Economy

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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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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NY Fed: Manufacturing Activity Expanded Strongly in September

The Empire State Manufacturing Survey from the New York Federal Reserve Bank reported a strong increase in activity in September, its fastest pace in nearly five years. The composite index of general business conditions rose from 14.7 in August to 27.5 in September, with almost 46 percent of those taking the survey saying that conditions had improved in the month. Other measures were mostly positive, as well, including faster paces for new orders (up from 14.1 to 16.9) and shipments (up from 24.6 to 27.1).

Yet, there were also some challenges, most notably in the labor market. Hiring eased in September, with the index for the number of employees dropping from 13.6 to 3.3. This decline stemmed from an increase in those respondents who said that their employment levels had decreased, up from 5.7 percent in August to 16.3 percent in September. Along those lines, the average employee workweek (down from 8.0 to 3.2) also narrowed.

Pricing pressures continued to be elevated, even as there was a marginal improvement for the month. The index for raw material prices declined slightly, down from 27.3 to 23.9, but that still represents a significant percentage of manufacturers in the Fed district seeing input costs rise. That is expected to continue over the next six months, with nearly 46 percent of respondents anticipating higher prices.

The other forward-looking measures continue to find a mostly optimistic outlook in the New York Fed region. There was a slight pullback in many of the measures assessing the next six months, but manufacturing leaders remain upbeat overall. In fact, 57.1 percent of those completing the survey predict sales increases, or about the same proportion as those anticipating higher shipments. Just over one-quarter expect to add more workers in the coming months, with 29.4 percent planning additional capital expenditures.

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

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Manufacturing Production Was Softer than Expected in August on Reduced Auto Output

Manufacturing production fell 0.4 percent in August, declining unexpectedly instead of extending the strong gains of July. Much of this decline stemmed from reduced motor vehicle production (down 7.6 percent in August), but this was likely the result of auto makers’ switching over to a new model year and summertime vacations. Despite the decrease for the month, motor vehicle production has risen 8.1 percent over the past 12 months, the largest increase of any of the major sectors. As such, this month’s figure should not be misinterpreted as a weakness, but instead, it is just a pause in an otherwise upward trend for motor vehicle demand and output.  Excluding autos, manufacturing production would have increased 0.1 percent.

Manufacturing production continues to reflect an accelerated pace from the winter months, with the year-over-year pace up from 1.6 percent in January to 4.0 percent in August. Still, this pace was down from 5.2 percent in July. Durable and nondurable goods output has increased 5.6 percent and 2.2 percent year-over-year, respectively. At the same time, manufacturing capacity utilization also eased, down from 77.6 percent in July to 77.2 percent in August.

Nondurable goods production was up 0.2 percent in August, but that was offset by a decline of 0.9 percent for durable goods manufacturers. Computer and electronic products (up 1.3 percent), food, beverage and tobacco products (up 0.4 percent), nonmetallic mineral products (up 0.4 percent), machinery (up 0.3 percent) and chemicals (up 0.3 percent) were examples of sectors with increased output in August.

In contrast, sectors with declining output included apparel and leather products (down 2.3 percent), fabricated metal products (down 1.3 percent), furniture and related products (down 1.0 percent), textile and product mills (down 0.9 percent) and printing and support (down 0.6 percent).

Meanwhile, overall industrial production decreased 0.1 percent, its first decline since the weather-related slowdowns of January. Mining (up 0.5 percent) and utilities (up 1.0 percent) output were both higher. Total capacity utilization edged lower, down from 79.1 percent to 78.8 percent.

In conclusion, manufacturers continue to be upbeat about activity in the second half of this year, but much like the jobs data out a couple weeks ago, the production figures suggest that there was softness in August. Instead of modest gains in output in August as expected, production in the sector declined 0.4 percent, mainly on slower activity in the auto sector. Nonetheless, the outlook remains mostly optimistic, and there were likely retooling issues related to the declines in motor vehicle production.

Still, manufacturers would like to see stronger economic activity moving forward, and for that reason, policymakers should focus on pro-growth initiatives that will allow them to expand and flourish.

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

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Global Manufacturing Economic Update – September 12, 2014

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

Net exports have been a drag on the U.S. economy so far through the first half of this year, with manufacturers continuing to experience sluggish sales growth in international markets. With that said, the U.S. trade deficit narrowed a bit in July to its lowest level in six months, with growth in goods exports outpacing growth in goods imports. Petroleum trade accounted for a significant portion of the change in each, and in general, energy has helped to narrow the deficit from that of a couple years ago. Another positive note was the fact that each of the top-five trading partners for U.S.-manufactured goods experienced increases in manufactured goods exports year-to-date relative to the same time frame last year using non-seasonally adjusted data.

Along those lines, manufacturers worldwide saw modest growth, with a slight improvement from the month before. The J.P. Morgan Global Manufacturing Purchasing Managers’ Index (PMI) rose marginally, up from 52.4 in July to 52.6 in August. The good news is that this marks the 21st straight month of expanding activity globally; yet, it is also clear that the pace of growth has not changed much this year. Still, manufacturing activity in August expanded in 9 of the top 10 markets for U.S.-manufactured goods, an improvement from just five markets in May.

Nonetheless, the data also show signs of softness, most notably in Europe and in China. Real GDP in the Eurozone fell 0.2 percent in the second quarter, with recent industrial production and retail sales data trending lower, as well. The Markit Eurozone Manufacturing PMI declined from 51.8 to 50.7, its lowest level since July 2013, when Europe was just emerging from its deep recession. Still, the economic health of various European nations varies widely, ranging from deteriorating activity in France to relatively robust growth in Ireland. For its part, the European Central Bank has once again lowered interest rates in the hope of spurring more economic activity and additional lending. With these actions and slow growth in Europe, the euro has depreciated against the dollar, down from a recent high of $1.3924 for one euro on May 6 to yesterday’s close of $1.2921 on September 11.

Meanwhile, Chinese manufacturers have reported expanding levels of activity for three straight months (June to August), which by itself is progress after starting the year with five months of contraction. However, the HSBC China Manufacturing PMI declined from 51.7 to 50.2, or just barely above neutral, with decelerating levels of new orders, output and exports. Moreover, while real GDP in China picked up slightly from a year-over-year pace of 7.4 percent in the first quarter to 7.5 percent in the second quarter, we expect to continue to see an easing in growth rates moving forward. We have also seen decelerating rates of growth—albeit still healthy ones by our standards—for industrial production, fixed asset investments and retail sales. Slower growth in China has also helped to pull down overall manufacturing activity in the emerging markets.

U.S. trade talks continue this month with both Asia-Pacific nations and Europe, while the World Trade Organization seeks to move forward both trade facilitation and environmental goods discussions. Domestically, a range of trade and international financing legislation awaits action, including the reauthorization of the Export-Import Bank of the United States, whose charter expires on September 30.

Chad Moutray is the chief economist, National Association of Manufacturers. us trade deficit - sept2014

 

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University of Michigan: Consumer Confidence Has Risen Somewhat in September

The University of Michigan and Thomson Reuters said that preliminary data on consumer confidence reflects a slight increase in September. The Consumer Sentiment Index increased from 82.5 in August to 84.6 in September, its highest level since July 2013. These figures suggest that the lull in confidence that we have seen so far this year might finally be starting to dissipate. Prior to the September reading, for instance, the University of Michigan index has averaged just 81.9, and it was little changed since recovering from the budget showdown last fall. In contrast, the Conference Board’s confidence measure has reached pre-recessionary highs in its most recent report.

The subcomponents in the University of Michigan data continue to reflect some anxieties on the part of the consumer. For instance, the index for the current economic environment slipped a bit this month, down from 99.8 to 98.5, even as it represents an improvement from earlier in the year. Americans remain concerned about labor market and income growth, and this is likely responsible for the decline in the present figure. Geopolitical events might also play into this. Still, the future-oriented index rose strongly, up from 71.3 to 75.6, its highest level in over one year, suggesting more optimism moving forward.

We will get final data on September consumer sentiment from the University of Michigan on September 26. The Conference Board will also release its survey data on consumer confidence on September 30.

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

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After Cautiousness in July, Retail Sales Pick Up in August

The Census Bureau said that retail sales rose 0.6 percent in August, rebounding from a revised 0.3 percent increase in July. The July figure was originally reported as being unchanged. As such, this is a sign that consumer spending has picked up in August after cautiousness over much of the summer. Still, the longer-term trend for retail sales has been mostly favorable, particularly after strong growth this spring, with 3.8 percent growth since December and a 5.0 percent increase year-over-year.

Healthy gains in spending on motor vehicles helped to lift August retail sales, with auto sales up 1.5 percent. It was the second straight increase in auto purchasing levels after being stagnant in June. Year-to-date, motor vehicle sales have risen by a healthy 7.7 percent, or 8.9 percent over the past 12 months.

Beyond autos, consumer spending also increased at decent levels, up 0.3 percent in August or 4.1 percent year-to-date. Therefore, we have seen modest gains for retail sales in the broader market. Excluding autos, other segments with strong increases in retail spending in August included miscellaneous store retailers (up 2.5 percent), building materials and garden supplies (up 1.4 percent), sporting goods and hobbies (up 0.9 percent), electronics and appliances (up 0.7 percent) and furniture and home furnishings (up 0.7 percent.

In contrast, gasoline stations (down 0.8 percent) and department stores (down 0.4 percent) were two areas with softer spending levels for the month. For gasoline stations, the decline stemmed from reductions in petroleum costs, with the price of West Texas intermediate crude falling from $106.07 per barrel on the last day of July to $98.23 a barrel on the last day of August. (It has fallen further since then, closing at $92.84 on Thursday.)

Overall, retail sales figures were encouraging. With softer spending levels from May to July, there were worries that cautiousness on the part of the consumer could serve to be a downside risk to the economy moving into the second half of the year. This data suggests that Americans might be loosening up a little in terms of their willingness to spend – a good sign perhaps.

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

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Manufacturing Job Postings Eased Slightly in July, but Remained Improved from Earlier in the Year

The Bureau of Labor Statistics said that manufacturing job openings declined slightly, down from 302,000 in June to 296,000 in July. Still, June’s figure was a two-year high, and job postings remain higher than earlier in the year. In February (six months earlier), for instance, there were 258,000 job openings in the sector.

The Job Openings and Labor Turnover Survey (JOLTS) data also show a disparity between durable and nondurable goods. Durable goods manufacturers increased the number of job openings for the second straight month, up from 194,000 in June to 201,000 in July. In contrast, nondurable goods firms reduced their postings once again, down from 108,000 to 95,000, pulling the headline figure lower. A similar trend was observed in the hiring data.

Manufacturers hired 259,000 additional employees in July, down somewhat from 268,000 in June. The decrease was the result of reduced hiring for nondurable goods manufacturers (down from 113,000 to 102,000), which was enough to offset a small increase in hiring for durable goods businesses (up from 155,000 to 157,000). At the same time, manufacturing separations – including layoffs, quits and retirements – decreased from 241,000 to 226,000. Overall, net hiring (or hires minus separations) in the manufacturing sector increased from 27,000 to 33,000, illustrating the rebound in hiring seen since the winter and spring months.

In the larger economy, the number of job postings were essentially unchanged (down slightly from 4,675,000 in June to 4,673,000 in July). This continues to reflect significant growth from January’s pace of 3,874,000. Note that the June rate was the highest since February 2007, meaning that those gains were mostly sustained. There were more job postings in July for accommodation and food services, health care, professional and business services and retail trade, in addition to durable goods manufacturers.

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

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