economic growth

The U.S. Economy Grew 3.5 Percent in the Third Quarter

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The Bureau of Economic Analysis said that real GDP grew an annualized 3.5 percent in the third quarter, slightly higher than my forecast of 3.25 percent. This followed a decline of 2.1 percent in real GDP in the first quarter and a gain of 4.6 percent in the second quarter. As such, the U.S. economy grew a frustratingly slow 1.2 percent at the annual rate in the first half of 2014, which was a major disappointment. Still, consumer and business spending strengthened in the second quarter, and we continued to see gains in these areas in the third quarter, albeit with some easing in the pace of growth. In addition, after seeing net exports serve as a drag toward growth in the first half of the year, they were a positive contributor this time around, which was encouraging. Read More

Real GDP Fell 2.9 Percent in the First Quarter; Revision Makes it the Worst Quarter since Recession

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The Bureau of Economic Analysis revised real GDP growth down sharply for the first quarter in its latest revision. The U.S. economy shrank by 2.9 percent in the first quarter, progressively worse the first estimate of a gain of 0.1 percent and the first revision of a 1.0 percent decline. As such, it was the first quarterly decline in the nation’s output in three years and the sharpest drop in five years, when we were still in the Great Recession.

Of course, the larger narrative is one of disappointment. We began 2014 with a lot of optimism that this might finally be the year where the economy could gain some momentum, particularly given the strength seen in the manufacturing sector in the third and fourth quarters of 2013. I had forecast growth of 3 percent for this year at one point. With this release, we will be more likely to repeat the subpar growth rate of 2013, which was 1.9 percent.

With that said, the numbers also foretell a rebound in the second quarter. The largest drag, for instance, came from inventory spending, which reduced real GDP by 1.7 percentage points in the first quarter. Particularly given the stronger levels of activity seen in more recent data, we would anticipate stronger growth in the current quarter as businesses replenish their stockpiles.

The other significant negative on real GDP in the first quarter was net exports, which subtracted 1.53 percentage points from growth. This stemmed from an 11.4 percent decline at the annual rate in goods exports. In general, manufactured goods exports began 2014 on a weak note, and we hope that this trend begins to improve moving forward.

In terms of other components to real GDP, the main positive was consumer spending on services, which added 0.67 percentage points to growth. Nonetheless, that represented a major downgrade from the 1.92 percentage point contribution seen in the last estimate. Consumer spending on goods was also positive, but only barely so, adding just 0.04 percentage points. Much of that was from motor vehicles, but spending was dampened by weather and other uncertainties. Meanwhile, government spending continued to be a drag, with the negative impact coming primarily from the state and local level.

In conclusion, U.S. and global economic growth started off the year on a bad note. Real GDP was much weaker than we originally predicted, and while winter storms were a major factor, the data suggest that this softness went beyond weather-related influences. Fortunately, more recent data suggest that economic activity has begun to recover somewhat, with expectations of a stronger rebound for the second quarter that exceed 3 percent.

Still, these data suggest that the economic recovery – now celebrating its fifth anniversary – continues to remain fragile. Manufacturers came into this year with a lot of optimism, and while they remain upbeat about the second half of this year, these numbers indicate growth has started off slower than desired. Policymakers need to explore new ways to facilitate growth moving forward.

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

AT&T Chief Talks Growth in Washington

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Randall Stephenson, chairman and CEO of AT&T, appeared the Economic Club of Washington, DC, on June 17 to talk about the key ingredients for economic growth in the United States.

In a wide-ranging policy discussion, the head of the telecommunications giant honed in issues like immigration reform and tax reform as opportunities to drive and attract investment. Stephenson also highlighted the need for strong trade policies and the importance of free trade agreements. Currently, the United States’ ability to negotiate new agreements and complete pending ones is hindered by the lack of Trade Promotion Authority, which helps streamline the negotiation process.

Stephenson’s remarks send a powerful message from the business community about the necessity of engaging with Washington. Policymakers, whether on Capitol Hill or in the executive branch, need to hear from America’s job creators—because like it or not, what happens in Washington matters to businesses. We need to be at the table for these important discussions.

Monday Economic Report – June 2, 2014

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

The U.S. economy contracted for the first time in three years in the first quarter of 2014. Real GDP fell 1.0 percent in the quarter, a fairly substantial revision from the earlier estimate of a gain of 0.1 percent. Much of the storyline behind these figures was the same, with consumer spending on services being the only real bright spot. Purchases of durable and nondurable goods were positive, but weather-related challenges dampened both. Weaknesses in business spending for equipment and structures, residential housing investments and reduced goods exports were all major drags on growth.

The bulk of the downward revision stemmed from lower inventory replenishment. Ironically, that could lead to more inventory spending in the second quarter with stocks running lower. In addition, other figures also point to a rebound in activity during the spring months, with my forecast for second-quarter real GDP at 3.8 percent. Still, U.S. and global growth have started off 2014 much slower than anticipated, particularly when averaging together the first and second quarters. For the year, we now expect growth of 2.3 percent, which would indicate a slight downgrade from the more optimistic outlook predicted coming out of the strong momentum during the second half of last year.

The spring rebound in the manufacturing sector can be seen in other data released last week as well, albeit with some mixed news overall. For instance, new durable goods orders rose 0.8 percent in April, building on strong growth in February and March. Nonetheless, excluding transportation, new durable goods orders were up less robustly, suggesting some broader weaknesses beyond the headline monthly figure. Moreover, new durable goods shipments declined 0.2 percent in April, even as the longer-term trend remains positive.

At the same time, regional Federal Reserve Bank surveys show a similar recovery for manufacturers, but also some easing in the latest data. Manufacturing activity in the Dallas Federal Reserve district has now expanded for 12 straight months, but the pace of growth for new orders, production, capacity and employment eased in May. The Richmond Federal Reserve’s report also observed a deceleration in sales growth; however, it also noted a pickup in shipments and hiring. Perceptions about the current business outlook were unchanged, even as conditions had improved from winter weather earlier in the year. Looking ahead six months, respondents in both Dallas and Richmond remain mostly upbeat, even if this enthusiasm was a bit weaker in May.

The two surveys also indicated a rise in pricing pressure expectations, consistent with other reports showing some higher raw material costs. Indeed, prices for personal consumption expenditures have risen 1.6 percent year-over-year, up from 0.9 percent in February and 1.1 percent in March. April’s increase stemmed largely from higher energy prices, with food costs also up modestly (but at a slower pace than the month before).

Speaking of consumer spending, Americans decreased their purchases by 0.1 percent in April following two months of healthy increases. Year-to-date, personal spending has grown 1.6 percent, with purchases up 4.3 percent over the past 12 months. Meanwhile, the two consumer confidence measures—one from the Conference Board and the other from the University of Michigan and Thomson Reuters—moved in opposite directions in May, even as they continue to reflect rising sentiment over the past few months, particularly since the government shutdown.

This week, the focus will be on jobs and trade. We will get new employment numbers for May on Friday, which we hope will build on April’s strong figures. Manufacturers have averaged just more than 13,000 workers per month since August, and the expectation is for job growth in the sector around 10,000 or so in May. The consensus forecast is for 215,000 additional nonfarm payroll workers for the month, suggesting decent hiring. On the international front, we will learn if manufactured goods exports can improve from the rather disappointing rates so far in 2014, up just 1.1 percent in the first quarter of this year relative to the same three months in 2013. Other highlights include new data on construction, factory orders, productivity and Purchasing Managers’ Index figures from the Institute for Supply Management.

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

percent change in real GDP - jun2014

Leading Economic Indicators Rose for the Third Straight Month

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The Conference Board said that the Leading Economic Index (LEI) rose 0.4 percent in April, increasing for the third straight month. The April figure extended the 1.0 percent growth experienced in the March, which had been the fastest pace of growth since last September. Over the past six months, the LEI grew 2.9 percent, which bodes well for future activity.

With that said, the increase in April stemmed primarily from improvements in building permits, favorable credit conditions, and the interest rate spread. Manufacturing activity provided a bit of a drag to the LEI for the month, with an unchanged pace for new orders and a reduced average workweek for production employees. Consumer confidence and the stock market provided only a negligible contribution to the index this time.

The Coincident Economic Index (CEI), which assesses current conditions, increased 0.1 percent in April, slower than the 0.3 percent paces seen in both February and March. Nonetheless, it also shows a rebound from weather-related softness in December and January. Industrial production, which decreased 0.6 percent in April, subtracted 0.08 percentage points from the CEI. The other contributors to the index were all positive, including nonfarm payrolls, personal income, and manufacturing and trade sales.

Meanwhile, the Chicago Federal Reserve Bank also said that economic activity slowed last month, with its National Activity Index (NAI) declining from 0.34 in March to -0.32 in April. The reduction in manufacturing production was a large factor in decrease for the month. The housing data improved but remain a drag on the NAI because the market remains below its historical averages. Employment was also a bright spot, with improvements in nonfarm hiring and a drop in the unemployment rate.

On the positive side, the three-month moving average for the NAI rose from 0.04 in March to 0.19 in April. This was a statistical shift resulting from dropping the very weak January data (due to winter storms) from the three-month average. Nonetheless, it indicates that the U.S. economy is growing above its historical average overall, even as the pace remains below what was measured in November of last year when the moving average was 0.34. It also tends to support the view that we have largely rebounded from weather-related softness.

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

Monday Report – May 5, 2014

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

With the U.S. economy growing just 0.1 percent in the first quarter of 2014, analysts need to ask themselves whether this was just an aberration—a function largely of winter-related slowness—or a sign of larger weaknesses. The preliminary real GDP data showed drags from business investment, net exports and the government. Consumer spending on services was the biggest positive, and durable and nondurable goods purchases were up marginally for the quarter. My view is that real GDP probably will be revised higher in future updates, particularly with other data showing rebounding activity in March.

Fortunately, other recent economic reports show the economy recovering from difficulties earlier in the year. Consumer spending picked up strongly in March, with pent-up demand for durable goods, such as automobiles, pushing up overall purchases. Along those lines, manufacturing construction spending and new factory orders were also higher in March, with the Dallas Federal Reserve Bank’s monthly survey mirroring other regional reports showing an increase in respondents’ outlook.

Nationally, manufacturing confidence appears to be rising, with the Institute for Supply Management’s (ISM) Purchasing Managers’ Index (PMI) rising from 53.7 in March to 54.9 in April, its highest point so far in 2014. Still, activity remains below the torrid pace at the end of last year. The ISM’s PMI values averaged 56.3 in the second half of 2013, with new orders and output averaging 61.8 and 62.6, respectively. As such, there is still room for improvement. One of the brighter spots in the ISM release was the increased pace of hiring, with the employment index jumping from 51.1 to 54.7. This suggested that more manufacturers were adding workers, which was progress from the slower rate the month before.

In fact, the sector has hired more than 13,000 additional employees on average each month since August, when manufacturing demand and output began gaining momentum last year. Since the end of 2009, manufacturers have created 623,000 new jobs, with 12.1 million workers total in April. In the larger economy, nonfarm payrolls increased by 288,000 for the month—well above the consensus estimate of around 220,000—and the unemployment rate fell sharply from 6.7 percent in March to 6.3 percent in April. Despite this progress, the unemployment rate’s decline was largely due to a significant drop in the labor force size. The participation rate returned to where it was in December, matching its lowest point since February 1978.

From its perspective, the Federal Reserve felt that the economy was getting better; yet, it continues to worry about elevated unemployment rates, reduced business investment and fiscal restraints. For that reason, the Federal Open Market Committee (FOMC) reported that it would keep its highly accommodative stance for the foreseeable future, with short-term rates effectively zero until likely sometime in 2015. Meanwhile, the Federal Reserve continued to taper its long-term and mortgage-backed securities purchases from $55 billion per month to $45 billion, as expected. On the positive side, inflationary pressures remain minimal, with the personal consumption expenditure deflator up just 1.1 percent year-over-year and below the FOMC’s stated target of 2 percent.

This week, the highlight will come tomorrow with the release of new international trade numbers. In the first two months of 2014, manufactured goods exports were below their pace of 2013. It will be important to see if the picture improves in the March data. Beyond trade, other highlights to watch include the latest reports on consumer credit, job openings, productivity and wholesale trade.

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

monthly employment changes - may2014

No Surprises in the FOMC Statement

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The Federal Reserve said that it would keep its “highly accommodative stance” according to its latest monetary policy statement, which mostly adhered to expectations. The Federal Open Market Committee (FOMC) continued to taper its long-term and mortgage-backed securities purchases from $55 billion per month to $45 billion, as anticipated. The winding down of the Fed’s quantitative easing measures have mostly been on auto-pilot since tapering began in December.

At the same time, the FOMC statement’s forward guidance continued to be more qualitative than quantitative, something that started at its March meeting. As such, the Fed no longer refers to an unemployment rate of 6.5 percent as a threshold for its short-term interest rate policy. The Fed will continue to pursue stimulative measures in the economy – with short-term rates near zero – until it sees sufficient economic progress. Such goals are consistent with the Fed’s “objectives of maximum employment and 2 percent inflation.” The statement says that it will keep rates low “for a considerable time after the asset purchase program ends,” particularly if long-term inflation stays below its two percent goal.

Regarding economic growth, the Fed notes recent progress from the winter-related slowdowns earlier in the year. While the FOMC participants see some improvement in the labor market, the unemployment rate “remains elevated” and a major concern. Reduced business investment and fiscal restraint were also challenges. On the positive side, pricing pressures remain minimal.

None of the FOMC participants dissented this time around. In March, Narayana Kocherlakota, the president of the Federal Reserve Bank of Minneapolis, did not support dropping the unemployment rate target from the Fed’s forward guidance. This was only the second time – the other time was in January – since June 2011 that there were no dissents in the FOMC statement.

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

The U.S. Economy Stagnated in the First Quarter of 2014

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The Bureau of Economic Analysis said that real GDP grew a paltry 0.1 percent in the first quarter of 2014, according to preliminary data. This was well below the 2.6 percent growth rate experienced in the fourth quarter of 2013, but it was also a significant disappointment from the 1.5 percent consensus expectation. Severe winter storms wreaked havoc with both consumer demand and overall business activity, and manufactured goods exports were very weak in both January and February. These factors were widely anticipated to have dampened economic growth in the first quarter, but those negative impacts were obviously larger than predicted.

To be fair, I would not be surprised if this figure is revised upward somewhat when the March data comes into clearer focus, which had already indicated a rebound from weather-related softness in the prior two months.

Digging into the first quarter data, there were drags on growth from business investment, net exports, and government. The largest positive was consumer spending (up an annualized 3.0 percent in the quarter), primarily from services (up 4.4 percent). Spending on both durable and nondurable goods was higher, but just barely (up 0.8 percent and 0.1 percent, respectively). Personal consumption expenditures added 2.04 percentage points to real GDP in the first quarter, with 1.96 percent coming from service-sector spending.

Meanwhile, reduced business investment subtracted 1.01 percentage points from real GDP. This stemmed from declines in residential and nonresidential investment and from changes in private-sector inventories. The data were down mostly across-the-board, with industrial equipment purchases and investments in intellectual property being the only positives. The 2.8 percent decrease in fixed investment represented the first decline in one year, essentially offsetting the 2.8 percent increase in the fourth quarter. As such, it highlights the need for stimulating more business investment moving forward, particularly if we are to have stronger growth for the year as a whole.

On the trade front, manufactured goods exports were 0.6 percent lower in January and February 2014 than in the same two months in 2013. (March data will be released next week.) Therefore, we had largely expected net exports to be weaker in the real GDP data. Indeed, goods exports subtracted 1.19 percentage points from growth in the first quarter, the largest drag on growth from the category in five years. Hopefully, export growth will pick up in the coming months, building on stronger growth in many of our key markets.

Government spending subtracted 0.09 percentage points from real GDP, an improvement from the nearly one percentage point loss at the end of last year. The prior quarter had been negatively influenced by the government shutdown, sequestration, and continuing budget uncertainties. In the first quarter, the largest drags came from public investments at the state and local level and from reduced federal defense spending.

Weather provides much of the explanation for why real GDP slowed to a crawl to begin the new year, particularly regarding consumer and business spending. But, you also get a sense that other weaknesses loomed large as well, dampening new housing activity and decreasing export sales growth. It’s a disappointment, as manufacturers ended 2013 with a lot of momentum, driven by strong demand and increased output.

Overall, these data show just how fragile the U.S. economy can be. While manufacturers remain mostly upbeat about the coming months, policymakers need to implement pro-growth measures to ensure that such optimism is well placed. That is especially true given today’s weak numbers.

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

Monday Economic Report – March 3, 2014

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

The U.S. economy grew 2.4 percent in the fourth quarter, down from the earlier estimate of 3.2 percent. Given some of the recent weaker manufacturing, retail and housing data, the downward revision was largely expected. Still, there are some positives in the report, with strength in consumer spending, business investment and net exports. Fixed investment was higher in this revision, which was welcome news. Federal government spending accounted for the biggest drag on growth during the fourth quarter, subtracting one percentage point from the total figure.

The bottom line is that real GDP increased 3.3 percent in the second half of 2013, providing some momentum for growth moving into this year. While weather and other factors have dampened the economy recently (and will also reduce real GDP in the current quarter), we still expect 3.0 percent growth for 2014. Manufacturers continue to be mostly upbeat about demand and production over the coming months.

Despite such optimism in the outlook for the year, the current environment for manufacturers clearly has its challenges. Weather has negatively impacted production and shipments in a number of regions around the country, and surveys from the Dallas, Kansas City and Richmond Federal Reserve Banks all observed some easing in activity in February. This followed similar reports from the New York and Philadelphia Federal Reserve Banks the week before. Meanwhile, the Census Bureau has reported lower new durable goods orders for two straight months, with poor weather conditions likely a factor, particularly for auto sales. At the same time, new durable goods orders excluding transportation were higher, suggesting that the broader manufacturing market was slightly better than the headline figure indicated.

Some of the other data remain mixed. New home sales were up sharply in January to their highest level since July 2008, but year-over-year growth was more modest, and inventories of new homes have fallen over the past few months. Nonetheless, the positive report on new home sales stands in contrast to much weaker residential construction figures of late, including housing starts and existing home sales, which have seen negative impacts from the weather. Similarly, the two major reports about consumer confidence moved in opposite directions, with the Conference Board’s measure lower in February and the University of Michigan’s figure edging slightly higher. Doubts about income and labor growth have possibly fed some anxieties in sentiment in both surveys, but the two reports differ in their findings about the economic outlook.

This week, the focus will be on manufacturing activity, employment growth and international trade. We will get February Purchasing Managers’ Index (PMI) data from the Institute for Supply Management (ISM) later this morning. After falling from 56.5 in December to 51.3 in January, the ISM PMI is expected to increase modestly, still indicating weaknesses in new orders and production for the month. On the trade front, we will be looking for better manufactured goods exports in 2014, improving on the modest 2.4 percent growth rate seen in 2013. Still, manufactured goods exports hit an all-time high last year, providing a positive for economic growth.

The biggest news of the week will come on Friday with the release of new jobs numbers. Nonfarm payroll growth has been soft over the past two months, with just 75,000 and 113,000 net new workers added in December and January, respectively. The consensus expectation is for roughly 165,000 nonfarm workers added in February. In contrast, manufacturing job gains have been fairly decent over the past six months, averaging 15,500 since August, and we should get modest gains again in February. One of the bigger conversation pieces will be whether the unemployment rate falls to 6.5 percent in February, which is the rate specified in the Federal Reserve Board’s forward guidance. (Either way, look for the Federal Open Market Committee to change its guidance at its next meeting.) Other highlights this week include the latest data on construction spending, factory orders, personal income and spending and productivity.

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

personal consumption - mar2014

Fed Minutes: Highly Accommodative Policies to Continue, Tapering Could Start “In Coming Months”

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The Federal Reserve released the minutes to the October 29-30 Federal Open Market Committee (FOMC) meeting, providing an inside look at the internal deliberations. As noted earlier, the FOMC made no changes to its monetary policy actions at the October meeting, continuing to purchase $85 billion in long-term and mortgage-backed securities each month. It also affirmed its goal of maintaining “highly accommodative” policies until the unemployment rate hits 6.5 percent and/or long-term inflation exceeds 2.5 percent. As such, this means that short-term interest rates will remain near zero percent throughout 2014, and perhaps into 2015.

Over the summer, the Fed had been expected to begin “tapering” (or reducing) its asset purchases by year’s end, with it widely anticipated to start at the September 17-18 meeting. Instead, the FOMC chose not to taper at that meeting, surprising the market. In making its decision, the Fed cited the political stalemate in Washington and the possibility of a government shutdown. Beyond that, it also wrote:

In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. Asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s economic outlook as well as its assessment of the likely efficacy and costs of such purchases.

The Fed has since insisted that a tapering decision was not pre-ordained, with any action being data dependent. Nonetheless, the Fed was widely criticized for miscommunicating its intentions, something that Chairman Ben Bernanke addressed at last night’s National Economists Club annual meeting. The threat of reducing asset purchases had sent long-term interest rates sharply higher, which he said was “neither welcome nor warranted.” Moreover, he added, “This change in expectations did not correspond to any actual lessening in the FOMC’s commitment or intention to provide the high degree of monetary accommodation needed to meet its objectives….”

The Fed’s forward guidance was discussed in both the FOMC minutes and Bernanke’s speech. Specifically, Bernanke noted that that 6.5 percent unemployment rate target was a “threshold” and not a “trigger.” In other words, the FOMC would begin debating a wind-down to its accommodative policies once the unemployment reached 6.5 percent, but one should not assume that the fed funds rate will automatically go up just because the threshold was reached. The Fed minutes make a similar point, with a couple participants pushing for an even lower target unemployment rate.

In the end, the FOMC voted to keep its policies in place without changing its forward guidance. The issue of accommodation remains a controversial one in the public and within the FOMC, with inflation hawks worried about longer-term inflation worries from current actions. Esther L. George, the president of the Kansas City Fed, dissented from the Fed’s statement for that reason. The minutes did reiterate that tapering was to begin “in the coming months,” but that is not likely to occur until probably early next year. The next FOMC meeting is on December 15-16.

Regarding the economy, the FOMC members found that the impacts of the partial government shutdown were “temporary and limited,” with several of them worrying about “the possible economic effects of repeated fiscal impasses on business and consumer confidence.” They were also disappointed with the September jobs numbers. Yet, they were encouraged  by the recent pickup in manufacturing activity, singling out strength in auto sales. While the economic projections for the short-term were slightly lower, the outlook for 2014 and 2015 currently calls for growth to accelerate. In September, the Fed had estimated growth of 2.9 to 3.1 percent real GDP growth for next year.

Chad Moutray is the chief economist, National Association of Manufacturers. He is a former president and chairman of the National Economists Club, where Bernanke gave the Herbert Stein Memorial Lecture.