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Chicago Fed: Slight Improvement in U.S. Economy in May, But Growth Still Subpar

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The Chicago Federal Reserve Bank said that its National Activity Index (NAI) increased from -0.52 in April to -0.30 in May. While there was some progress in this index at the beginning of the year, this was the third consecutive month with the NAI in negative territory. Negative numbers indicate that the U.S. economy is growing below its historical trend, and when the 3-month moving average falls below -0.70, the risk of recession is increased.

Despite the higher monthly NAI, the 3-month moving averaged moved lower, down from -0.13 to -0.43 for the month. This is largely a function of losing February’s positive gains in the calculation. The current data suggest that there was modest progress in May, but the macroeconomic environment remains subpar. Still, the likelihood of recession is low.

Manufacturing was a drag on the NAI, with industrial production unchanged in May and the Institute for Supply Management’s purchasing managers’ index contracting for the first time since November. Production-related measures subtracted 0.10 points from the NAI as a result. That is better, though, than the 0.34 points that it decreased the NAI in April, when industrial production had fallen by 0.5 percent. Nonfarm payroll growth made a slight positive contribution, while lower housing permits and a still-struggling (but much improved) residential sector provided a drag of 0.17 points.

This data is largely consistent with the Conference Board’s Leading Economic Index, which was released last week, despite the different methodologies. Both sets of analysis point to an economy that made some modest progress in May, but with significant challenges still present. Sluggish manufacturing growth has been one of those weaknesses, with slowing global sales and weaker domestic demand challenging growth.

Chicago and Richmond Fed Survey’s Show Slowed Manufacturing Growth

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The Chicago Federal Reserve Banks’ Midwest Manufacturing Index (MMI) declined from 96.4 in March to 95.9 in April, down 0.5 percent for the month. This ended five straight months of increasing manufacturing activity in the Chicago Fed district. Even with April’s decrease, production is still up 0.8 percent in the first four months of 2013 and 3.3 percent over the past 12 months.

The auto and steel sectors led the index lower, with both seeing their output fall 0.9 percent in the month of April. As such, this represents a pullback in production for the motor vehicle sector, which has had year-over-year gains of 5.8 percent over the past year and has helped to propel the overall economy regionally and nationally. The machinery sector also had lower production, down 0.3 percent. The lone riser in the MMI was output in the “resource” sector, up 0.1 percent. The Chicago Fed’s resource sector definition includes food, wood products, paper, chemicals, and nonmetallic mineral products. In particular, the April resource sector numbers were boosted by higher food and chemical manufacturing activity.

The Richmond Federal Reserve Bank’s survey of manufacturers found that activity declined for the second month in a row. The composite index of general business conditions improved from -6 in April to -2 in May, but the negative reading was still at contractionary levels, even as the pace of the decline eased somewhat for the month. While there was some progress reported in January and February, it is hard to escape the fact that the Richmond Fed district’s main measure of manufacturing activity has seen a contraction in three of the past five months.

The May survey reflected lower levels of activity mostly across-the-board, with the decline in new orders accelerating from -8 in April to -10 in May. With fewer sales, it is not surprising that many of the other components were also down. Respondents indicated net decreases in capacity utilization, employment, and the average workweek. Interestingly, the measure for shipments turned positive, up from -9 in April to +8 in May, but the ability for these shipments to continue to increase in the coming months will depend on what happens with new orders. Read More

Chicago Fed: National Economy Struggled in October

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The Chicago Federal Reserve Bank said that the U.S. economy weakened significantly in October. The National Activity Index (NAI) declined from zero in September to -0.56 in October. The three-month moving average, which has now been negative for eight consecutive months, fell from -0.56 to -0.36.

Negative values suggest that the U.S. economy is growing below its historical average, and when the 3-month moving average falls below -0.70, the risk of a recession is increased. The lower index values suggest an economy that was moving in the wrong direction, but not quite in recession territory yet.

One of the larger factors in the decline was the decrease in industrial production, which fell 0.4 percent in October. Reduced output due to Hurricane Sandy was a major reason for this decrease, but it is also true that manufacturing production was off 1.7 percent since July. There have been significant weaknesses for the past few months even before the hurricane, with soft sales and uncertainties related to the U.S. fiscal situation. Reduced housing permits also provided a drag on the NAI.

One of the larger positive contributions came from higher nonfarm payrolls. There were 171,000 additional workers hired in October, with 13,000 new manufacturing employees.

Overall, the Chicago Fed’s National Activity Index suggests that the U.S. economy continues to struggle, growing below its historical trend. As the attached chart shows, the 3-month moving average has moved progressively lower since February (when it stood at 0.45). This is definitely a trend that needs to be reversed.

Chad Moutray is chief economist, National Association of Manufacturers.

Chicago and Dallas Fed Surveys Provide Mixed News

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The Texas Manufacturing Outlook Survey provided mixed comfort with its latest results. On the one hand, the Dallas Federal Reserve Bank reports that its index of general business conditions improved from -0.9 in September to 1.8 in October, a figure that suggests a slight expansion on net. Indeed, indices for production, capacity utilization, shipments, employment, and capital expenditures all indicate modest growth for the month (even as some of them eased somewhat).

More worrisome potentially, the rate of growth for new orders moved in the wrong direction, down from 5.3 to -4.5. Nearly 27 percent of respondents reported sales declines, with another 56.5 percent indicating no change. Along those lines, hours worked also declined.

Despite slowing new orders, manufacturers in the Texas region were more positive about the next 6 months. Almost one-third expect their company’s outlook to improve, with the forward-looking index up from 9.2 to 20.9. Measures of activity were higher across-the-board, with business leaders anticipating stronger increases. Pricing pressures also remain elevated.

The cautious optimism expressed in these numbers notwithstanding, the sample comments do reflect some anxieties about the election, the fiscal cliff, and other headwinds. A plastics manufacturer, for instance, said that they “strongly feel the uncertainty of the election outcome has small businesses and their customers holding their breath.” This was echoed in some of the other comments, as well. One respondent in the fabricated metals sector went so far as to say that his customers – many of whom are Subchapter S corporations who could potentially see their taxes go up on January 1st – are uncertain about their prospects and hampering sales.

Meanwhile, these larger anxieties and a slower global economic environment can be noted in a similar survey from the Chicago Federal Reserve Bank released earlier today. The Chicago Fed’s Midwest Manufacturing Index (MMI) decreased from 95.5 in July to 93.8 in August to 93.4 in September. The auto sector led this decline, with production down 5.3 percent and 2.2 percent, respectively, in the past two months. Still, even with the current slowdown, year-over-year motor vehicle output has risen over 16 percent.

The Midwest has been one of the stronger regions in the country for manufacturing activity, with the MMI up 8.5 percent since September 2011. Strength in the auto, steel, and machinery sectors has been the primary reason. In September, however, steel and machinery production activity were off 0.1 percent and 0.3 percent, respectively. The resource sectors (e.g., “food, wood, paper, chemical, and nonmetallic mineral”) were one area with positive gains for the month, up 0.9 percent.

Overall, these two surveys suggest that there remain significant weaknesses in the manufacturing sector right now. This was highlighted in both falling new orders and the comments of the Dallas Fed survey and in the lower levels of activity in the Chicago MMI. Yet, it is also clear that manufacturers are cautiously optimistic about the future, as well, with hopes that the fiscal cliff and other concerns can adequately be addressed after the election.

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

Chicago Fed: National Economy Weakened Significantly in August

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The Chicago Federal Reserve Bank said that the U.S. economy weakened significantly in August. Its National Activity Index declined from -0.12 in July to -0.87 in August. The three-month moving average fell from -0.27 to -0.47, its lowest level since June 2011. Negative values suggest that the U.S. economy is growing below its historical average, and when the 3-month moving average falls below -0.70, the risk of a recession is increased. Therefore, the lower index values this month suggest an economy that is moving in the wrong direction, but not quite in recession territory yet.

As with the Conference Board’s Leading Economic Index which was released last week, reduced manufacturing activity was a major contributor this month’s decline. Production-related components reduced the measure, with its contribution down from +0.08 to -0.58. The 1.2 percent decline in industrial production, in addition to lower capacity utilization, was an important factor.

Consumption, housing, and employment factors also provided negative contributions to the index. While housing starts were higher, permits were lower. Sales have also been an issue, particularly for manufacturers.

Overall, the Chicago Fed’s National Activity Index is one more measure showing that the manufacturing sector – as well as the U.S. and global economy – continues to experience significant headwinds. It will be important for us to reverse these trends, but with slowing global growth and worries about the fiscal abyss mounting, we are probably not out of the woods yet.

Chad Moutray is chief economist, National Association of Manufacturers.

Texas Manufacturers See a Pickup in Activity, While National Index Shows Weaknesses

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The Federal Reserve Bank of Dallas reported that manufacturing production has picked up, with the production index increasing from 5.5 in May to 15.5 in June. Approximately three out of five respondents said that their overall activity levels did not change, but those suggesting higher production levels rose. Similar findings were observed for capacity utilization, new orders, shipments, and employment. The pace of capital spending also rose slightly. In terms of pricing pressures, these have eased significantly.

The jump in manufacturing activity mirrored attitudes toward the larger macroeconomy. The index of general business activity improved from -5.1 last month (contraction) to 5.8 this month (expansion). Nonetheless, it did not change their views about their own company’s outlook by much, as this index edged marginally higher from 4.7 to 5.5.

Even with improvements in the current economic environment, the forward-looking indices show a degree of cautious optimism moving forward. On the one hand, nearly all of the measures reflect an expectation of higher output and employment six months from now. For instance, the expected production index rose from 31.6 to 33.0, with only 9.2 percent of respondents anticipating a decline in activity moving ahead.

Yet, the composite indices for the company outlook and general business activity declined somewhat, reflecting recent anxieties. Indeed, the sample comments seem to back this up, with discussions about recent “softness” in the market, “hesitation to move forward” on new projects, U.S. fiscal challenges, and the November elections. Perhaps reflecting this, the forward-looking measures for employment and capital spending reflect some easing, even as they continue to show expansion for both.

Meanwhile, other economic indicators tend to highlight why so many manufacturers are concerned about growth. The latest of these comes from the Chicago Federal Reserve Bank, which observed a sharp drop-off in economic activity in May. Its National Activity Index fell from 0.08 in April to -0.45 in May. In this index, zero values suggest that the macroeconomy is growing at its historical rate. Lower manufacturing production, which was down 0.4 percent, last month, was one of the contributing factors to the declining figure. Consumer spending and housing were also drags on the index, with employment measures neutral.

The lower figure for May helped to bring down the three-month moving average to -0.34. Values below -0.70 indicate an increased risk for recession. While a recession is not likely at this point, the pace of growth has certainly slowed considerably in the past three months. This was the third consecutive month of negative index values.

Chad Moutray is chief economist, National Association of Manufacturers.

Chicago Fed Observes Above Trend Growth in U.S. Economy

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The National Activity Index from the Chicago Federal Reserve Bank dropped from 0.54 in December to 0.22 in January. Positive numbers suggest that the U.S. economy is growing above its historical trend. Therefore, despite the decline, the real story is the fact that the index has shown above trend growth for two consecutive months. It was positive only three months (January, July and December) in 2011.

Industrial production was one reason that the index dropped, as it was unchanged in January. Of course, as was noted last week, manufacturing production was the exception, with a strong 0.7 percent gain for the month. Positive forces in the economy include employment, sales, orders and inventories. Housing and consumption remain drags on economic growth.

The three-month moving average for the index is 0.14, up from 0.06 last month. Values under -0.70 suggest that the economy might be in a recession. The fact that this measure continues to move away from the recession threshold is obviously a good sign, mirroring other indicators which show recent rebounds in economic activity. While risks still exist, they have lessened significantly over the past few months.

Chad Moutray is chief economist, National Association of Manufacturers.

Monday Economic Report

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The government reported that the U.S. economy grew by 2.8 percent in the fourth quarter of 2011, with manufacturers playing an integral role. Consumers and businesses replenishing their inventories were the largest contributors of real GDP for the quarter. In many ways, this number was not a surprise: other indicators also suggested an uptick in manufacturing activity in the months of November and December. Manufacturers are cautiously optimistic about future production, and the rebound is welcome news.

Yet, the GDP numbers also bring to mind challenges that might dampen growth in the coming months. It is unlikely, for instance, that we will see the same lift from inventories in the first quarter, and consumers have dipped into their savings to increase their purchases. At some point, this level of spending might ease so that consumers might pay off some of these debts. In addition, it is clear that the government sector will be a drag on growth for the foreseeable future – of which we were reminded when the Department of Defense announced budget cuts last week. Most pressing, though, is the constant reminder of Europe’s ills and the challenges that slowing global growth might have on our exports. Fitch Ratings downgraded several European nations’ credit ratings on Friday, following the lead of Standard & Poor’s from a few weeks ago.

These worries aside, most of the recent domestic economic indicators have been positive. Durable goods orders, for example, rose 3 percent in December, with strength in nondefense capital goods. This mirrors much-improved production, employment and investment data from the Kansas City and Richmond Federal Reserve Banks (and for that matter, in most of the recent regional) surveys. The National Association of Business Economics (NABE), in its latest Industry Survey, observes these improvements, with more economists upgrading their assessments for growth this year. Sixty-five percent of respondents to the NABE survey expect for real GDP to grow at least by 2 percent in 2012. Similarly, the Chicago Federal Reserve Bank’s National Activity Index indicates that the risk of a recession seems to be lessening.

These growth estimates are in line with those from the Federal Reserve Board, which estimates real GDP growing between 2.2 and 2.7 percent this year. The Fed also expects the unemployment rate to remain elevated, improving slowly to a range of 8.2 to 8.5 percent in 2012 and to 6.7 to 7.6 percent by 2014. The Federal Open Market Committee, even as it cites improvements in the domestic economy, remains worried about high unemployment, a still-weak housing market and uncertainties related to European sovereign debt. It stated last week that it now plans to keep interest rates at “exceptionally low” levels through late 2014 – an extension from its earlier intentions of doing so through mid-2013. With these moves, the Fed hopes that lower long-term rates spur more borrowing, both by homeowners and businesses.

This week, we will receive more data about production and employment, which will hopefully show continued growth in manufacturing in January. The Institute for Supply Management’s well-cited index of manufacturing activity will come out on Wednesday, and it is expected to be somewhat higher. On Thursday, new productivity data will be released, with manufacturing output per worker expected to continue to show strong growth. Finally, the Bureau of Labor Statistics will unveil new employment data on Friday, which should show increased hiring among manufacturers in conjunction with recently increased production.

Chad Moutray is chief economist, National Association of Manufacturers.

Leading Economic Indicators Suggest Modest Growth Ahead

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The Conference Board announced that its Leading Economic Index rose 0.4 percent in December, the third consecutive month of gains. Manufacturing played an important role in this month’s increases, with increased new orders and a longer average workweek. Improvements in the employment situation, equity markets and the interest rate spread also made positive contributions to this figure, with lower consumer confidence dragging it lower.

The index has changed, effective with this month’s release, by replacing a measure of the money supply (M2) with a newly-created Leading Credit Index. The switch was made so that the indicator would do a better job of predicting the impact of credit crunches on the business cycle, with this new measure an improved predictor of the recent downturn. In this month’s analysis, the index was lower, providing a slight drag to the composite figure.

The Coincident Economic Index, which measures the current environment, increased by 0.3 percent. All of the subcomponents of this index rose. This includes higher levels of industrial production, manufacturing and trade sales, nonfarm employment and personal income.

This positive report mirrors another national index on the economy from the Chicago Federal Reserve Bank. Its National Activity Index rose from -0.46 in November to +0.17 in December. This measure looks to see if the U.S. is expanding at its historical growth rate; therefore, positive numbers reflect above-average growth. This month’s data suggest a significant improvement, with manufacturing output the leading contributor. The production-related variables shifted from -0.28 to +0.24 for the month, led by stronger manufacturing production and capacity utilization.

Other positive contributors included higher employment and sales. Housing, on the other hand, remains a weak spot. Overall, 85 indicators provided a positive contribution, offset by 32 others.

The three-month moving average for the composite index improved from -0.19 to -0.08 in December. This suggests that, while the overall economy remains below its long-term trend, it is moving in the right direction. Moreover, the risk of recession is reduced, as the index has moved further away from the -0.70 threshold which suggests an increased likelihood of recession.

These two measures – one from the Conference Board and the other from the Chicago Fed – are good news as we enter 2012. The economy is improving, with manufacturers playing an important role in its recent rebound.

Chad Moutray is chief economist, National Association of Manufacturers.

Chicago Fed Index Up Slightly in June

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Summarizing many of the publicly available data sets, the Chicago Federal Reserve Bank’s National Activity Index moved slightly higher from -0.55 in May to -0.46 in June.  The index remained negative for the third month in a row, reflecting continued weakness in the national economy.

This index is distinctive in that a recession is deemed more likely when the three-month moving average moves below -0.70.  The current three-month moving average is -0.60, which is too close for comfort, mainly due to a large contraction in April. Fortunately, the index is moving in the right direction now, albeit still in negative territory.

One of the strongest contributors to the index was the Institute for Supply Management’s Purchasing Managers Index, which rose in June, helping to lift the sales, orders and inventories category. Improvements in industrial production and housing starts also helped to lift the index for the month. Employment, however, had a negative influence, with weak nonfarm payroll growth and a rising unemployment rate.

Chad Moutray is chief economist, National Association of Manufacturers.