The latest Federal Reserve Board Beige Book said that “economic activity [has] increased at a modest to moderate pace since the previous report.” Consumer spending and housing activity continue to be positive, with most of the Federal Reserve Districts reporting increases in both. Motor vehicle sales, in particular, have remained somewhat strong, helping to boost the economy with “moderate” increases nationally.

Interestingly, the Fed says that manufacturing activity “expanded in most Districts,” and it specifically mentioned a number of regions where this was the case. It is important to note that the Beige Book says it uses data collected before May 24, however since that date, we have seen a number of sentiment surveys from the regional Federal Reserve Banks showing weaknesses. These include contracting levels of activity in Dallas, New York, Philadelphia, and Richmond, and slower output in Chicago. At least some of these data points are mentioned in this write-up, particularly the “softening” seen in Philadelphia and Richmond. In the sector analysis section, the report also singles out strengths in construction-related manufacturing sectors due to improvements in housing and challenges in the defense industry pertaining to sequestration.

Meanwhile, employment growth remains sluggish. Specifically, the Fed writes, “Hiring increased at a measured pace in several Districts, with some contacts noting difficulty finding qualified workers.” Many of the Fed Districts noted an easing in employment growth, with the Boston Fed saying that “with only a few exceptions, businesses were not hiring much beyond replacement.” Yet, there were also areas where labor market conditions were tightening. For instance, the Minneapolis District reports the shortage of labor in the “oil boom area” of North Dakota and Montana. However, overall, wage pressures continue to be held in check.

On the topic of inflation, “Districts reported level to mild price increases.” While some manufacturers have been able to increase prices and certain raw material costs, pricing pressures, in general, remain under control. We have seen this in other reports, as well, including the most recent data on consumer and producer prices. Year-over-year prices have grown by less than two percent, the desired level stated by the Federal Open Market Committee of the Fed.

Chad Moutray is chief economist, National Association of Manufacturers.

The Federal Reserve kept its existing monetary policies in place at its latest Federal Open Market Committee (FOMC) meeting. This was largely expected. With the policy positions unchanged, the focus instead was on the language that the Fed used to describe economic conditions. In particular, the Fed said that the U.S. economy is “expanding at a moderate pace,” but it added that “fiscal policy is restraining economic growth.”

This latter point is a reference to higher payroll taxes, across-the-board federal budget cuts, and the continuing debate over how to resolve our nation’s fiscal challenges. Given the limitations of fiscal policy right now and lack of action from Congress and the Administration, the FOMC has felt that it needs to act to stimulate growth pursuant to its dual mandate of tackling both inflation and unemployment. With pricing pressures under control for the time being, the Fed is free to pursue highly accommodating policies.

Specifically, the Fed will continue to purchase $85 billion in mortgage-backed and long-term securities each month, helping to push down long-term interest rates. The Fed will continue to make these purchases until the unemployment rate reaches 6½ percent or until longer-term inflation consistently exceeds 2½ percent. In the event that either of these thresholds is reached, the FOMC would re-evaluate its current stance.

The minutes of the last FOMC meeting in March led many to believe that some voting members were open to scaling back these purchases if economic conditions improved in the coming months; however, it is widely expected that these purchases will continue at least until year’s end, if not longer. Note that the Fed’s most recent economic projections do not have the unemployment rate reaching 6.5 percent until the beginning of 2015.

As with previous statements, Esther L. George, the President of the Kansas City Federal Reserve Bank and a voting member of the FOMC this year, dissented. She remains “concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.” Ms. George is one of the “inflation hawks” who continues to worry about the long-term impact of the Fed’s stimulative policies.

Chad Moutray is chief economist, National Association of Manufacturers.

The Federal Reserve kept its existing monetary policy actions in place at its latest Federal Open Market Committee (FOMC) meeting, which was expected. Regarding the current state of the economy, the FOMC noted recent progress in many of the key economic indicators since its last meeting. At the January meeting, the Fed had noted a “pause” in activity largely related to Hurricane Sandy and the lead-up to the fiscal cliff. Specifically, the Fed’s current statement says the following:

Information received since the Federal Open Market Committee met in January suggests a return to moderate economic growth following a pause late last year. Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy has become somewhat more restrictive.

Inflationary pressures appear to be in-check, at least for now, with prices at or below the Fed’s stated 2 percent goal. This frees the FOMC to continue to pursue its highly accommodating policies. This means that the Fed will continue to purchase $85 billion in mortgage-backed and long-term securities each month, helping to push down long-term interest rates. The Fed will continue to make these purchases until the unemployment rate reaches 6½ percent or until longer-term inflation consistently exceeds 2½ percent. In the event that either of these thresholds is reached, the FOMC would re-evaluate its current stance. (continue reading…)

Below is the summary from this week’s Monday Economic Report:

The Federal Reserve noted the U.S. economy has seen some modest improvements during the past month, with a number of indicators highlighting this progress. Hurricane Sandy had an impact, both in slowing down activity in October and increasing it in November in its aftermath. Industrial production rose 1.1 percent in November, recovering from October’s 0.7 percent decline, with repairs from the storm possibly explaining at least some of these gains. Similarly, retail sales also rebounded for the month, led by strong auto sales and spending on appliances, building materials, furnishings and clothing. Lower petroleum costs also helped to ease Americans’ pocketbooks, with gasoline station sales down 4 percent in November on lower prices.

Despite the optimistic news on production and sales, major headwinds confront businesses and consumers. Manufacturing production remains 0.6 percent below July’s levels, a reflection of the weaker economic environment during the past few months. These headwinds mostly stem from uncertainties related to the fiscal cliff and the impact of a slowing global economy on international orders. The trade balance widened in October on reduced exports and imports. While year-to-date manufactured goods exports are higher than last year, they reflect significant easing in trade volumes, resulting from a weakened economic environment among our major trading partners. Meanwhile, in the United States, small business owner confidence plummeted last month on worries about the political environment and diminished expectations for sales, earnings, inventories and capital spending.

High unemployment rates and challenges to the U.S. and global economies are persistent worries for the Federal Reserve Board. The Federal Open Market Committee (FOMC) voted to purchase $85 billion in mortgage-backed and long-term securities each month in an effort to push down long-term interest rates and stimulate economic growth. Moreover, it will continue to do so until the unemployment rate hits 6.5 percent or forecasted inflation exceeds 2.5 percent. These economic indicator targets replace earlier language about maintaining these policies through mid-2015. Still, in practicality, the Fed does not expect the unemployment rate to reach 6.5 percent until 2015, according to its forecasts, suggesting that it will continue to pursue these policies for the foreseeable future.

The fact that inflation remains in-check, at least for now, facilitates the Fed’s willingness and ability to stimulate growth. Consumer and producer pricing data released last week back this up, with lower energy costs helping to ease cost pressures. Core consumer prices have risen 1.8 percent over the past 12 months, and manufacturing raw material costs—down 1.2 percent in November—have risen just 1.0 percent year-over-year. These rates are significantly lower than earlier in the year.

This week, we will learn more about regional manufacturing activity and housing. Surveys from the Kansas City, New York and Philadelphia Federal Reserve Banks—which all indicated a contraction last month—will likely show the sector continuing to struggle. Housing starts data, on the other hand, should continue to illustrate strength in the residential construction sector. Other highlights for the week include data on leading indicators, a second revision to GDP and personal spending.

Note: Due to the holidays, the next report will be released on Wednesday, December 26. There will be no report issued during the week of December 31. The schedule will resume on Monday, January 7, 2013.

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

The Federal Open Market Committee (FOMC), in its monetary policy statement, said that the economy and labor markets continue to expand “at a moderate pace” despite Hurricane Sandy and other challenges. With that said, the Fed noted that “business investment has slowed” and “economic growth might not be strong enough to generate sustained improvement in labor market conditions.”

There remain significant headwinds from slowing global growth and the fiscal cliff to warrant concern, with “significant downside risks to the economic outlook.

Therefore, the Fed will continue its policy of purchasing $40 billion in mortgage-backed securities each month to stimulate the economy. In addition, with the expiration of the “Operation Twist” objective, it will also purchase another $45 billion in long-term securities each month. This $85 billion in purchases each month will continue to push down long-term rates, something that has already brought mortgage rates to historic lows. This has helped to prop up the housing sector and allowed many Americans to refinance their mortgages for extra disposable income.

In its press release, the Fed says that inflation remains under control for now, with core prices at or below its stated target of 2 percent. Nonetheless, it will continue to monitor pricing pressures moving forward, adjusting its stance as needed. (continue reading…)

Below is the summary from this week’s Monday Economic Report:

The U.S. economy grew 2.7 percent during the third quarter, faster than originally thought. This news was mixed for manufacturers. On the one hand, consumer spending, improvements in residential construction and net exports boosted overall growth. In addition, end-of-fiscal-year government spending (particularly from defense) contributed roughly one-quarter of the increase in real GDP for the quarter—something unlikely to be repeated anytime soon. With lower discretionary spending and the possibility of budget sequestration, the government will be a drag on growth. Fixed investment fell, with slowing sales and uncertainties about the looming fiscal cliff weighing heavily on business leaders’ minds. This should indicate real GDP growth closer to 2 percent in the fourth quarter.

The other economic highlights from last week supported this contrasted assessment, with increased consumer confidence and holiday spending somewhat offset by manufacturing weaknesses. The Beige Book reported that the economy was growing at a moderate pace while also citing softness among many manufacturers. The Chicago, Dallas and Kansas City Federal Reserve Banks reported declines in manufacturing activity, with the latest Institute for Supply Management (ISM)-Chicago survey showing contracting new orders. The Richmond Fed bucked this trend with improving sales, production and shipments and a more positive outlook. Yet, hiring expectations remain sluggish.

Advanced durable goods orders were unchanged in October; however, aircraft and auto sales declined. Outside of transportation, new orders would have risen 1.5 percent, indicating sales figures that were positive than at first glance. Consumer spending fell in October, but there are signs of progress since then. According to the National Retail Federation, the first reports of holiday spending have had modest growth over last year. The Conference Board reported that consumer confidence rose to its highest point since early 2008.

Today, the ISM will release Purchasing Managers’ Index data for the U.S. manufacturing sector. It is expected to show a slight uptick in activity, continuing the slow growth that we have seen in the past two surveys. The big news, however, will come on Friday with the announcement of November’s employment numbers. The consensus estimate is for roughly 100,000 net new non-farm payroll jobs, with weak growth in manufacturing employment.  Other data highlights for the week include updates on consumer credit, construction spending, labor productivity and vehicle sales.

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

The Federal Reserve’s Federal Open Market Committee (FOMC) has decided to pursue additional monetary stimulus to prop up a struggling U.S. economy. Specifically, it will purchase $40 billion in mortgage-backed securities each month for an undisclosed time period. This will be in addition to its already existing policy of reinvesting principal payments in mortgage-backed securities.

The goal of doing this is simple. The Fed wants to “put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.” Already, the Fed’s actions have pushed mortgage rates to historic lows, helping to improve a still-depressed housing market.

The Fed also decided to extend its guidance regarding long-term interest rates. It is now specifically stating that it will strive for “exceptionally low” interest rates through mid-2015. It had been saying as much through the end of 2014.

In choosing to do another round of quantitative easing (QE), the Fed is reacting to slowing domestic and global economic growth. Market-watchers had widely anticipated a third round of QE (QE3), making today’s announcement less dramatic. In describing the current economic environment, the Fed’s statement said:

The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions.  Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook.  The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.

The latter comment is a reference to moderate inflation levels, which are mostly in-line with the Fed’s stated target. The Fed has a statutory dual mandate to “foster maximum employment and price stability.” With weak – and slowing – economic activity and modest price growth, the Fed feels that it has some leeway to pursue additional accommodative measures. (continue reading…)

The Federal Reserve’s Federal Open Market Committee (FOMC) continued its efforts to keep long-term interest rates low, as announced in its statement issued this afternoon. In particular, the Fed will extend “Operation Twist,” which seeks to rebalance the Fed’s portfolio toward long-term – especially mortgage-backed – securities. The statement from the New York Federal Reserve Bank, which conducts trades for the Federal Reserve Board, said, “The continuation of the maturity extension program will proceed at a current pace and result in the purchase, as well as the sale and redemption, of about $267 billion in Treasury securities by the end of 2012.”

The FOMC made this action because the pace of economic growth has slowed somewhat in the past couple months. While the U.S. continues to see “modest” growth, employment growth and household spending appear to be easing. On the positive side, Americans are benefiting from lower prices due largely to lower energy costs, and the housing market continues its slow ascent upward (even as it remains depressed overall).

Some analysts felt that slower economic growth warranted another round of quantitative easing to help stimulate economic growth. The Federal Reserve has a dual mandate to “foster maximum employment and price stability.” But, it was not clear that the economy needed that, and in the end, the Fed opted to simply extend Operation Twist. Even that, though, was too much for Jeffrey Lacker, the President of the Richmond Federal Reserve Bank and a well-known “inflation hawk.” He dissented from the FOMC’s policy action, as he “opposed continuation of the maturity extension program.”

Much of the rest of the language in the Fed’s statement was similar to past iterations. For instance, the Fed will continue to strive for “exceptionally low” interest rates through late 2014. The Fed feels that inflationary pressures will remain “subdued” until then, allowing it to continue to pursue other options to stimulate growth.

Updated: While the Fed anticipates core inflation of between 1.7 and 2.0 percent this year, its latest economic projections show reduced economic growth and higher estimates for unemployment. It now expects for real GDP to grow between 1.9 and 2.4 percent in 2012, down from the 2.4 to 2.9 percent range predicted in April. In addition, the unemployment rate should be between 8.0 and 8.2 percent by year’s end, up from 7.8 to 8.0 percent.

As with past forecasts, the unemployment rate is expected to remain elevated. In 2014, it should range between 7.0 and 7.7 percent, higher than the 6.7 to 7.4 percent range seen three months ago. Real GDP should grow 2.2 to 2.8 percent in 2013 and 3.0 to 3.5 percent in 2014, according to the Fed’s latest analysis.

Chad Moutray is chief economist, National Association of Manufacturers.

 Two narratives dominated last week’s economic discussion. First, as the Beige Book from the Federal Reserve Board stated, the economy “continued to increase at a modest to moderate pace in January and early February.” In his congressional testimony, Chairman Ben Bernanke was also quick to cite the important role that manufacturing has played in the recent rebound, with higher levels of activity reported in most areas of the country. Indeed, regional surveys from the Dallas and Richmond Federal Reserve Banks observed greater production activity and increased optimism for the next six months.

This upbeat assessment is shared by business economists at the National Association for Business Economics, who see a stronger outlook. Their consensus estimates for real GDP growth for this year and next are 2.4 percent and 2.8 percent, respectively. Adding to this sentiment, the Bureau of Economic Analysis (BEA) revised its estimates for fourth quarter 2011 growth up from 2.8 percent to 3 percent, led by increased consumer spending and business inventory accumulation. BEA also reported modest growth in personal income and spending for January, with strong gains in durable goods purchasing. Consumers, too, are more confident, according to the Conference Board, with their sentiments about the current and future economy at their highest level since this time last year.

In contrast to the more positive tone of many of these studies, the second narrative of last week focused on a series of indicators that unexpectedly declined. Most of us were anticipating growth for the Institute for Supply Management’s purchasing managers index, but it declined from 54.1 in January to 52.4 in February. This was led by a slower pace of growth for new orders, with production and employment also easing. Likewise, the Census Bureau reported reduced durable goods orders and construction spending in January.

In each of these cases, the longer-term trend remains a positive one and is in line with the first narrative. November and December figures were sharply higher, and so it might be expected to have some easing afterwards. Growth should resume in the coming months, especially as industrial production should grow around 4 percent this year. Even with that said, it is also clear that manufacturers are closely watching the events of Europe, once-again resurgent energy and raw material prices, and policy actions stemming from Washington. They remain cautious that one of these headwinds might derail growth, even with higher optimism overall.

This week, everyone will be focused on Friday’s jobs numbers. With 82,000 net new jobs created in the past two months, I anticipate continued improvements in employment for the sector, but perhaps not as large as were seen in November and December. Other key indicators of note include the release of revised productivity data on Wednesday and international trade findings on Friday.

Chad Moutray is chief economist, National Association of Manufacturers.

Mirroring other economic indicators, the Federal Reserve Board’s Beige Book highlights “modest to moderate” growth in activity in recent months. It says, “Compared with prior summaries, the reports on balance suggest ongoing improvement in economic conditions in recent months, with most Districts highlighting more favorable conditions than identified in reports from the late spring to early fall.”

The report says manufacturing activity has picked up in most districts. According to their analysis, “The strongest reports came from subsectors such as heavy equipment manufacturing and steel, for which demand has been boosted by robust growth in the energy, agricultural, and auto manufacturing sectors.” Another positive for manufacturers has been the increase in consumer spending, which was driven largely by holiday sales. Export growth for manufactured goods has also been largely a positive.

There were exceptions to the trend of higher manufacturing activity, though, including some districts which were “stable” (Cleveland, Richmond and Dallas) or slightly declining (Kansas City). For instance, lower demand continues to be a challenge for manufacturers tied to the housing sector, and supply issues persist for some sectors because of the recent flooding in Thailand.

Pricing pressures, which have been a major challenge for manufacturers over the past year due to elevated energy and raw material costs, have eased somewhat. Price and wage increases have been limited. With that said, higher health benefit costs were cited as one compensation cost that was squeezing many employers.

This report is largely consistent with the last Beige Book release. While economic growth remains sub-par overall, there have been a number of modest improvements lately to say that the domestic environment is getting better. Still, the Fed continues to watch the developments in Europe and domestically very closely, as there continue to be a number of potential risks out there which could derail what progress has been made.

Chad Moutray is chief economist, National Association of Manufacturers.