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
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.
The Bureau of Labor Statistics said that producer prices for final goods and services decreased by 0.1 percent in March, falling for the second straight month. The March decrease, however, stemmed mainly from services. The producer prices for final demand goods rose by 0.2 percent in March, increasing for the first time since June. Energy costs jumped 1.8 percent for the month on higher crude oil prices, which was enough to offset a decline of 0.9 percent on food prices. The decline for food costs in March for producers came largely from sharp drops in prices for eggs and fresh fruits and vegetables, along with lower prices for coffee, pork, poultry and shortening and cooking oils. Food costs have trended lower over the past 12 months, down 2.5 percent, with energy prices off 13.8 percent year-over-year. Read More
The Federal Open Market Committee (FOMC) chose to keep short-term interest rates unchanged, as expected, at its March 15–16 meeting. Coming into 2016, conventional wisdom held that the Federal Reserve would raise the federal funds rate as much as four times this year, building on the 25 basis point increase made at its December 15–16 meeting. Yet, in the interim, the global economic environment has been highly volatile, with softer-than-desired economic activity and lingering outlook worries among businesses. (See, for instance, the most recent NAM Manufacturers’ Outlook Survey, which was released last week.) In the FOMC’s statement, participants acknowledged these challenges, but also noted that “economic activity has been expanding at a modest pace.”
With that said, the Federal Reserve also released its economic projections, and these data make it clear that FOMC participants had slightly downgraded their forecasts for growth for 2016 and 2017. The Fed now predicts 2.2 percent real GDP growth in 2016, down from 2.4 percent in December, and 2.1 percent growth for 2017, down from 2.2 percent. They also expect the unemployment rate to fall to 4.7 percent in 2016 and to 4.6 percent in 2017. In addition, core inflation is seen remaining below 2.0 percent. Yet, the Fed also expects inflationary pressures to pick up from currently low levels as the effect of energy price declines and the labor market improves further.
From a financial markets perspective, the economic projections also provide a signal about the number of future rate increases. Participants now see the effective federal funds rate rising to 0.9 percent by year’s end, down from 1.4 percent in December. Given that the current target range for the federal funds rate is between 0.25 and 0.50 percent, this would suggest two more increases in 2016, instead of four as predicted in December. As such, this keeps a rate hike at either the April 26-27 or June 14–15 meetings on the table, with the latter being more likely. The Federal Reserve will be looking for broader progress in the U.S. economic data, and hopefully, this includes improved manufacturing activity. Read More
Manufacturing production grew 0.2 percent in February, extending the 0.5 percent gain seen in January. As such, output in the sector has begun 2016 on a somewhat stronger note than it ended 2015. To be clear, manufacturing activity remains weaker than we would prefer, particularly given the difficulties in growing export demand and with soft commodity prices. Still, manufacturing output has increased 1.8 percent over the past 12 months, up from 0.5 percent in December and 1.2 percent in January. With that said, production growth slowed considerably last year, with the year-over-year rate of manufacturing output down from 4.3 percent in January 2015. Capacity utilization for manufacturers was unchanged at 76.1 percent in February. Read More
The economy remains a mixed bag for manufacturers, with job numbers drawing back for the second month this year. The numbers indicate obstacles still stand in the way of unleashing the economic potential of the manufacturing sector. The Bureau of Labor Statistics reported that manufacturing employment declined by 16,000 in February, somewhat offsetting the 23,000-worker increase observed in January. In addition, data revisions subtracted another 13,000 workers from the December and January original estimates. As such, manufacturers have added just 7,000 net new workers year-to-date through the first two months of 2016, a sluggish pace that speaks to the ongoing challenges seen in the sector from the strong U.S. dollar and falling commodity prices. Read More
The NAM Manufacturing Outlook Index declined from 45.8 in September to 40.5 in the most recent survey, falling below the historical average for the second consecutive quarter. Nearly 60 percent of respondents were either somewhat or very positive about their own company’s outlook, a sharp decline from the 91.2 percent who said the same thing one year ago. Manufacturers continue to wrestle with global headwinds and lower commodity prices, which likely dampened enthusiasm in this report, especially regarding export expectations, with roughly 58 percent suggesting that their firms were negatively impacted by the global slowdown. Capital spending and hiring plans pulled back materially from the prior survey, which we also saw in the latest job openings numbers. On the positive side, manufacturing leaders anticipate 1.4 percent growth in sales and production over the next 12 months. While this pace remained well below the 4.5 percent pace observed in December 2014, it does suggest that activity remains positive, albeit less than desired.
The top business challenge was an unfavorable business climate, cited by 77.3 percent of manufacturing respondents. Indeed, manufacturers continue to be frustrated with the lack of comprehensive tax reform and with a perceived regulatory assault on their businesses. Rising health care and insurance costs were also a major concern, cited by 72.2 percent as a primary challenge. Manufacturers see health insurance costs increasing eight percent over the next 12 months. Small and medium-sized firms anticipate health insurance premiums to jump faster in the next year than large manufacturers do, with rates rising 8.6 percent and 6.5 percent, respectively.
The Bureau of Labor Statistics said that nonfarm payrolls increased by a surprisingly strong 271,000 workers in October. This was well above the consensus estimate of around 180,000, and it suggests that hiring has begun to rebound again after a lull in August (153,000) and September (137,000). Even with some progress this month, it is worth noting that nonfarm payroll growth has averaged 206,200 per month year-to-date, down from 280,833 per month in the second half of last year. Meanwhile, the unemployment rate fell to 5.0 percent, which was the lowest level seen since April 2008. Moreover, the so-called “real” unemployment rate – which includes marginally attached workers by those employed part-time for economic reasons – was 9.8 percent, the first time this rate has fallen below 10 percent since May 2008. It peaked at 17.1 percent six years ago.
The overall strength in this report should serve to enhance the chances that the Federal Reserve will begin to raise short-term interest rates at its December meeting, which was already becoming the conventional wisdom. Read More
The Federal Open Market Committee (FOMC) spent much of its time at the September 16-17 meeting debating the timing of when to begin normalizing short-term rates. Some participants argued that there were still sufficient downside risks in the economy and that inflationary pressures remained minimal – well below the Fed’s stated goal of two percent. Therefore, it did not make sense for the FOMC to wait for better signs of strength in the U.S. economy before starting the process of raising rates. This process was often referred to in the minutes as “policy firming.” In contrast, others said that “a prompt decision to firm policy could provide a signal of confidence in the strength of the U.S. economy that might spur rather than restrain economic activity.” Those same individuals also worried about the long-term pricing consequences of continuing to keep short-term rates near zero for so long. Read More
The Bureau of Labor Statistics said that manufacturers lost 9,000 workers in September, extending the 18,000 declines seen in August. These numbers are disappointing, as they show just how sluggish growth has become in the manufacturing sector over the past few months, mirroring the stagnant ISM data released yesterday. Since January (or over the past eight months), the manufacturing sector has netted zero net new jobs, with 27,000 workers lost in just the past two months. In the second half of 2014, manufacturers were hiring at the more-robust pace of 20,667 workers per month on average, illustrating a significant pullback in employment growth year-to-date. Indeed, manufacturers have grappled for much of this year with headwinds from abroad, a strong U.S. dollar, gridlock in Washington on critical market-opening policies and lower crude oil prices – each of which have combined to dampen demand, production and hiring. Read More