Producer prices were unchanged in October, slowing after a rebound in the September data. The flat growth in the headline number stemmed from reduced producer prices for final demand services, down 0.3 percent. In contrast, producer prices for final demand goods increased 0.4 percent in October, extending the 0.7 percent gain seen in September. Higher inflation for goods came largely from a jump in energy costs, up 2.5 percent; whereas, food prices were off by 0.8 percent. Food costs have been on a downward trend over the longer-term, down 3.5 percent over the past 12 months. On the other hand, energy prices have edged up 0.2 percent year-over-year. Read More
Producer prices ticked higher in September, bouncing back from softness in the prior two months. The Bureau of Labor Statistics said that producer prices for final demand goods and services rose 0.3 percent in September, the first increase reading in three months. For final demand goods, food and energy prices were both higher, up 0.5 percent and 2.5 percent, respectively, but each were coming back from notable declines in both July and August. The longer-term trend has been negative for both. Food costs have decreased 3.4 percent over the past 12 months, with energy prices off by 2.4 percent year-over-year. Read More
According to the Federal Reserve, manufacturing production fell by 0.4 percent in August. After two straight months of gains, this news was disappointing, even as it mirrored weaknesses found in other economic indicators in August. Moreover, manufacturing production has declined over the past 12 months, the first year-over-year decline since December. In addition, manufacturing capacity utilization decreased from 75.2 percent to 74.8 percent, a three-month low. As such, this report highlights the tremendous challenges in the sector. Nonetheless, manufacturers continue to be cautiously hopeful for increased activity over the coming months, as noted in our latest survey.
The current softness, though, means that policymakers need to focus more on priorities that will grow the economy and increase competitiveness. It also suggests that the Federal Reserve is likely to wait to raise rates. Along those lines, 45.5 percent of respondents to our survey felt that the Federal Open Market Committee would hike rates in December.
In another sign that manufacturing in the United States remains weaker-than-desired despite some signs of recent progress, employment in the sector fell once again in August. Manufacturers hired 14,000 fewer workers on net in August, and the job gains for the prior two months were revised down by a combined 10,000. All in all, manufacturing employment has fallen by 39,000 year-to-date through August, suggesting continuing cautiousness among manufacturing business leaders to add workers in light of lingering weaknesses in the global economy. It is hard not to be disappointed by these numbers, particularly when combined with yesterday’s ISM data, which found that overall manufacturing activity contracted for the first time since February.
Durable goods firms shed 16,000 workers in August, with nondurable goods manufacturers adding 2,000 jobs for the month. Of the 19 major sectors in manufacturing, all but four had reduced employment in August. The largest declines were seen in the transportation equipment (down 6,400, including a 5,600 decline for motor vehicles and parts), primary metals (down 2,500) and nonmetallic mineral products (down 1,400). In contrast, there were employment gains in August for food manufacturing (up 4,500), paper and paper products (up 700), machinery (up 500) and petroleum and coal products (up 400). Read More
As expected, the Federal Open Market Committee (FOMC) did not change short-term interest rates at its June 14–15 meeting. Prior to the release of disappointing employment numbers for May, the Federal Reserve had positioned itself to begin hiking rates at its June meeting, with two increases anticipated in 2016. (At least one participant predicted just one increase in the federal funds rate this year, according to the latest economic projections.) The jobs report shifted those expectations to either the July 26–27 or the September 20–21 FOMC meetings. My own forecast would be for the hike to come in July, subject to incoming data between now and then. Along those lines, the press release has the following to say about the timing of future moves:
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 longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
In terms of the economy, FOMC participants said that “the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up.” On this latter point, they noted the declining unemployment rate and better retail spending data. With that said, the Federal Reserve officials see real GDP growing 2.0 percent in 2016, down from an outlook of 2.2 percent in March, and the unemployment rate was seen falling to 4.7 percent, which happens to be the current rate. In terms of inflation, the Fed predicts core price increases of 1.7 percent this year.
The Bureau of Labor Statistics said that producer prices for final demand goods and services rose 0.4 percent, extending the 0.2 percent gain seen in April. At the same time, the producer prices for final demand goods jumped 0.7 percent in May, its fastest pace in 12 months. Energy costs rose 2.8 percent in May on higher crude oil prices, which approached $50 per barrel for West Texas Intermediate crude by month’s end, levels not seen since July 2015. At the same time, food costs were up 0.3 percent, offsetting the 0.3 percent decline observed in the prior report. The rise in food prices in May for goods producers came largely from higher costs for chicken, eggs, fresh and dry vegetables, grains, oilseeds and pork. Despite the rises this month, food costs have trended lower over the past 12 months, down 2.7 percent, with energy prices off 14.2 percent year-over-year. Read More
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