economic outlook

regional Fed

Kansas City Fed: Manufacturing Activity Continued to Decline in April, but the Outlook Improved

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The Kansas City Federal Reserve Bank said that manufacturing activity continued to decline in April, contracting for the 14th straight month. Reduced crude oil prices, the strong dollar and weaknesses abroad have pressured the sector’s performance, especially since the district includes energy-intensive Oklahoma. With that said, the pace of decline slowed for production (up from -14 to -8), shipments (up from -15 to -6), exports (up from -10 to -4) and the average workweek (up from -10 to -6). New orders remained slightly negative (unchanged at -2), and hiring continued to lag behind (unchanged at -12). Despite the negative seasonally-adjusted figure, one-third of respondents had increased new orders for the month, with 29 percent citing declines.

Meanwhile, the forward-looking data composite index returned to positive territory, up from -2 in March to 10 in April, its highest level in 14 months. Indeed, manufacturers in the Kansas City Fed’s district appeared to be more upbeat in April, with greatly-improved assessments for future orders (up from zero to 20), production (up from 5 to 25) and shipments (up from 5 to 27). More than 40 percent of those completing the survey expected increases in each of those three activities over the next six months. In addition, more respondents expect increased employment (up from 1 to 8) and a longer average workweek (up from 3 to 8), with modest gains seen in the labor market. Nonetheless, it was not all good news. Exports (up from zero to 1) were anticipated to remain marginally positive over the coming months, and capital expenditures (up from -9 to -6) were expected to continue to contract.


The U.S. Economy Had Sluggish Start to 2016

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The Bureau of Economic Analysis said that the U.S. economy grew just 0.5 percent in the first quarter of 2016, signifying a sluggish start to the year. This was slightly below the consensus estimate of real GDP growth of 0.7 percent, and it was down from 1.4 percent growth in the fourth quarter of 2015. In many ways, the data for the first quarter mirrored the trends seen in the prior report, with drags on growth coming from fixed business investment and net exports. Consumer spending on goods was the difference-maker in this release.  While personal consumption continued to be one of the brighter spots, adding 1.27 percentage points to headline GDP growth, that increase stemmed almost entirely from spending on services. The gain from goods spending was negligible – adding just 0.03 percentage points. This finding is consistent with the disappointing retail sales numbers observed year-to-date, particularly for durable goods, and it was another sign that Americans have pulled back on their purchases as a result of anxieties in the economic outlook. Read More

Federal Reserve Leaves Rates Unchanged, as Expected, Signaling Caution Moving Forward

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The Federal Reserve left short-term interest rates unchanged, as expected, at the conclusion of the Federal Open Market Committee (FOMC) meeting. In its statement, the FOMC acknowledged that “economic activity appears to have slowed” despite progress in some areas, most notably in the labor market. As such, it left the federal funds rate at the ¼ to ½ percent target range that it established at its December meeting. More importantly, participants appear to not be a hurry to raise rate, expressing some caution moving forward. They write, “The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the long run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

At their prior meeting, the economic projections signaled two interest rate increases in 2016, each by 25 basis points. By itself, that was an admission that economic conditions no longer warranted four rate increases this year – the stated goal coming into 2016. The consensus among most economist had been for the FOMC to hike interest rates again at its June 14–15 meeting. That could still happen, but that will hinge on better data coming in between now and then. Hopefully, improvements in the broader economy would include manufacturing, which continues to lag other segments. With that said, this press release would seem to indicate that a June rate increase just became less likely.

Kansas City Federal Reserve Bank President Esther L. George dissented in her vote. She has established herself as an inflation hawk, and she would have preferred for the FOMC to have raised the federal funds rate to ½ to ¾ percent at this meeting.

Richmond Fed: Manufacturing Activity Expanded for the Second Straight Month in April

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The Richmond Federal Reserve Bank said that manufacturing activity expanded for the second straight month in April. The composite index of general business activity declined from 22 in March to 14 in April. More importantly, the relatively strong data seen in this report are consistent with some stabilization in activity following significant softness over the course of the past year. For instance, new orders (down from 24 to 18) and shipments (down from 27 to 14) each expanded strongly in April despite some easing in the pace of growth in this latest report. Capacity utilization (up from 17 to 18) accelerated slightly in April, its highest point since December 2010. In addition, the labor market variables continued to grow modestly, with some pullback for the month, including hiring (down from 11 to 8) and the average workweek (down from 16 to 9). Read More

durable goods

New Durable Goods Sales Rebounded Somewhat in March, but Weaker Than Expected

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The Census Bureau said that new durable goods orders increased by 0.8 percent in March, rebounding somewhat after the 3.1 percent decline seen in February. This was weaker-than-expected, with a consensus expecting a gain of 1.8 percent. Sales of new durable goods orders rose from $228.9 billion in February to $230.7 billion in March. Overall, demand remains quite soft, with the sector challenged by global headwinds and lingering anxieties in the economic outlook. Order volumes have been highly volatile from month-to-month over the course of the past year, with sales trending lower since peaking in 2015 at $241.0 billion in July. On a year-over-year basis, new durable goods orders have fallen 2.5 percent, down from $236.7 billion in March 2015. Even with transportation equipment sales excluded, year-over-year growth declined by 1.4 percent, with orders down 0.2 percent for the month, highlighting the broad-based softness of demand for durable goods over the past 12 months. Read More

Dallas Fed: Despite Negative Current Outlook, Texas Manufacturing Activity Picked Up in April

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The Dallas Federal Reserve Bank reported mixed news on Texas manufacturing activity in April. The composite index of general business conditions remained mired in negative territory, down from -13.6 in March to -13.9 in April. It was the 16th straight month with respondents having a negative outlook about the current economic environment. The sample comments mostly echoed these sentiments, highlighting ongoing challenges in the market. Yet, beyond the headline number, the data were more encouraging, suggesting some stabilization in activity in April. Indeed, measures for new orders (up from -4.8 to 6.2), production (up from 3.3 to 5.8), shipments (up from 0.3 to 7.1), capacity utilization (up from 3.3 to 8.2) and capital expenditures (up from -0.9 to 1.6) each accelerated for the month. To illustrate this progress, 30.1 percent of respondents cited increased new orders in April, up from 23.8 percent saying the same thing in March. Read More

Philly Fed: Manufacturing Activity Declined Again in April after Rebounding in March

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The Federal Reserve Bank of Philadelphia said that manufacturing activity declined again after rebounding in March. The composite index of general business activity fell from 12.4 in March to -1.6 in April. As such, the headline number has now been negative in seven of the past eight months, suggesting that manufacturers continue to struggle from recent economic weaknesses. In April, that was most evident in the new orders (down from 15.7 to zero) and shipments (down from 22.1 to -10.8) data, with demand stagnating and shipments plunging. Indeed, the percentage of respondents saying that their orders had increased in the month decreased from 36.7 percent in March to 22.9 percent in April, illustrating the shift in this month’s report. Read More

Business Economists Noted Slower Growth in Sales in Latest Business Conditions Survey

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The National Association for Business Economics (NABE) said that sales growth fell to its lowest level in seven years. In the latest Business Conditions Survey, the net rising index for sales dropped sharply from 32 in January to 4 in the latest survey, its smallest reading since April 2009. The percentage of respondents suggesting that their sales had fallen over the past three months rose from 15 percent in the last report to 25 percent this time, with 41 percent of goods-producing firms citing reduced sales. As a result, the net percentage saying that their profits were rising dropped from zero in January to -5 percent in April. With that said, businesses were cautiously optimistic about activity improving over the next three months, with 46 percent anticipating rising sales and 31 percent predicting improved profit margins. Read More


Manufacturing Production Growth Disappointed in March

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Much of the recent data regarding manufacturing output and demand has reflected improvements, with signs of possible stabilization in the market. This included better data in this morning’s Empire State Manufacturing Survey, mirroring other sentiment reports. That makes the latest data on manufacturing production even more disappointing. The consensus expectation had been for a slight gain of 0.1 percent in March for manufacturing output; instead, production in the sector declined by 0.3 percent. In addition, February’s data were revised lower, down from the prior estimate of an increase of 0.2 percent to a decline of 0.1 percent. (The Federal Reserve conducted a new annual revision to reflect seasonal adjustments, and all of the data were revised with this release.) The bottom line was that manufacturing production grew just 0.4 percent over the past 12 months in March, down from 0.8 percent in February. Manufacturing capacity utilization was also lower, down from 75.4 percent to 75.1 percent, its lowest level in nearly two years. Read More

GDP forecast

Fourth Quarter 2015 Real GDP Revised Higher at 1.4 Percent Growth

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The Bureau of Economic Analysis said that real GDP growth grew 1.4 percent at the annual rate in the fourth quarter. This was higher than the prior estimates of 0.7 percent and 1.0 percent. This latest revision reflected improvements in spending on services and growth in exports, but inventory spending was slower than in the most recent data release. Here are some trends in the data of note:

  • Personal consumption expenditures added 1.66 percentage points to real GDP growth in the fourth quarter, increasing 2.4 percent at the annual rate. The bulk of that contribution came from services, which added 1.30 percent to the headline figure, especially from spending on food services, health care and recreation. In contrast, spending on durable and nondurable goods eased from growth rates seen in the third quarter, suggesting that consumers were holding back in the fourth quarter from making larger purchases.
  • Businesses were also holding back on capital spending. Nonresidential fixed investment subtracted 0.27 percentage points from real GDP in the fourth quarter, with decreased spending on equipment, intellectual property products and structures. Slower inventory spending was also a factor, subtracting 0.22 percentage points. In contrast, residential investment rose by an annualized 10.1 percent in the fourth quarter on strength in the housing market, adding 0.33 percentage points. As a whole, gross private domestic investment served as a drag on real GDP growth, reducing the headline figure by 0.16 percentage points.
  • Net exports were also a drag on growth, subtracting 0.14 percentage points from real GDP in the quarter. Goods exports declined by 5.4 percent at the annual rate in this report; whereas, goods imports were off by 1.3 percent. These data illustrate the significant headwinds faced by manufacturers from the strong dollar and sluggish economic growth in key markets. Indeed, U.S.-manufactured goods exports fell 6.1 percent last year.

Overall, demand and output remain significantly challenged in the manufacturing sector, and business leaders remain nervous in their economic outlook. The current expectation is for real GDP to increase by 2.1 percent in 2016, with manufacturing production up 1.5 percent.