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

Looking at last week’s reports, there appears to be a split between the economic progress of the larger economy and what we continue to observe in the manufacturing sector. That is not to suggest that the U.S. economy is growing robustly—because it isn’t. Nonetheless, some of the data show signs of upward movement. The Bureau of Labor Statistics reported that 165,000 new nonfarm payroll workers were added in April, with healthy upward revisions for February and March. As a result, the economy created almost 200,000 workers in the first four months of 2013, and the unemployment rate fell to 7.5 percent, its lowest level in more than four years. At the same time, the participation rate remains low, and the “real” unemployment rate is still elevated at 13.9 percent, suggesting challenges continue on the labor front even with the recent progress.

One of those challenges can be seen in the manufacturing sector, with its employment levels unchanged in April and lower on a year-over-year basis. Several indicators show softness in activity nationally for manufacturers, with sales, production and employment growing at a slower pace. The Institute for Supply Management’s (ISM) Purchasing Managers’ Index (PMI) dropped from 51.3 in March to 50.7 in April largely on flat job growth, and factory orders declined 3.1 percent in the first quarter of 2013. Manufacturing construction spending was also lower. Regionally, several surveys tend to indicate an easing in activity, with modest growth at best, in manufacturing. The one exception of note was the Chicago Federal Reserve Bank’s Midwest Manufacturing Index, which noted an increase in production mainly due to higher output in the motor vehicle sector. (continue reading…)

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

Suddenly, in the midst of decent and cautiously optimistic U.S. growth, world economic markets have begun to focus on the banking crisis in Cyprus. With GDP of around $25 billion, Cyprus has seen its problems once again bring Europe’s sovereign debt challenges to the forefront of economic discussion. Cypriot lawmakers have struggled to find a way to bail out their banking system, particularly after attempts to tax depositors failed. The deal announced over the weekend was negotiated so that Cyprus could remain in the European Union. It was that prospect that has sent equity markets lower last week, particularly in Europe, on fears of how the crisis in Cyprus might spread to other countries.

Of course, Cyprus is not Europe’s only problem. The Eurozone is mired in a prolonged recession. As we have discussed in the monthly Global Manufacturing Economic Update, real GDP and employment continue to decline in the continent, with weaknesses even in Germany, its largest country. The Markit Flash Eurozone Purchasing Managers’ Index (PMI) dropped from 47.8 in February to 46.5 in March. This measure has contracted every month since July 2011. This latest report states that sales, output and hiring were all lower, and the prospects for improvements in April do not look good.

The data stand in contrast to what we are seeing elsewhere. Markit Flash PMI data for China and the United States reflect continuing, albeit modest, growth in manufacturing activity in both countries. In its Federal Open Market Committee (FOMC) statement last week, the Federal Reserve Board noted recent progress in many economic indicators, which had “paused” at the end of last year due to the fiscal cliff and weather-related concerns. Even with these improvements, the Federal Reserve continues to worry about slow economic growth and elevated unemployment rates. As such, it will continue to make purchases of $85 billion in long-term and mortgage-backed securities for the foreseeable future. In the short term, the Federal Reserve will be closely watching the impact of across-the-board budget cuts and the debt ceiling debate, both of which could put a dent in real GDP growth in the second quarter of 2013. (continue reading…)

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…)

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

Some of the indicators released last week helped confirm the belief that the U.S. economy has started 2013 on a stronger-than-expected note. First, industrial production rose 0.8 percent in February, led by strong demand for automobiles and other goods. This was a decent turnaround from much weaker numbers in January, with all but three major manufacturing sectors experiencing higher production. Second, retail sales rose a surprisingly healthy 1.1 percent in February. While much of that growth stemmed from higher gasoline prices and higher motor vehicle sales, the data suggested modest growth overall, with Americans continuing to make modest gains in purchases despite headwinds from higher taxes and fiscal uncertainties.

At the same time, those headwinds appear to be having some negative impacts. Industrial production was increasing at a 5.1 percent year-over-year pace at this point last year; today, that rate is 2 percent. That example can be replicated in so many of the recent indicators. For instance, the NAM/IndustryWeek Survey of Manufacturers reported an uptick in optimism in the latest survey, with sales expected to grow 2.3 percent over the next year. That represents an improvement from three months ago (when the rate was 1.0 percent), and the percentage of respondents who were positive about their own company’s outlook rose from about 52 percent in December to roughly 70 percent today. But this is a come-down from the stronger pace of nearly 5 percent growth in annual sales expected in March of last year (when approximately 89 percent were positive in their outlook). Clearly, more work still needs to be done to get the economy moving. (continue reading…)

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

Manufacturing activity picked up somewhat in January, according to several reports that came out last week. The Institute for Supply Management’s (ISM) Purchasing Managers’ Index (PMI) rose from 50.2 in December to 53.1 in January. Stronger sales and production data helped to lift this index higher, with export growth still lagging (but no longer declining). The data was mirrored in the latest surveys from ISM-Chicago and the Chicago and Dallas Federal Reserve Banks. New durable goods orders were also higher in December, mainly due to increased aircraft sales.

The sentiment surveys tended to show an uptick in hiring in January, which might be a gauge of future activity. However, for now at least, the data show that employment growth in the sector has been slow at best. The ADP payroll data suggest that manufacturing employment contracted in January, while the government report showed that manufacturers added just 4,000 workers during the month. It is hard to ignore the significant slowdown in hiring that took place among manufacturers during the second half of 2012, with worries about sales and the economic outlook taking a toll on hiring and investing. While the larger economy added roughly 180,000 workers on average each month last year—a figure which is decent, but still not strong enough to bring the unemployment rate down—manufacturers only gained 11,000 additional workers in the last six months of the year.

Much of the economic uncertainty was tied to the fiscal cliff negotiations, with upcoming debates on the budget and deficit still causing uncertainty for many manufacturers. With the debt ceiling conversation postponed until mid-May, all eyes will now focus on the across-the-board federal budget cuts scheduled for March 1 and the possibility of a government shutdown on March 27. The fiscal cliff’s impact can be seen in the economic data as well, with manufacturing activity falling and consumer and business confidence indicators plunging. Dividends rose sharply at the end of the year (up 34.3 percent in December), as companies tried to accelerate these payments in anticipation of higher dividend taxes. The result was a 2.6 percent rise in personal income, pushing the savings rate up to 6.5 percent, its highest level (albeit a temporary one) in nearly four years.

The Federal Reserve Board reported that the economy “paused” at the end of 2012, referencing both Hurricane Sandy and the political wrangling over the fiscal cliff. Beyond that, however, the Federal Open Market Committee (FOMC) made little news. It continued the stimulative policies put in place in December, with new rotating members of the FOMC voting much like the old ones did. Kansas City Federal Reserve Bank President Esther L. George picked up the mantle of her fellow inflation hawks by being the lone dissenter.

This week is a much slower one on the data front. The key data to watch for will come on Thursday with new labor productivity numbers and on Friday with the latest international trade figures. The export data will be closely followed as it will be the first to show activity for all four quarters of 2012.

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

The Federal Reserve’s Federal Open Market Committee (FOMC) has decided to continue its accommodative policies in an attempt to stimulate more growth. Specifically, the Fed said that “growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors.” That coded language is a clear reference to Hurricane Sandy and the lead-up to the fiscal cliff deal. Both of them had significant negative impact on production and the business psyche as we ended 2012. Indeed, the Bureau of Economic Analysis announced earlier today that real GDP shrank by 0.1 percent in the fourth quarter of last year, with these factors clearly at play.

For the most part, today’s FOMC announcement was largely anticipated. The Fed will continue its monetary stimulus programs, which it announced in December, of purchasing $40 billion in mortgage-backed securities and another $45 billion in long-term securities each month. These purchases will continue to push down long-term rates, particularly for mortgages. In the process, it will help to prop up the housing sector, and to the extent that more Americans refinance their mortgages, it will also provide extra disposable income.

The Fed will continue these purchases as long as the unemployment rate stays above 6½ percent. In addition, it will continue to target long-term inflation of 2 percent. The FOMC will continue to maintain these policies so long as “inflation between one or two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal.” As always, the Fed will also look at other measures and react accordingly in the economic environment changes – an out in case the Fed needs it for flexibility. (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 Reserve Board’s Federal Open Market Committee (FOMC) maintained its existing monetary policy actions, as announced in its statement released this afternoon.  Much of the wording of this statement was similar to the last two. The only part that changed was the paragraph describing the economy:

Information received since the Federal Open Market Committee met in January suggests that the economy has been expanding moderately. Labor market conditions have improved further; the unemployment rate has declined notably in recent months but remains elevated. Household spending and business fixed investment have continued to advance. The housing sector remains depressed. Inflation has been subdued in recent months, although prices of crude oil and gasoline have increased lately. Longer-term inflation expectations have remained stable.

Aside from the description of an improved economy, much of the rest of the text remained the same. On the topic of inflation, the Fed feels that pricing pressures remain subdued. In particular, the release says the following:

Strains in global financial markets have eased, though they continue to pose significant downside risks to the economic outlook. The recent increase in oil and gasoline prices will push up inflation temporarily, but the Committee anticipates that subsequently inflation will run at or below the rate that it judges most consistent with its dual mandate.

It left intact the policy – enacted at its January meeting – of “exceptionally low” levels of interest rates through late 2014. Because of this action, Jeffrey Lacker, the President of the Richmond Federal Reserve Bank, dissented once again. All of the other FOMC members voted in favor. 

The Fed will also maintain its plan to continue rebalancing its portfolio toward holding more long-term securities (“Operation Twist”) and reinvesting principal payments in mortgage-backed securities. The intent of this policy is to push interest rates – particularly those impacting mortgages – lower.

Overall, it was widely anticipated that the Fed would make no new moves at its March FOMC meeting. Recent improvements in the economy and developments in Europe have tended to lessen the drive for additional stimulus from the Fed, such as another round of quantitative easing. While pricing pressures have begun to accelerate again – led by higher energy and raw material prices – core inflation as a whole remains modest, at least for now.

Chad Moutray is chief economist, National Association of Manufacturers.

The government reported that the U.S. economy grew by 2.8 percent in the fourth quarter of 2011, with manufacturers playing an integral role. Consumers and businesses replenishing their inventories were the largest contributors of real GDP for the quarter. In many ways, this number was not a surprise: other indicators also suggested an uptick in manufacturing activity in the months of November and December. Manufacturers are cautiously optimistic about future production, and the rebound is welcome news.

Yet, the GDP numbers also bring to mind challenges that might dampen growth in the coming months. It is unlikely, for instance, that we will see the same lift from inventories in the first quarter, and consumers have dipped into their savings to increase their purchases. At some point, this level of spending might ease so that consumers might pay off some of these debts. In addition, it is clear that the government sector will be a drag on growth for the foreseeable future – of which we were reminded when the Department of Defense announced budget cuts last week. Most pressing, though, is the constant reminder of Europe’s ills and the challenges that slowing global growth might have on our exports. Fitch Ratings downgraded several European nations’ credit ratings on Friday, following the lead of Standard & Poor’s from a few weeks ago.

These worries aside, most of the recent domestic economic indicators have been positive. Durable goods orders, for example, rose 3 percent in December, with strength in nondefense capital goods. This mirrors much-improved production, employment and investment data from the Kansas City and Richmond Federal Reserve Banks (and for that matter, in most of the recent regional) surveys. The National Association of Business Economics (NABE), in its latest Industry Survey, observes these improvements, with more economists upgrading their assessments for growth this year. Sixty-five percent of respondents to the NABE survey expect for real GDP to grow at least by 2 percent in 2012. Similarly, the Chicago Federal Reserve Bank’s National Activity Index indicates that the risk of a recession seems to be lessening.

These growth estimates are in line with those from the Federal Reserve Board, which estimates real GDP growing between 2.2 and 2.7 percent this year. The Fed also expects the unemployment rate to remain elevated, improving slowly to a range of 8.2 to 8.5 percent in 2012 and to 6.7 to 7.6 percent by 2014. The Federal Open Market Committee, even as it cites improvements in the domestic economy, remains worried about high unemployment, a still-weak housing market and uncertainties related to European sovereign debt. It stated last week that it now plans to keep interest rates at “exceptionally low” levels through late 2014 – an extension from its earlier intentions of doing so through mid-2013. With these moves, the Fed hopes that lower long-term rates spur more borrowing, both by homeowners and businesses.

This week, we will receive more data about production and employment, which will hopefully show continued growth in manufacturing in January. The Institute for Supply Management’s well-cited index of manufacturing activity will come out on Wednesday, and it is expected to be somewhat higher. On Thursday, new productivity data will be released, with manufacturing output per worker expected to continue to show strong growth. Finally, the Bureau of Labor Statistics will unveil new employment data on Friday, which should show increased hiring among manufacturers in conjunction with recently increased production.

Chad Moutray is chief economist, National Association of Manufacturers.

The Federal Reserve Board’s Federal Open Market Committee (FOMC) left monetary policy unchanged, as expected. In fact, the statement is nearly identical to the one released on November 2. The only differences appear in the first paragraph, which describes the current economic environment. The Fed writes:

Information received since the Federal Open Market Committee met in November suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth. While indicators point to some improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but business fixed investment appears to be increasing less rapidly and the housing sector remains depressed. Inflation has moderated since earlier in the year, and longer-term inflation expectations have remained stable.

Slowing “global growth” is clearly a reference to the sovereign debt crisis in Europe. The Federal Reserve continues to monitor the developments there with great interest, and it was just a couple weeks ago that it – acting in concert with other central banks – acted to provide more liquidity to the global financial system.

The Fed will continue its policy of keeping “exceptionally low” interest rates through mid-2013, rebalancing its portfolio toward holding more long-term securities (“Operation Twist”) and reinvesting principal payments in mortgage-backed securities.

As was the case with last month’s statement, the only dissention came from Charles L. Evans, the president of the Chicago Federal Reserve Bank. He voted against the decision to leave monetary policy unchanged based on his belief that the Fed should do another round of quantitative easing. While some Fed-watchers believe that this might be possible in early 2012, a third round of quantitative easing (or “QE3”) was not expected to come from today’s FOMC meeting. It would also come over the objections of three FOMC members who dissented in previous meetings: Richard Fisher (Dallas), Narayana Kocherlakota (Minneapolis), and Charles Plosser (Philadelphia).

Note that the FOMC membership will change in 2012, which could alter the dynamics. The current makeup of presidents from Chicago, Dallas, Minneapolis and Philadelphia will shift to their counterparts from Atlanta, Cleveland, Richmond and San Francisco. The president of the New York Federal Reserve Bank is always a member of the FOMC along with the Federal Reserve Board members themselves.