Here is a summary of this week’s Monday Economic Report:
The Federal Reserve made little news at its April 29–30 Federal Open Market Committee (FOMC) meeting, mostly mirroring the observations and policy actions taken at its March meeting. Yet, the latest minutes do give us a glimpse of how the Federal Reserve sees the economy as well as its thinking about future policy actions. For instance, participants spent much time discussing “monetary policy normalization,” or the exit strategy from recent stimulative actions. With quantitative easing winding down by the fall and with short-term interest rates expected to rise sometime in 2015, the Federal Reserve has begun to contemplate “the combination of policy tools that might be used to accomplish those objectives.” Moreover, it stressed the need to communicate its plans effectively to the markets and the public well before taking any actions. In essence, including a discussion of normalization in the minutes was a first step in such communications.
Regarding economic trends, the Federal Reserve noted recent improvements in activity since winter storms wreaked havoc earlier in the year. It observed that “business contacts in many parts of the country were generally optimistic about economic prospects,” and there were signs of increased capital spending and hiring as well as stronger demand for loans. Indeed, the manufacturing surveys released last week tend to echo these sentiments. For instance, the Markit Flash U.S. Manufacturing Purchasing Managers’ Index (PMI) rose from 55.4 in April to 56.2 in May. The increase stemmed largely from higher production growth, with the output index up from 58.2 to 59.6, the fastest pace since February 2011. Likewise, the Kansas City Federal Reserve Bank reported that manufacturing new orders and production have been much stronger since March, leading to a renewed desire to add more workers.
However, not all of the news out last week was positive. The Chicago Federal Reserve Bank’s National Activity Index (NAI) found that the U.S. economy grew below its historical average in April. The reduction in manufacturing production was a large factor in the NAI’s decrease for the month. Weaker industrial production numbers were also a drag on the Conference Board’s Leading Economic Index (LEI) in April. Despite this, the long-term trend for both of these measures is a relatively optimistic one. For instance, the overall headline figure for the LEI expanded in each of the past three months, with 2.9 percent growth in the past six months. This should bode well for future activity.
Housing was a positive contributor in April in each of the above reports; however, the residential market remains a challenge. Improvements in housing starts and permits boosted sentiment, and there were increases in both existing and new home sales in April. Still, the housing market remains weaker today than it was several months ago. Existing home sales, for example, have dropped 13.6 percent since peaking in November, and new single-family sales have declined 3.9 percent since January. Even with these challenges, we remain cautiously optimistic about the housing market for the coming months, but will watch it closely in light of higher mortgage rates on the horizon.
On the international front, the HSBC Flash China Manufacturing PMI has shown contracting activity levels for five straight months, with economic growth decelerating of late. The good news, however, was that there were signs of this beginning to stabilize in the May data, with new orders, exports and production shifting to slight gains for the month. The overall PMI figure remains just shy of being neutral, and even though downside risks to growth remain, perhaps we will begin to see some expansion again in the June data. Likewise, Japan’s economy appears to be stabilizing after the imposition of higher taxes in April, but manufacturing activity has now contracted for two straight months. Meanwhile, manufacturers in Europe continue to reflect improvements in demand and output relative to this time last year, but the Markit Flash Eurozone Manufacturing PMI declined from 53.4 in March to 52.5 in April, reflecting some easing in the most recent data.
This week, much of the focus will be on revisions to real GDP growth for the first quarter. The original estimate was for just 0.1 percent growth, with weather and weaker activity bringing the economy to a crawl. Forecasts for this revision reflect newer data produced since then and hinge on whether activity rebounded enough in March to warrant an increase. Other highlights include the latest data on consumer confidence, durable goods orders, personal income and spending and manufacturing surveys from the Dallas and Richmond Federal Reserve Banks.
Chad Moutray is the chief economist, National Association of Manufacturers.