Tag: federal reserve

Monday Economic Report – August 25, 2014

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

Market leaders continue to play the guessing game of when the Federal Reserve Board will start to normalize short-term interest rates. Conventional wisdom suggests that the Federal Open Market Committee (FOMC) will begin to raise the federal funds rate sometime in 2015 from the near-zero levels that have been prevalent since the financial crisis in 2008. The Federal Reserve has already announced that it will cease purchasing long-term and mortgage-backed securities in October. In the July FOMC meeting minutes, participants noted recent improvements in the economy, including increased activity among manufacturers (see below). Most notably, they said the following regarding monetary policy over the next few months:

“…many participants noted that if convergence toward the Committee’s objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated.”

That line, which was widely reported in the media, was seen as hawkish. Indeed, financial markets saw that statement as a sign that short-term rates might rise sooner than expected, perhaps as early as the first quarter of 2015. In her keynote speech at a Kansas City Federal Reserve economic symposium at Jackson Hole, Wyoming, Federal Reserve Chair Janet Yellen reiterated this point, noting the role that upcoming economic data will have on the timing of policy normalization. She cited continued “slack” in labor markets, but also highlighted positive developments more recently. Either way, it remains true that monetary policy will remain highly accommodative for the foreseeable future, with short-term rate hikes (whenever they occur) being gradual. Recent data on consumer and producer prices have shown inflationary pressures easing a bit, even as they remain near the Federal Reserve’s stated target of 2 percent.

Meanwhile, economic data released last week suggest that the manufacturing rebound that we have seen since the winter continues to strengthen. The Markit Flash U.S. Manufacturing Purchasing Managers’ Index (PMI) increased sharply, up from 55.8 in July to 58.0 in August, reaching its highest level since April 2010. The indices for new orders and production were both above 60, suggesting strong growth and closely mirroring similar data from the Institute for Supply Management (ISM). The Philadelphia Federal Reserve Bank’s manufacturing survey also reported healthy gains in August, with activity growing at its fastest pace in more than three years, and respondents were very upbeat in their assessment of the next six months. Still, if there are any weaknesses of note, it would be overseas. Manufacturing demand and output were softer in both China and Europe, for instance.

The housing market also appears to be faring better of late, recovering somewhat from the lull that we saw earlier in the year. Housing starts jumped 15.7 percent in July, offsetting significant declines in both May and June. Starts reached their second-highest pace since November 2007, with an annualized 1,093,000 units in July. Both single-family and multifamily construction activity were higher for the month, and housing permits also reflected progress. In addition, existing home sales also notched improved figures in July, with activity up for the fourth straight month. Overall, this is encouraging news for residential construction. We would expect a solid 1.1 million housing starts at the annual rate by year’s end, representing slow-but-steady progress.

This week, we will get an update on second-quarter real GDP, with consensus expectations calling for a slight downward revision from the 4.0 percent growth rate estimate announced in late July. The new figure would still represent a rebound from the first quarter’s decline of 2.1 percent. We will also see if regional activity continues to expand in the August manufacturing surveys from the Dallas, Richmond and Kansas City Federal Reserve Banks, mirroring what we have seen in the similar New York and Philadelphia Federal Reserve reports. Other highlights include the latest data on consumer confidence, durable goods orders and personal income and spending.

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

markit us pmi - aug2014

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Consumer Inflation Eased Slightly in July, but with Prices Up 2 Percent in the Past 12 Months

The Bureau of Labor Statistics said that consumer prices increased 0.1 percent in July, its slowest pace in 6 months. Nonetheless, food prices continue to rise, up 0.4 percent in July. The price of food purchased for the home has risen 2.2 percent year-to-date, or 2.5 percent in the past 12 months. The bulk of this increase has come from meats, eggs, shellfish and fresh produce. For instance, consumers have spent 9.3 percent more year-over-year on meats (e.g., beef and veal, pork, poultry and fish and seafood), with an increase of 0.4 percent for the month, mirroring the headline figure.

In contrast, energy prices have eased, mirroring producer price data released last week. Consumers have benefited from lower prices for natural gas and petroleum. For instance, the cost of West Texas intermediate crude oil declined from a recent peak of $107.95 per barrel on June 20 to $98.23 on July 31. The consumer price index data suggest that energy prices fell 0.3 percent in July. At the same time, energy expenses have risen 1.2 percent over the past 12 months, largely from higher costs for the home.

Excluding food and energy, consumer prices were up 0.1 percent, matching the increase seen the month before. Higher prices for apparel, medical care, new motor vehicles and shelter were somewhat offset by reduced costs for transportation services and used cars and trucks.

Overall, the consumer price index rose 2.0 percent from July 2013 to July 2014, its fourth straight month with an inflation rate of 2.0 percent or more. With that said, it represents an easing from the 2.1 percent paces seen in May and June. The core inflation rate – which excludes food and energy – has been 1.9 percent for three consecutive months.

While core pricing pressures have accelerated from earlier in the year, they appear to be stabilizing somewhat this summer. That should be good news for the Federal Reserve, which has targeted 2.0 percent in its stated goals. Still, the Federal Open Market Committee will closely watch to see how pricing pressures develop in the coming months, particularly as it prepares to start normalizing short-term rates in early 2015.

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

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Despite Higher Food Producer Prices in July, Overall Inflationary Pressures Eased Slightly

The Bureau of Labor Statistics said that producer prices for final demand goods and services increased 0.1 percent in July, slowing from the 0.4 percent gain seen in June. Specifically, producer prices for final demand goods were unchanged for the month, with food prices up 0.4 percent but energy costs down 0.6 percent. The increase in food costs stemmed largely from higher prices for meats and shellfish; however, there was some relief from recent price gains for produce. On the energy side, producers have benefited from lower prices for natural gas and petroleum of late. For instance, the cost of West Texas intermediate crude oil declined from a recent peak of $107.95 per barrel on June 20 to $98.23 on July 31.

Beyond food and energy, core prices for final demand goods rose 0.2 percent in July. The largest increases were seen in apparel for women, girls and infants; commercial furniture; industrial chemicals; light motor trucks; pharmaceuticals; and transformers and power regulators. These were offset somewhat by declines in prices for floor coverings, gold and platinum jewelry, pet food, sanitary paper products, tires and x-ray equipment.

On an annual basis, producer prices for final demand goods and services rose 1.7 percent over the past 12 months. This was down for the third straight month, off from the 2.1 percent pace observed in April. Likewise, core inflation – which excludes food and energy costs – increased 1.6 percent over the past 12 months, down from 2.0 percent in May.

Overall, this suggests that inflationary pressures have eased slightly over the past couple months. While we have seen some acceleration in producer prices since the beginning of the year, costs remain below the Federal Reserve’s stated threshold of 2 percent. This indicates the inflation remains in-check, at least for now, and the recent deceleration should ease the pressure on the Federal Open Market Committee to expedite its plans to normalize rates. Of course, the final decision to raise short-term rates will hinge on economic data in the months to come.

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

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Consumer Prices Ease a Bit in June, Still Reflect an Acceleration in the Second Quarter

The Bureau of Labor Statistics reported that consumer prices increased 0.3 percent in June, easing a bit from the 0.4 percent growth rate seen in May. Still, it is clear that prices have accelerated in the second quarter, led by higher food and energy costs. The annualized rate of growth in the second quarter was 3.5 percent, a substantial jump from the 1.8 percent annual pace seen in the first quarter. Of course, this figure perhaps overstates the significance of the last three months, with the consumer price index up 2.1 percent over the past 12 months. Even there, though, the year-over-year rate has jumped from being just 1.1 percent in February.

In the June data, the largest jump in consumer prices came from energy, up 1.6 percent for the month and building off of the 0.9 percent increase in May. Indeed, the price of West Texas intermediate crude has increased from an average of $97.63 per barrel in December to $100.80 in March to $105.79 in June. Much of the latest rise in prices has stemmed from Middle Eastern turmoil, particularly in Iraq at that time. Energy costs have risen 2.8 percent in the past three months alone, primarily from higher gasoline prices.

Meanwhile, food prices were up 0.1 percent, its slowest pace of growth in four months. In fact, prices of food for the home were unchanged in June, the first non-positive growth figure in six months. Higher prices for meats and eggs were offset by some easing in the costs of bakery items, cereals, dairy products and fruits and vegetables. Nonetheless, the cost of food for the consumer has risen 1.8 percent over the past six months, something that Americans are bound to notice in the grocery aisle.

Outside of food and energy, core consumer inflation decelerated in June to 0.1 percent growth in June. Over the past 12 months, core consumer prices have risen 1.9 percent, unchanged from May but up from 1.6 percent in January. In June, the largest increases were seen in airfare, apparel, housing, medical care and tobacco.

While pricing pressures have definitely picked up in the second quarter, the year-over-year pace still remains mostly in-line with the Federal Reserve Board’s stated goals. They will no-doubt continue to watch inflation numbers closely, but the Federal Open Market Committee (FOMC) is unlikely to deviate from its current monetary policy trajectory at next week’s meeting.

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

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Business Economists Anticipate 2.5 Percent Growth in Real GDP in 2014

Economists with the National Association for Business Economics (NABE) expect the economy to pick up in the second half of this year. Yet, overall estimates for growth for 2014 as a whole have fallen over the course of the past few months, with activity starting off somewhat disappointing in the first quarter. Economists now estimate real GDP growth of 2.5 percent for this year, down from 2.7 percent in the March survey and 2.8 percent in the December survey. This implies growth exceeding 3 percent in each of the remaining three quarters this year. In addition, survey respondents anticipate 3.1 percent growth in 2015.

Looking at the manufacturing sector, business economists expect industrial production to accelerate this year, with current estimates of 3.7 percent for 2014. That would be an improvement from the 3.2 percent growth rate forecasted three months ago. These results are consistent with the mostly upbeat data seen in the latest NAM/IndustryWeek Survey of Manufacturers, which predicted 4.0 percent growth in manufacturing output through the end of this year and sales rising at their fastest pace in two years.

In terms of auto production, light vehicle sales should rise from an average of 15.5 million annualized units in 2013 to 16.1 million and 16.5 million in 2014 and 2015, respectively. Meanwhile, housing starts are anticipated to grow rapidly, particularly next year, up from an expected 1.03 million in 2014 to 1.30 million in 2015. Capital spending should improve, as well, with relatively healthy gains for fixed investments in nonresidential structures, equipment and software, and intellectual property products.

Labor market growth has picked up since the last survey, not unlike the data seen in the most recent jobs report. Those taking the survey predict that nonfarm payrolls will average 209,000 per month in 2014, up from 188,000 each month in the last survey. With that said, business economists still predict a slow decline in the unemployment rate, averaging 6.2 percent this year.

A number of special questions focused on the Federal Reserve Board and monetary policy. Over ninety percent felt that the Fed would end its asset purchase program by year’s end, with the vast majority feeling that it would end in the fourth quarter. Similarly, 86 percent felt that short-term rates would rise in 2015, with over half anticipating the federal funds rate to increase in the second half of next year. In terms of global worries, the majority of respondents feel that the Russia/Ukraine crisis will hurt growth in Europe (84 percent) and that China will face a debt crisis in the next few years (51 percent). At the same time, nearly half suggest that deflationary concerns will hinder the economic recovery in Europe.

Chad Moutray is the chief economist, National Association of Manufacturers. Note that he was one of the panelists for the NABE Outlook Survey. 

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Producer Prices Move Higher, Particularly for Food, But Core Inflation Remains In-Check for Now

The Bureau of Labor Statistics said that producer prices for final demand goods and services increased 0.6 percent in April, building on the 0.5 percent gain of March. April’s increase was the fastest pace of monthly input price growth since February 2013. The bulk of the jump in producer prices over the past two months has stemmed from higher food costs, which rose 1.1 percent  and 2.7 percent, respectively, in March and April. The largest increases were in meat and dairy prices. Indeed, the cost of final demand food goods have increased a whopping 5.1 percent year-to-date.

Meanwhile, energy costs edged slightly higher in April, up 0.1 percent, following a 1.2 percent decline in March. Over the course of the first four months of 2014, final demand energy costs have fallen by a very modest 0.2 percent, with year-over-year growth of 3.8 percent. For the most part, energy costs have mostly stayed in-check so far this year overall.

Excluding energy and food, core producer prices for final demand goods rose 0.3 percent.  Some notable price increases in April included costs for light motor trucks and textile machinery and equipment. In contrast, there were decreases in the costs for floor coverings, oil field and gas field machinery, silverware and hollowware, tires, among others.

The bottom line is that core inflation remains relatively minimal despite increased producer prices in March and April, particularly for food items. On a year-over-year basis, core producer prices for final demand goods (which exclude energy and foods items) was 1.5 percent in April, up from 1.2 percent in March. Core input prices have remained below the Federal Reserve’s threshold of 2 percent for 23 straight months. This allows the Federal Open Market Committee to continue its accommodative measures to stimulate the economy.

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

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Higher Gasoline Costs Push Consumer Prices Up 0.3 Percent in December

The Bureau of Labor Statistics reported that consumer prices rose 0.3 percent in December, its fastest pace since June. The consumer price index had declined 0.1 percent in October and was unchanged in November. On a year-over-year basis, we have seen a pickup in consumer price inflation over the past couple months, up from 0.9 percent in October to 1.2 percent in November to 1.5 percent in December. Core inflation, which excludes food and energy costs, was 1.7 percent in December for the fourth consecutive month.

In essence, price increases continue to be in the acceptable range, with the annual pace of inflation remaining below the Federal Reserve’s stated goal of 2 percent. Year-over-year consumer prices have remained below 2 percent each month since February 2013. A similar finding was noted in yesterday’s producer price index release.

Nonetheless, December’s data did reflect a modest increase, with a 3.1 percent increase in gasoline prices pushing the consumer price index higher. Indeed, the monthly average for West Texas intermediate crude jumped from $93.86 per barrel in November to $97.63 a barrel in December.

Food prices increased 0.1 percent for the third straight month. In December, this higher figure stemmed largely from a rise in restaurant prices. Prices for food purchased at home were unchanged. Increased prices for meats, fish, and eggs were offset by declining costs for cereals and bakery products.

Outside of food and energy, core inflation was also up 0.1 percent for the month. There were increases in the price of apparel, medical care services, and shelter in December. In contrast, the cost of medical care commodities, transportation services, and used cars are trucks were lower.

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

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After Two Months of Declines, Producer Prices Rose in December

The Bureau of Labor Statistics reported that producer prices for finished goods rose 0.4 percent in December. This follows declines of 0.2 percent and 0.1 percent in October and November, respectively. On a year-over-year basis, producer prices have risen 1.2 percent since December 2012. This suggests a bit of pickup in the annual rate, up from 0.3 percent in October and 0.7 percent in November.

Nonetheless, pricing pressures remain quite minimal for the most part. Year-over-year core inflation, which excludes energy and food costs, was 1.4 percent in December, up from 1.3 percent in November. Note that the annual pace of price increases has been below 2 percent – the stated goal of the Federal Reserve – for all of 2013. This frees the Fed to pursue highly accommodative monetary policies to stimulate growth, with worries about inflation reduced (at least for now).

The increase in producer prices in December was due to higher energy costs. The price of finished energy goods increased 1.6 percent in December, up primarily from diesel fuel and home heating oil. Crude energy costs were also higher, up 6.2 percent, on increased petroleum costs. Indeed, the cost of West Texas intermediate crude oil rose from $92.55 per barrel at the end of November to $98.17 at the end of December. In contrast to energy, food costs were off 0.6 percent in December, with vegetable prices leading the data lower.

For manufacturers, there were modest gains in raw material costs, up 0.3 percent in December. Yet, overall pricing pressures have been minimal over the course of the past year, with producer prices in the manufacturing sector rising just 0.6 percent over the past 12 months.

Nonetheless, there were some sector that experienced more rapid changes in input cost in December than the overall  average suggests. The largest increases in monthly raw material costs were seen in the following sectors: wood products (up 4.5 percent), leather and allied products (up 3.9 percent), paper products (up 3.1 percent), nonmetallic mineral products (up 2.9 percent), plastics and rubber products (up 2.4 percent), beverages and tobacco (up 2.0 percent), apparel (up 1.7 percent), textile products (up 1.6 percent), chemicals (up 1.3 percent), and machinery (up 1.2 percent). Still, these shifts mostly reflect some recent volatility in the data, with annual rates of change that were more consistent with the overall year-over-year average.

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

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November Personal Spending Increased Modestly Led by Strong Growth in Durable Goods

The Bureau of Economic Analysis said that personal spending growth grew 0.5 percent in November, extending the 0.4 percent gain seen in October. Consumer spending has increased 3.5 percent over the past 12 months, its fastest pace so far in 2013 and an improvement from the 2.9 percent year-over-year rate in September. Nonetheless, it is clear that personal spending growth has decelerated from the 4.1 percent pace average of 2012 to the 3.1 percent average year-to-date in 2013.

Looking specifically at the November data, the growth in personal goods spending stemmed from an increase in durable goods expenditures. Spending on durable goods increased from an annualized $1.282 trillion in October to $1.307 trillion in November. Meanwhile, purchases of nondurable goods declined in the month from $2.667 trillion to $2.657 trillion.

Both durable and nondurable goods spending continue to increase over a longer term. Six months ago (May), for instance, durable and nondurable goods purchases were $1.255 trillion and $2.585 trillion, respectively.

Meanwhile, personal income rebounded in November, rising by 0.2 percent after falling 0.1 percent in November. Much of October’s decrease had been attributable to a sharp falloff in farm proprietors’ income, which was still down in November. But, it was offset by stronger growth in wages and salaries, which increased 0.4 percent for the month. For manufacturers, total wages and salaries rose from $754.3 billion to $759.1 billion. This figure has gradually moved higher. Six months ago, wages and salaries in the sector were $744.8 billion, and they moved steadily higher from the averages of $707.1 billion and $735.4 billion in 2011 and 2012, respectively.

Perhaps disappointingly, the year-over-year pace of personal income continues to decelerate, down from 3.4 percent in October to 2.3 percent in November. In contrast to personal spending, this was the lowest annual pace of the year. Through the first 11 months of 2013, the annual pace has averaged 3.2 percent, down from the 4.2 percent rate experienced in all of 2012.

With personal spending outstripping personal income, the savings rate has fallen in each of the past two months, down from 5.1 percent in September to 4.5 percent in October to 4.2 percent in November.

Overall inflationary pressures remain minimal, with prices for personal consumption expenditures (PCE) unchanged for the second month in a row. The year-over-year rate of PCE growth was just 0.9 percent, and when you exclude food and energy, the annual rate of core PCE growth was 1.1 percent. Much as we have seen in recent consumer and producer price data, inflation remains below the Federal Reserve’s 2 percent target rate, which frees the Fed up to pursue its highly accommodative policies.

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

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Federal Reserve: Manufacturing Production Continues to Accelerate, Up 0.6 Percent in November


The Federal Reserve Board said that manufacturing production increased 0.6 percent in November, building on the 0.5 percent gain seen in October. This was the fifth consecutive monthly gain in manufacturing output, with the sector recovering from weaknesses seen in the spring months. Year-over-year growth in manufacturing production has definitely improved from the 1.2 percent pace experienced in July to 2.9 percent in November.

Manufacturing capacity utilization has also increased over the past few months, up from 75.7 percent in July to 76.4 in October to 76.8 percent in November. This was the highest level since March 2008 for the manufacturing sector.

Durable and nondurable goods production were both higher in November, up 0.8 percent and 0.5 percent, respectively. The strongest increase in output was seen in motor vehicles and parts production, which rose 3.4 percent for the month. Other sectors with stronger production in November included wood products (up 3.1 percent), textile and product mills (up 1.7 percent), nonmetallic mineral products (up 1.3 percent), fabricated metal products (1.0 percent), chemicals (up 0.9 percent), electrical equipment and appliances (up 0.9 percent), furniture and related products (up 0.9 percent), and petroleum and coal products (up 0.9 percent), among others.

There were also six manufacturing sectors that had declining output for the month. These segments were apparel and leather (down 0.4 percent), aerospace and other miscellaneous transportation (down 0.2 percent), computer and electronic products (down 0.2 percent), primary metals (down 0.2 percent), and printing and support (down 0.1 percent).

The overall industrial production data also grew strongly, up 1.1 percent in November. This was much stronger than the 0.1 percent increase in October, and it was slightly higher than consensus expectations. The higher figure was boosted by sharp gains in mining and utility production, up 1.7 percent and 3.9 percent, respectively.

The bottom line in this data is that the manufacturing sector appears to be picking up some steam as we end 2013, a trend that we have observed since the beginning of the third quarter. Given the softness in production demand that we saw over much of the past year, the news of accelerated output is entirely welcome. Most importantly, manufacturers continue to be cautiously optimistic about 2014.

With that said, there is also some tentativeness in the marketplace. After all, we have begun each of the past few years with the belief that the sector was finally beginning to get some traction, only to be let down. Policymakers need to harness the momentum of these gains by pursuing pro-growth measures and policies that will allow manufacturers to continue to expand and compete globally.

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

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