stated 2.0 percent goal.)

In its FOMC statement, the Federal Reserve said that “economic activity is expanding at a moderate pace.” Nonetheless, it continues to worry about slack in the economy, particularly in labor markets. The Fed predicts growth this year of between 2.0 and 2.2 percent, with 2.6 to 3.0 percent real GDP growth next year. The unemployment rate is expected to fall to 5.9 or 6.0 percent by the end of 2014 and 5.4 to 5.6 percent by the end of 2015. In terms of inflation, the Fed forecasts prices growing by less than 2.0 percent over the next few years. If core inflation consistently exceeds 2.0 percent, it will give greater credence to hawks on the FOMC to increase rates sooner rather than later.

This week, we will get a sense of how manufacturing activity is faring globally with preliminary purchasing managers’ index (PMI) data from Markit for China, the Eurozone and the United States. The Chinese economy has begun to stabilize after slowing earlier in the year, but is still not growing by much. European growth has effectively come to a halt. In the United States, however, recent PMI data have reflected healthy gains in both demand and output over the summer months. We will also get new surveys from the Kansas City and Richmond Federal Reserve banks. Beyond those surveys, we will get the second revision to real GDP growth for the second quarter on Friday, with a consensus estimate of 4.3 percent growth, or just slightly higher than the previous 4.2 percent figure.

Other highlights this week include the latest data on consumer confidence, durable goods orders and shipments, and existing and new home sales.

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

housing starts and permits - sept2014

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Georgia Added the Most Manufacturing Employees in August

Georgia added the most net new manufacturing employees in August, according to new state-wide employment data provided by the Bureau of Labor Statistics. Georgia manufacturers hired an additional 5,500 workers in the month. This was followed by Florida (up 4,500), Colorado (up 2,100), Illinois (up 2,100) and Michigan (up 2,000). On a year-to-date basis, Georgia also fared well, making the top five states for manufacturing job growth. The top five states for manufacturing job gains through August were Indiana (up 14,300), Ohio (up 9,400), Georgia (up 9,100), Texas (up 9,100) and Michigan (up 7,100).

Since the recession, manufacturers have added 681,000 net new workers. Michigan has added the most manufacturing employees since the end of 2009, hiring 111,300 on net. Other top states since the recession ended include Texas (up 80,100), Indiana (up 72,600), Ohio (up 61,300) and Wisconsin (up 41,600).

In terms of the unemployment rate, North Dakota’s 2.8 percent rate remains the lowest in the United States, with shale exploration continuing to pay benefits that that state’s economy. Nebraska, South Dakota and Utah also have very low unemployment rates, each with 3.6 percent of their populations unemployed. At the other end of the spectrum, Georgia (8.1 percent) has the highest unemployment rate, followed by Mississippi (7.9 percent), Rhode Island (7.7 percent), the District of Columbia (7.6 percent) and Nevada (7.6 percent).

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

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Philly Fed: Manufacturing Activity Eased Slightly, but Growth Remains Strong

The Federal Reserve Bank of Philadelphia said that manufacturing activity eased slightly, but growth remained strong in its district. The Manufacturing Business Outlook Survey’s composite index of general business activity declined from 28.0 in August to 22.5 in September. While the figure decreased somewhat, it is important to note that August’s reading was the fastest pace since March 2011, and a modest pullback should have been anticipated. Many of the key indicators continued to expand at healthy rates, keeping the underlying trends positive.

As evidence of this, the paces for new orders (up from 14.7 to 15.5), shipments (up from 16.5 to 21.6) and employment (up from 9.1 to 21.2) accelerated. The percentage of respondents saying that their sales had increased in the month rose from 32.3 percent in August to 37.6 percent in September. Roughly one-quarter of respondents noted additional hiring in both months, with the percentage citing declines in employment dropping from 15.6 percent to 4.5 percent. Therefore, fewer manufacturers were cutting workers in September, which was encouraging. Still, the average workweek (down from 13.3 to 4.4) narrowed a bit.

Manufacturers remained overwhelmingly upbeat in their outlook despite a decrease in the forward-looking composite measure (down from 66.4 to 56.0). In fact, 55.1 percent of respondents anticipate increased new orders in the next 6 months, with 58.8 percent seeing higher shipment levels. Regarding employment, 43.6 percent expect to add new workers in the coming months, with just 4.0 percent indicating possible declines. Capital spending (up from 17.5 to 23.7) was also expected to increase at decent rates. The one downside was pricing pressures for raw materials, with almost half of those taking the survey predicting higher input costs ahead.

As further evidence of this optimism, manufacturers responded to a special question about production in the third quarter. Nearly 59 percent of them said that output would increase for their company in the third quarter relative to the second quarter, with 28.7 percent stating declines. On average, production was expected to increase by 2 percent in the third quarter. For the fourth quarter, those predicting an acceleration in activity (53.8 percent) outpaced those forecasting a deceleration (21.2 percent).

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

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Housing Starts and Permits Come Back Down to Earth in August after a Strong July

The Census Bureau and the U.S. Department of Housing and Urban Development said that housing starts returned to Earth in August after a strong gain in July. Housing starts soared to a revised 1,117,000 units at the annual rate in July, their second-highest pace since November 2007. This figure fell to an annualized 956,000 in August, or a decline of 14.4 percent. Still, it represented an increase from June’s 909,000 figure, and over the past 12 months, housing starts have risen 8.0 percent. As such, despite the decrease in August, residential construction activity remains on an upward trajectory, albeit one that only gradually has moved higher with a lot of volatility from month to month.

The bulk of the decline in August stemmed from a falloff in multi-family housing starts, down from 458,000 to 313,000. Multi-family starts have averaged 352,375 per month year-to-date, with the August reading being the low-point so far this year. Yet, multi-family starts have risen 16.8 percent over the past 12 months. Even with such unpredictability from month to month, multi-family unit activity has trended higher.

At the same time, single-family starts were down from 659,000 in July to 643,000 in August. This figure has also increased over a longer time horizon, up from 583,000 in January and 617,000 in August 2013. As such, single-family housing starts have increased 4.2 percent year-over-year.

Meanwhile, housing permits mirrored many of these same developments, with permitting down from 1,057,000 in July to 998,000 in August. On a year-over-year basis, housing permits grew 5.3 percent since August 2013. Single-family (down from 631,000 to 626,000) and multi-family (down from 426,000 to 372,000) were both lower for the month, with the latter off more significantly.

Overall, the slowdown in new residential activity in August was disappointing, particularly given the strength seen in July. Moreover, it follows encouraging news on home builder sentiment, which improved to its highest level in nearly 9 years. Nonetheless, the July data were perhaps a bit too strong, and we should have expected the pendulum to swing back somewhat. Despite the decline in both starts and permits in August, the longer-term trend for housing remains positive, especially for single-family construction.

Moving forward, we would expect August’s housing data to remain above the one-million mark, with starts solidly at 1.1 million by year’s end, representing slow-but-steady progress in the residential market.

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

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Federal Reserve Sets Principles for its Exit Strategy

The Federal Open Market Committee (FOMC) began laying out its framework for “normalizing” monetary policy moving forward. In particular, the Federal Reserve plans to end it quantitative easing program next month, with its purchases of long-term and mortgage-backed securities coming to a conclusion after its October meeting. Because of these purchases, the Fed’s balance sheet has now soared to over $4.4 trillion. Moving forward, the Fed’s assets will be reduced “in a gradual and predictable manner.” That does not mean, however, that the balance sheet will return to pre-crisis levels, as it is likely to remain at elevated levels for the foreseeable future. Still, the FOMC added the following language to its guidance, perhaps to allay worries from those who suggest that the Fed’s actions have distorted the marketplace:

The Committee intends that the Federal Reserve will, in the longer run, hold no more securities than necessary to implement monetary policy efficiently and effectively, and that it will hold primarily Treasury securities, thereby minimizing the effect of Federal Reserve holdings on the allocation of credit across sectors of the economy.

Moreover, the Fed is expected to start raising short-term interest rates, which have effectively been zero since late 2008, beginning next year. The guessing game is when that will occur, whether in the first half or second half of 2015. The FOMC’s principles state that rates will begin to rise when “economic conditions and the economic outlook warrant” such an action. In the monetary policy statement issued at the conclusion of its September 16-17 meeting, the FOMC said that “it will take a balanced approach consistent with its longer-term goals of maximum employment and inflation of 2 percent” in deciding to normalize rates. Nonetheless, the statement continues to assert that the federal funds rate will be at its current low levels for a “considerable time after the asset purchase program ends.”

The decision to continue stimulating the economy for the foreseeable future despite progress in the economy was supported by most of the FOMC participants. Fed participants remain concerned about “slack” in the economy, particularly in labor markets. Yet, inflation hawks on the FOMC dissented with these actions. Dallas Federal Reserve Bank President Richard W. Fisher felt that the pickup in economic growth warranted less accommodative policies; whereas, Philadelphia Federal Reserve Bank President Charles I. Plosser would objected to the long time horizon for keeping short-term rates at their current levels.

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

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Consumer Prices Fell 0.2 Percent in August on Reduced Energy Costs

The Bureau of Labor Statistics said that consumer prices fell 0.2 percent in August, the first monthly decline since April 2013. The decrease stemmed largely from reduced energy costs, which were off 2.6 percent in August. Gasoline prices decreased 4.1 percent for the month. Indeed, we have seen the average price of regular gasoline decline from $3.47 a gallon during the week of July 28 to $3.40 a gallon for the week of August 25, according to the Energy Information Administration. It has fallen further since then, averaging $3.35 per gallon this week.

In contrast, food prices continued to rise, up 0.2 percent, albeit at a slower pace than earlier in the year. Food costs have risen 2.4 percent year-to-date, or 2.7 percent over the past 12 months. As with past months, the largest food price increases in August were for beef and veal, chicken, eggs, fish, ham and seafood. These gains were somewhat offset, however, by decreased monthly costs for fruits and vegetables and beverages.

Meanwhile, when you exclude food and energy items, consumer prices were unchanged, mirroring producer price index data released yesterday. There were higher prices for new motor vehicles and shelter, with reduced costs for apparel, household furnishings and used cars and trucks.

Overall, the consumer price index rose 1.7 percent from August 2013 to August 2014, down from the 2.0 percent pace observed in July. This suggests a slight easing in inflationary pressures, even as it still reflects an acceleration from the 1.1 percent year-over-year rate in February. Similarly, core inflation – which excludes food and energy items – was also up 1.7 percent year-over-year, down from 1.9 percent the month before.

The Federal Open Market Committee (FOMC), which is winding up its meeting today, no doubt welcomes news that pricing pressures have lessened somewhat in August. Core inflation remains below the Federal Reserve’s stated target of 2 percent. Still, the FOMC will closely watch to see how pricing pressures develop in the coming months, particularly as it prepares to start normalizing short-term rates in early 2015.

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

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Producer Prices Were Unchanged in August

The Bureau of Labor Statistics said that producer prices for final demand goods and services were unchanged in August, continuing the easing in inflationary pressures seen in July. More importantly, producer prices for final demand goods were down 0.3 percent in August, with costs for both food and energy lower for the month. Energy prices fell for the second straight month(down 1.5 percent), consistent with the drop in the price of West Texas intermediate (WTI) crude oil from $106.07 per barrel at the end of July to $98.23 at the end of August. (WTI closed at $92.92 per barrel yesterday, indicating that there will be a further deceleration in this measure in September.)

Meanwhile, food prices decreased 0.5 percent in August. After rising 5.4 percent from December to April, producer prices for final demand food products have eased by 0.8 percent. As such, the cost of food remained 4.5 percent higher in August than at the start of the year. This has largely stemmed from higher prices for meats, eggs, dairy and produce. The largest price declines in August were seen in eggs, fish, oilseeds, pasta products and pork.

Beyond food and energy, core prices for final demand goods were unchanged. Higher monthly costs for footwear, heavy motor trucks, mobile homes, paper industries machinery, pet food and toys were offset by lower prices in computers, household appliances, metal forming machinery, office equipment, passenger cars and women’s apparel.

On an annual basis, producer prices for final demand goods and services have increased 1.8 percent over the past 12 months. This represents a decline from the 2.0 percent observed in May but an acceleration from December’s 1.1 percent pace. Likewise, core inflation – which excludes food and energy costs – for final demand goods and services has increased 1.8 percent year-over-year in August, up from 1.6 percent in July.

Overall, this report suggests that pricing pressures have accelerated from earlier in the year, but inflationary growth has eased slightly over the past couple months. Core inflation remains below the Federal Reserve’s stated threshold of 2 percent. This indicates the inflation remains in-check, at least for now, and the recent deceleration should ease the pressure on the Federal Open Market Committee (FOMC) to expedite its plans to normalize rates. With the FOMC meeting concluding tomorrow, we will get a better sense of its intentions with its latest statement. Of course, the final decision to raise short-term rates will likely hinge on economic data in the months to come.

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

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