The Kansas City Federal Reserve Bank said that manufacturing activity in its District turned positive for the first time since September. The composite index improved from -5 in April to 2 in May. Even as other regional sentiment surveys had some progress earlier in the year, the Kansas City Fed survey continued to reflect more pessimism. Now, it appears to be one of the few indicating some slight growth, with surveys from the New York and Philadelphia Fed Banks reporting contractions last week.

The good news is that measures of production, shipments, and new orders were all higher for the month. The new orders index, for instance, shifted from being unchanged in March and April to modest growth (an index reading of 6) in May. Looking ahead six months, manufacturers were somewhat more upbeat about additional activity, with this cautious optimism increasing the forward-looking composite index from 4 to 11.

Still, there were also some areas to caution us from getting too optimistic. Export sales continue to be negative (for the 12^th consecutive month), and hiring and the average workweek were both headed in the wrong direction. The index for the number of employees dropped from -3 to -7. Recognizing these weaknesses, Chad Wilkerson, a vice president and economist at the Kansas City Fed, observed that “activity remains at only about year-ago levels and firms are having difficulty passing cost increases through.” He said this even as he recognized the achievement of gains after seven months of declines.

The sample comments tend to add to the narrative provided by these numbers. Several respondents commented on their inability to pass along costs increases. Several comments focused on slower manufacturing activity. One individual, for example, said, “We had a better month last month, but it was  till very much lower than we should be this time of the year.” In addition to those comments, there were also those which focused on policy. As one company added, “Customers comment on the uncertainty of future health care costs and federal taxes. Both issues are creating too much uncertainty  for many companies to spend discretionary dollars.”

Chad Moutray is chief economist, National Association of Manufacturers.

The latest Markit purchasing managers’ index (PMI) data reflect slower manufacturing activity worldwide in May, continuing a trend that we saw in April. Last month, the Chinese economy slowed surprisingly, with the HSBC China Manufacturing PMI falling from 51.6 in March to 50.4 in April. Now, we see that the Flash measure has fallen further to 49.6 in May, its first contraction since October. A decline in new orders, with the sales index down from 51.7 to 49.5, was largely responsible for the decrease in the larger index. Exports, employment, and inventories were also lower. With that said, overall manufacturing output was only off slightly (down from 51.1 to 51.0), with very modest growth.

While the Chinese decline was unexpected, the European data have been in contracting levels since August 2011, and it is not expected to emerge from its recession any time soon. Nonetheless, the Markit Flash Eurozone Manufacturing PMI did improve somewhat from 46.7 in April to 47.8 in May, even as it remains in contraction for the 22^nd consecutive month. The pace of new orders (including exports) and output slowed in the month, helping to ease the rate of decline. The bottom line, though, is the fact that production and employment in the manufacturing sector are falling. The survey also indicates that selling prices among manufacturers are also decreasing, with deflation occurring each month so far in 2013.

In contrast to China and Europe, manufacturing activity in the United States is growing, but very slowly. The Markit Flash U.S. Manufacturing PMI edged marginally lower from 52.0 in April to 51.9 in May, decelerating for the fourth straight month. This easing appears to have erased the stronger growth that we saw in the U.S. at the beginning of the year, when the PMI was 56.1. (continue reading…)

Business economists expect real GDP growth of 2.4 percent in 2013, with slightly faster growth of 3.0 percent in 2014. The May Outlook Survey from the National Association of Business Economics (NABE) found that output estimates for this year and next have not changed from what was predicted three months ago in the February survey.

Beyond the headline figure, there were improvements in some of the key components of GDP. Specifically, respondents expect improved consumer spending (2.3 percent in 2013), residential investment (15.0 percent), nonresidential structure investment (4.6 percent), and business inventories. Regarding the housing sector growth rate, new residential starts are expected to average 1 million in 2013, rising to 1.18 million in 2014. In contrast to these positive contributors to real GDP, shrinking government budgets are expected to fall by 2.3 percent in 2013 and 0.9 percent in 2014, suggesting that they will continue to be a drag on growth.

Industrial productoin should increase 3.1 percent in 2013 and 3.5 percent in 2014. This would suggest a pickup from the most recent year-over-year growth rate of  1.3 percent.

Businesses are expected to add 168,000 nonfarm payroll workers per month in 2013, increasing to 198,000 per month in 2014. This modest growth in hiring, though, is not anticipated to bring the unemployment rate down much from its current 7.5 percent rate, with business economists forecasting the unemployment rate to average 7.1 percent in 2014.

On financial matters, business economists say that pricing pressures shuld be modest, up 1.8 percent in 2013 and 2.0 percent in 2014. Each of these numbers are slightly lower than what was forecast in February, most likely due to lower energy costs in the most recent data. More importantly, they are also consistent with the Federal Reserve’s stated goal of keeping inflation at or below 2 percent. Oil prices are predicted to average $93 per barrel in 2013 and $95 per barrel next year.

Chad Moutray is the chief economist, National Association of Manufacturers. Note that he is also a former board member of NABE and a current participant in NABE’s Outlook Survey.

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

The manufacturing economy has hit some speed bumps, according to recent data. Industrial production declined 0.5 percent in April—more than expected—with capacity utilization levels back to where we were at the beginning of the year. The slower pace of domestic and global sales has negatively impacted activity, with production down mostly across-the-board. Only four of the 19 major manufacturing sectors experienced an increase in output for the month. Moreover, annual growth in manufacturing production of just 1.3 percent is insufficient, and such low rates of industrial growth are not enough to help boost hiring and output. Ideally, we would like to see annual output growth of 4.5 percent or greater, as outlined in the NAM’s “20/20 Vision” earlier this year.

The national pullback in manufacturing activity extends to two of the regional manufacturing surveys released last week. Sentiment surveys from the New York and Philadelphia Federal Reserve Banks found contracting levels of new orders, shipments and the average workweek. In addition, manufacturers were more negative in their overall views of the current business environment. However, employment was mixed between the two reports, with a pickup in hiring reported in the Empire State survey, and manufacturers in both Fed districts were cautiously optimistic about future growth. As a result, capital investments are expected to increase in the coming months.

The Conference Board’s Leading Economic Index—a forward-looking measure of the U.S. economy—rose a healthy 0.6 percent in April, with strong growth in housing permits. New residential permits exceeded the 1 million mark for the first time since June 2008, even as housing starts fell for the month. The long-term trend for the housing market remains positive, with permits data highlighting growth in future activity. Other good news can be seen in the latest University of Michigan consumer sentiment survey, with Americans reporting optimism levels not seen since mid-2007. Retail sales were also higher, even with declines in gasoline station spending due to lower petroleum costs. (continue reading…)

The Conference Board said that its Leading Economic Index rose 0.6 percent in April. The largest component of the increase stemmed from the jump in housing permits for the month, which exceeded the 1 million mark for the first time since June 2008. This factor alone added 0.4 percentage points to the Leading Economic Index. The other major factor helping to push this forward-looking measure higher were measures of credit, including the interest rate spread and the Conference Board’s index of credit conditions.

At the same time, the Leading index also highlighted some of the current weaknesses in the economy, particularly for manufacturers. Measures for new orders and the average workweek of production workers were net drags on the index. Indeed, manufacturing employment has been quite sluggish of late, with hiring unchanged in April. In addition, while consumer confidence did improve in April, it remains sub-par, lowering the index somewhat.

Meanwhile, the Coincident Economic Index – which measures the current climate – increased 0.1 percent in April. The higher figure resulted from stronger growth in nonfarm payrolls and personal income, with modest growth in new manufacturing sales. These increases, though, were mitigated by the 0.5 percent decline in industrial production in the month. As such, softness in the manufacturing sector has dampened the U.S. economy, something we continue to see in a number of economic indicators lately.

Chad Moutray is chief economist, National Association of Manufacturers.

Consumer confidence rebounded in May, according to the University of Michigan and Thomson Reuters. The Consumer Sentiment Survey’s overall index rose from 76.4 in April to 83.7 in May, its highest level since July 2007. It is also a sign that the lull that we have seen in consumer confidence since November has dissipated, at least in this preliminary figure. (A revised number, with more complete information, will be released on May 31.)

The gain in confidence was more than expected, with a consensus estimate of 78.0. Perceptions about the current and future economic environment improved, with the largest gains regarding present conditions. The index for the current situation increased from 89.9 to 97.5; whereas, the forward-looking component moved from 67.8 to 74.8.

Surveys such as this one tend to rise and fall on pocketbook issues, and manufacturers tend to focus in particular on confidence indices to see if they might impact consumer behavior. The recent declines were in large part due to fiscal uncertainties, higher payroll taxes, and persistent economic worries. These issues have not necessarily gone away, but Americans are more than likely reacting to lower energy costs, decent nonfarm payroll gains, and modest growth in the U.S. economy. Earlier in the week, we did learn that retail sales – particularly when you exclude gasoline station spending – rose, a sign that consumers have picked up their purchases of late.

Moreover, the University of Michigan data tend to mirror similar upticks in confidence from the National Federation of Independent Business on small business sentiment and the most recent consumer survey from the Conference Board.

Chad Moutray is chief economist, National Association of Manufacturers.

The Federal Reserve Bank of Philadelphia’s Business Outlook Survey contracted again in May, declining for the first time since February. The composite index of general business conditions declined from 1.3 in April to -5.2 in May. The index was brought lower by reductions in new orders, shipments, and employment. Specifically, the new orders index dropped from -1.0 to -7.9, with over one-third of respondents saying that their sales had declined in the past month.

The indices looking at current activity declined, indicating some sluggishness this month. For instance, the shipments index shifted from modest growth in April (9.1) to a modest contraction in May (-8.5). The percentage of respondents saying that their shipments had declined from the previous month increased from 18.8 percent in April to 32.4 percent in May. The average workweek, unfilled orders, and delivery times were all negative, as well.

Unlike the Empire State Manufacturing Survey from the New York Fed, which was released yesterday, manufacturers in the Philly region were hiring fewer workers in May. The index for employment declined from -6.8 to -8.7. The two surveys did agree, though, on the forward-looking hiring measures. The index of expected employment six months from now rose from 8.2 to 10.0, suggesting that manufacturers plan to increase their hiring in the coming months moderately.

Indeed, manufacturers in the Philly Fed region remain cautiously optimistic about the future. The general business activity measure for six months from now rose from 19.5 to 32.3. Almost 45 percent of those completing the survey anticipate better economic conditions in the coming months, with 36.3 expecting them to be the same. Manufacturers are also planning for increased sales, shipments, and capital spending in the second half of 2013.

Regarding inventories, 58.1 percent of those answering a special question on the topic said that their stockpiles were “about right for current economic conditions.” Just over one-quarter of them expect to decrease their inventories in the second quarter, and in fact, the forward-looking index for inventories reflects a slight contraction.

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

Consumer prices declined for the second straight month, according to the Bureau of Labor Statistics. The consumer price index (CPI) was down 0.4 percent in April, building on the 0.2 percent decrease in March. These declines have helped to decelerate the year-over-year pace in inflation, falling from 2.0 percent in February to 1.5 percent in March to 1.1 percent in April. This suggests that Americans have generally benefited from mild inflationary pressures, with lower energy costs helping to provide a buffer for other increases.

Indeed, the decrease in the price of gasoline was the main contributor to reduction in the CPI in both March and April, with gasoline costs down 4.4 percent and 8.1 percent in those two months, respectively. On a year-over-year basis, gasoline costs were off 8.3 percent. These declines more than offset increases in electricity and natural gas.

Food prices were up a very modest 0.2 percent, with the largest increases in cereals and baking products (up 0.6 percent) and meats, poultry, fish and eggs (up 0.4 percent). The cost of fruits and vegetables declined 1.4 percent, offsetting some past increases. Overall food costs continue to experience moderate gains, up 1.5 percent on annual basis. This represents a slight pullback from the 1.8 percent pace of December.

Core inflation, which excludes food and energy costs, remains in the acceptable range. The year-over-year pace is currently 1.7 percent, down from 1.9 percent in March and 2.0 percent in February. This is below the stated goal of the Federal Reserve Board of 2.0 percent, enabling the Federal Open Market Committee to continue to pursue expansionary policies. As such, it also mirrors the producer price index data released yesterday. Both consumers and manufacturers continue to benefit from the slower pace of growth in prices, with inflationary pressures in-check, at least for now.

Chad Moutray is chief economist, National Association of Manufacturers.

The Census Bureau and the U.S. Department of Housing and Urban Development said that new residential construction declined significantly. New housing starts were down from an annualized 1,036,000 units in March to 853,000 units in April. These numbers illustrate the choppiness of the housing market from month-to-month that occurs even with seasonally-adjusted data. While the longer-term trend line remains positive (up 13.1 percent year-over-year), it is hard not to say that the construction figures were not disappointing.

The largest factor behind the decline in housing starts was the plummeting of multi-family housing starts, down from 398,000 in March to 243,000 in April. These declines appear to have taken place in all regions of the country except for the Midwest. Multi-family starts nationally are now slightly lower than they were 12 months ago, reversing the healthy gains seen in recent months. Meanwhile, new single-family construction starts decreased less dramatically, down from 623,000 to 610,000. These losses were primarily in the South. The year-over-year pace for single-family starts is still quite impressive, up 20.8 percent.

At the same time, housing permits soared to 1,017,000 annualized units in April from 890,000 in March. The permits data are important because they serve as a proxy for future construction activity, and as such, they allow us to get less worried about the declines in starts. The good news is that this is the first time that housing permits have been above 1 million since June 2008 (when they were headed lower). The year-over-year growth in housing permits between April 2012 and April 2013 was a very healthy 35.8 percent. (continue reading…)

The Bureau of Labor Statistics reported that producer prices for finished goods were down 0.7 percent in April, extending the 0.6 percent decline in March. Lower energy prices have helped to reduce pricing pressures over much of the past year, with producer prices up just 0.6 percent from where they were 12 months ago. This year-over-year rate is down from 1.4 percent in January and 2.3 percent as recently as October. To further illustrate how inflationary pressures have eased, the year-over-year rate was 4.2 percent in January 2012, with a recent peak of 7.3 percent in July 2011. (See the attached graphic.)

Behind these figures, there were lower food and energy costs for the month. Energy costs were down 2.5 percent in April, building on the 3.4 percent decrease in March. The average price of West Texas intermediate crude oil was $92.02 per barrel in April, down from $95.31 in February and $92.94 in March. This helped to reduce energy costs at both the finished and intermediate goods levels. Meanwhile, food prices were off 0.8 percent, offsetting the increase of the same amount the month before. Reduced meat and vegetable prices were largely responsible for this decrease.

Core producer prices, which exclude food and energy costs, at the finished goods level rose a modest 0.1 percent for the month of April and were up 1.7 percent year-over-year. This number is important, as it indicates that inflationary pressures remain below the Federal Reserve Board’s stated target of 2 percent or less. This frees the Federal Open Market Committee to pursue “highly accommodative” policies to attempt to stimulate economic growth, such as it reiterated at the last meeting.

For manufacturers, the reduction in pricing pressures has been extremely helpful. Raw material costs for the sector fell 0.2 percent in April, and year-over-year, producer prices were down 0.3 percent. The largest decline was in the petroleum and coal products sector, down 1.7 percent for the month and 9.3 percent on an annual basis.

This is not to suggest that rising costs are not still an issue, as they are for some segments of the industry. On a year-over-year basis, the following sectors have seen the fastest growth: wood products (up 10.6 percent), nonmetallic mineral products (up 3.2 percent), food (up 2.5 percent), and beverage and tobacco (up 2.4 percent) manufacturing. At the opposite end of the spectrum, primary metals manufacturers have seen their input costs fall 6.0 percent over the past 12 months.

Chad Moutray is chief economist, National Association of Manufacturers.