Tag: industrial production

Leading Economic Indicators Increased at Fastest Pace in Four Months

The Conference Board said that the Leading Economic Index (LEI) rose 0.8 percent in March, extending the 0.5 percent gain observed in February. It was the fastest pace since November, and more than anything, it suggests that the U.S. economy has begun to move beyond the weather-related softness of December and January. This rebound was most notable in the variable for the average workweek of production workers, which added 0.26 percentage points to headline figure and offset declines from December to February. Yet, new manufacturing data were somewhat mixed, but a small positive on net.

Other positive contributors to the LEI included favorable credit conditions, initial jobless claims, the stock market, and the interest rate spread. At the same time, building permits and consumer confidence provided small drags to the LEI.

Meanwhile, the Coincident Economic Index (CEI), which assesses current conditions, was up 0.2 percent in March. It was the second straight monthly increase, down from 0.4 percent in February. All four components were higher for the month. This included industrial production, which rose 0.7 percent in March and added 0.11 percentage points to the CEI. Other contributors which added to the CEI were nonfarm payrolls, personal income, and manufacturing and trade sales.

In general, the Conference Board’s report is good news for the economy over the coming months, with the rebound a sign of strength moving forward.

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

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Business Economists Anticipate 2.8 Percent Growth in Real GDP in 2014

Economists with the National Association for Business Economics (NABE) expect real GDP growth of 2.8 percent in 2014, up from 2.5 percent predicted three months ago. This is true despite weather-related softness in January and February, with economists anticipating 1.9 percent growth in the first (or current) quarter. Respondents to the NABE Outlook Survey also predict 3.2 percent output growth for 2015, suggesting the U.S. economy will continue to accelerate into next year.

This is good news for manufacturers. Industrial production is expected to increase 3.2 percent and 3.4 percent in 2014 and 2015, respectively. This is mostly consistent with the positive outlook noting in the latest NAM/IndustryWeek survey. In terms of auto production, light vehicle sales should rise from an average of 15.5 million annualized units in 2013 to 16.0 million and 16.5 million units in 2014 and 2015, respectively. Meanwhile, housing starts are anticipated to grow to 1.07 million and 1.3 million this year and next.

A number of special questions focused on the Federal Reserve Board and monetary policy. Eighty percent of business economists expect the Fed’s quantitative easing program, with 57 percent anticipating the end of long-term asset purchases in the fourth quarter of 2014. In terms of short-term interest rates, the responses were more scattered, but more than half predict the federal funds rate to start to increase in 2015. Overall inflationary pressures are expected to stay under or at the Fed’s 2-percent goal, with consumer prices up 1.7 percent and 2.0 percent in 2014 and 2015, respectively.

Those taking the survey were asked about the biggest threats to the economic expansion, and the top choice was rising interest rates, cited by 27 percent of responses. This was closely followed by the regulatory environment (14 percent), financial instability in emerging markets (14 percent), and federal fiscal gridlock (11 percent).

Labor market growth has slightly decelerated since the last survey, as we have seen in recent jobs numbers. Nonfarm payroll growth should average 188,000 per month in 2014, down from the average of 197,000 in 2013. In the December survey, respondents had predicted 197,000 for this year. In 2015, business economists predict an average of 205,000 additional nonfarm employees each month.

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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Monday Economic Report – March 24, 2014

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

For much of the past month, people have been questioning how much of the recent softness in the manufacturing sector was due to weather and how much stemmed from other factors. The data released last week support the view that it was largely weather related, with numerous winter storms keeping shoppers from the stores and closing factories temporarily. Fortunately, manufacturing activity has rebounded in the latest reports. For instance, manufacturing production increased 0.8 percent in February, nearly offsetting January’s 0.9 percent decline, with capacity utilization for the sector rising from 75.9 percent to 76.4 percent. Similar rebounds were seen in the March surveys from the New York and Philadelphia Federal Reserve Banks, and more importantly, manufacturers continue to be mostly upbeat about new orders and shipments over the next six months.

In its monetary policy statement, the Federal Reserve Board’s Federal Open Market Committee (FOMC) acknowledged the negative effects of “adverse weather conditions” on recent activity. It also provided the following evaluation of the current economic environment:

Labor market indicators were mixed but on balance showed further improvement. The unemployment rate, however, remains elevated. Household spending and business fixed investment continued to advance, while the recovery in the housing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable.

The biggest news from the FOMC’s statement was the change in its forward guidance, as expected, to no longer mention an unemployment rate target. Since its December 2012 meeting, the FOMC has said it would pursue a highly accommodative monetary policy until the unemployment rate hit 6.5 percent and/or long-term inflation consistently exceeded 2.0 percent. With unemployment falling, this put the Federal Reserve in a predicament because job growth continues to be a challenge, particularly for the long-term unemployed, and progress in the unemployment rate fails to acknowledge loforw participation rates and underemployment that exists in the labor market. For this reason, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota opposed the change in the Fed’s guidance, and he subsequently said that he wanted a 5.5 percent unemployment rate target.

In the end, however, short-term interest rates cannot hover around zero percent forever, particularly with the U.S. economy improving. The Federal Reserve now forecasts real GDP growth in 2014 of 2.8 percent to 3.0 percent, with the unemployment rate falling to 6.1 percent by year’s end. The FOMC continued to taper its long-term asset purchases, down from $65 billion each month to $55 billion, and short-term interest rates are now expected to start rising sometime in 2015. (This is true even with new Federal Reserve Chair Janet Yellen’s suggestion that rates might begin to increase around six months after quantitative easing ends, a comment that spooked markets on Wednesday.)

Fortunately for the Federal Reserve, inflationary pressures remain minimal, allowing the FOMC to continue its stimulative measures for now. Consumer prices rose 0.1 percent in February, with core inflation increasing 1.6 percent over the past 12 months. Of course, higher interest rates could negatively impact spending, particularly for large consumer items and for business investments.

Along these lines, housing starts have stabilized a little, up from 905,000 annualized units in January to 907,000 in February, but still remain somewhat weak. On the positive side, housing permits—a proxy of future activity—exceeded 1 million for the first time since November, largely on gains in multifamily residential construction. Single-family permitting remained soft, however, and homebuilder sentiment continued to be down from where it was just a few months ago. In addition to weather challenges, National Association of Home Builders (NAHB) Chief Economist David Crowe attributes the current weakness to “a shortage of buildable lots and skilled workers, rising materials prices and an extremely low inventory of new homes for sale.”

Today, we will get March Markit Flash Purchasing Managers’ Index (PMI) data for the United States, China and Eurozone. In particular, economists will be looking to see if Chinese manufacturing activity continues to decelerate and if the slight easing in February’s data was a one-month phenomenon. (For more on international trends, see the latest Global Manufacturing Economic Update, which was released on Friday.) Other highlights this week include updates on consumer confidence, durable goods orders and shipments, GDP, manufacturing surveys from the Kansas City and Richmond Federal Reserve Banks, personal income and spending and state employment.

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

fed funds rate - mar2014

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Global Manufacturing Economic Update – March 21, 2014

Here is the summary for this month’s Global Manufacturing Economic Update:

Headlines around the world have focused on the Russian annexation of the Crimean peninsula from the Ukraine and the mysterious disappearance of a Malaysian Airlines jetliner. Each of these events injects an element of uncertainty in the global dynamic picture. Indeed, so far in 2014, the global economy has not built on the strong momentum that we saw in the second half of 2013. A number of winter storms in the United States, financial struggles in the emerging markets and decelerating growth in China have combined to soften growth in recent months. Yet, we should not lose track of the longer-term trend, as markets in many of our largest trading partners have made significant progress over the course of the past year, with modest growth rates overall.

The JPMorgan Global Manufacturing Purchasing Managers’ Index (PMI) increased from 53.0 in January to 53.3 in February, its highest point since April 2011. New orders, exports and hiring rose. That said, this global measure might also be skewed higher by stronger performance in the United States, with the Markit U.S. Manufacturing PMI jumping from 53.7 to 57.1, its fastest pace in nearly three years. Sales and production both rebounded in February after weather dampened demand and hampered output and shipments in January. Elsewhere, there were signs that manufacturing activity eased somewhat in February in a number of areas, with a definite split between the developed nations and emerging markets. The HSBC Emerging Markets Index dropped from 51.4 to 51.1, influenced by contracting levels of activity in China, Russia and South Korea.

Speaking of China, its manufacturing PMI has now contracted for two straight months, and a number of economic indicators suggest that its economy has continued to decelerate. Industrial production has slowed from 10.4 percent in August to 8.6 percent in February, and fixed asset investment and retail sales have also eased significantly. These data points suggest that real GDP might fall below the 7.7 percent rate seen in the fourth quarter. Still, growth remains strong overall, even if these figures are well below the rates of growth that many businesses have become accustomed to. In other news, the Bank of China has worked to weaken its currency over the past month, with the Chinese yuan depreciating more than 2 percent since mid-February. The Chinese government has engineered this devaluation, it says, to help fend off speculators; yet, it is also important to note that the yuan has generally appreciated against the U.S. dollar since 2005. (See the attached graphic.)

Looking at our largest trading partners, 8 of the top 10 markets for U.S.-manufactured goods had expanding levels of manufacturing activity, with five countries experiencing slightly faster growth in February than in January. For example, the Canadian economy grew marginally faster in the fourth quarter, with real GDP up 2.9 percent in the fourth quarter. Manufacturing capacity utilization and shipments have also picked up recently, and the RBC Canadian Manufacturing PMI increased from 51.7 to 52.9, suggesting modest growth.

Meanwhile, in Europe, sentiment dipped somewhat in February, but the trend since last summer remains positive. New orders, exports and production eased a little for the month, but growth still remained healthy overall. Real GDP increased 0.3 percent in the fourth quarter, but growth is expected to rise to 1.1 percent for 2014 as a whole. While that indicates very slow growth, it is enough to provide a psychological boost to many businesses and consumers. The one issue that we do continue to worry about is possible disinflation, with still-weak demand keeping price growth at a minimum. Consumer prices have risen just 0.7 percent over the past year, for instance.

On the policy front, the Senate Finance Committee boasts a new chairman, as trade legislation from Trade Promotion Authority (TPA) to the Miscellaneous Tariff Bill (MTB) awaits action. Globally, Russia’s activities in Crimea and the Ukraine are prompting action by the Obama Administration and Congress, while trade talks in the Asia-Pacific and with Europe continue. Work has started on a bill to reauthorize the Export-Import (Ex-Im) Bank before the end of September. Manufacturers are also seeking input on which products should be covered by new international negotiations to eliminate tariffs on environmental goods.

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

chinese yuan - mar2014

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Manufacturing Production Rebounded in February, Offsetting Weather-Related Softness in January

The Federal Reserve Board said that manufacturing activity rebounded in February following weather-related weaknesses in January. Manufacturing production increased 0.8 percent in February, nearly offsetting the revised 0.9 percent decline from the month before. The year-over-year pace of manufacturing output rose from 1.3 percent to 1.5 percent. These very modest rates of growth reflect significant deceleration from the 3.8 percent pace seen in October. In terms of annual rates for the specific sectors, durable goods manufacturers had larger increases in production than their nondurable goods counterparts (up 2.7 percent to 0.5 percent, respectively).

Capacity utilization also mostly recovered in February, up from 75.9 percent to 76.4 percent. This was still below the 76.7 percent utilization rates observed in both November and December.

In February, durable and nondurable goods production rose 0.9 percent and 0.7 percent, respectively. The largest gains were seen in the motor vehicles and parts (up 5.7 percent), computer and electronic products (up 5.2 percent), plastics and rubber products (up 4.3 percent), machinery (up 3.0 percent), and furniture and related products (up 3.0 percent) sectors.

Nonetheless, there were 7 of the 19 major manufacturing sectors with continued declines in output, suggesting that the rebound could still be broader. Areas with decreased production included textile and product mills (down 2.7 percent), paper (down 2.0 percent), electrical equipment and appliances (down 1.4 percent), petroleum and coal products (down 1.3 percent), and wood products (down 1.2 percent).

Meanwhile, overall industrial production recovered in February, as well, up 0.6 percent following the 0.2 percent decline in January. In addition to the bounce-back in manufacturing, mining output rose 0.3 percent. Utility production declined 0.2 percent, but that followed a 3.8 percent jump in January as more Americans were using more energy to heat their homes. Industrial production increased 2.8 percent over the past 12 months, with capacity utilization rising 1.9 percent to 78.8 percent in February.

In summary, much has been made about the negative impact of weather on manufacturing output in the past couple months, and the February data suggest that production has picked back up as the temperatures warmed up, as we expected. (Ironically, I am writing this during yet another snow day here in Washington.)

Manufacturing production rose an annualized 3.0 percent in the second half of 2013, with durable goods output up 4.3 percent at the annual rate, providing a lot of momentum for 2014. Moreover, manufacturers are mostly upbeat about stronger demand and production over the coming months, a finding that we observed in the recent NAM/IndustryWeek survey. Still, the modest growth rates of the past couple months remind us that economic growth can be quite fragile, necessitating the need for pro-growth policies to keep the momentum going.

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

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Monday Economic Report – February 24, 2014

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

Mark Twain once said, “If you don’t like the weather in New England, just wait a few minutes.” Indeed, the poor weather conditions that temporarily closed many facilities and hampered shipments in the manufacturing sector over much of the past few weeks appear to have improved. Yet, the damage can be seen in many of the latest economic indicators released last week. Regional surveys from the New York and Philadelphia Federal Reserve Banks showed softness in new orders and production in February. This followed reports from earlier in the month that manufacturing production and the Institute for Supply Management’s (ISM) Purchasing Managers’ Index (PMI) both dropped sharply in January. Housing data were also weak, with new starts down 16 percent in January and homebuilder confidence plummeting 10 points in one month.

To the extent that weather was the primary factor in reducing activity, one should not over-interpret these results to suggest they indicate broad-based weaknesses in the economy. The same data sources provide hints that the momentum manufacturers experienced at the end of 2013 will continue into 2014. For example, housing permits fell less sharply in January, particularly for single-family homes, indicating that the intent to start new residential construction has largely been sustained (even if weather prevented homebuilders from doing so). Similarly, the New York and Philadelphia Federal Reserve surveys continue to report optimism for the next six months, with essentially half of the respondents in both surveys anticipating sales increases. Production, hiring and capital spending are also expected to rise in both regions.

Moreover, the Markit Flash U.S. Manufacturing PMI appeared to shrug off weather concerns altogether, up from 53.7 in January to 56.7 in February. The pace of growth for new orders (up from 53.9 to 58.8) and output (up from 53.5 to 57.2) increased significantly, with sales growth at its highest level since May 2010. Such data reinforce the notion that manufacturing should rebound from recent weaknesses.

Still, there were signs that global growth might also have slowed a bit. While European manufacturing activity continues to expand modestly and has made substantial progress after its deep two-year recession, there was a slight deceleration in the pace of growth in many key indicators in the preliminary February data. Meanwhile, the HSBC Flash China Manufacturing PMI has now contracted for two straight months, down from 49.5 in January to 48.3 in February. This suggests that the easing that we saw in industrial output during the final months of last year might be continuing in 2014. Nonetheless, even with reduced activity, the Chinese economy continues to grow solidly, with real GDP up an annualized 7.7 percent in the fourth quarter and industrial production up 9.7 percent year-over-year in December.

Regarding price stability in the United States, consumer and producer price data showed modest growth in January. Cold weather had an impact, with higher home heating costs pushing up natural gas and electricity prices. At the same time, pricing pressures remained minimal and in line with the Federal Reserve Board’s stated goal of keeping core inflation below 2 percent at the annual rate. This has allowed the Federal Reserve the luxury of pursuing highly accommodative monetary policies to try to stimulate growth. At the same time, the minutes from the January Federal Open Market Committee meeting suggests that better economic data might necessitate higher short-term interest rates by year’s end—sooner than expected. Either way, with the unemployment rate nearing 6.5 percent, the Federal Reserve will need to change its forward guidance. Long-term asset purchases are anticipated to end by mid-2014.

This week, the highlight will come on Friday when fourth-quarter real GDP will be revised. The consensus is for real GDP to decline from its earlier estimate of 3.2 percent to 2.3 percent. We will also get three new perspectives regarding current regional manufacturing activity in surveys from the Dallas, Kansas City and Richmond Federal Reserve Banks. These reports will be closely watched given the declines seen in last week’s releases. In addition, preliminary data on new durable goods orders and shipments are anticipated to reflect significant weaknesses. Other important releases include new data on consumer confidence, new home sales and the national activity index.

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

ppi - feb2014

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Monday Economic Report – February 18, 2014

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

A perfectly timed winter storm at the end of last week coincided with news that cold weather has had a negative impact on consumer spending and manufacturing output. Manufacturing production declined 0.8 percent in January, ending five straight months of expanding activity. Poor weather conditions closed some facilities and hampered shipments. Capacity utilization also decreased, down from 76.7 percent in December to 76.0 percent in January. That was the lowest utilization level since July. Yet, to the extent that weather contributed to the fall in manufacturing output, I would expect production to rebound in the coming months. After all, manufacturing production increased 3.0 percent in the second half of 2013, and manufacturers continue to be mostly upbeat about demand for 2014.

Nonetheless, we saw the effects of the weather in other indicators released last week as well. Retail sales fell 0.4 percent in January, extending December’s 0.1 percent decline. Reduced auto sales were a major factor in this decrease, with motor vehicle purchases down 1.8 percent in December and 2.1 percent in January. If you exclude autos from the analysis, retail spending was unchanged.

Although the University of Michigan and Thomson Reuters consumer sentiment measure was unchanged in February, respondents’ view of the current economy has slipped since December. One might surmise that weather impacted labor markets and incomes, lessening current confidence. However, Americans seem more optimistic about the future, with the expectations component rising from 71.2 in January to 73.0 in February.

There were signs that the U.S. economy’s recent improvements continue to bear fruit. Small business leaders have become more confident, with the National Federation of Independent Business’s Small Business Optimism Index edging higher for the third straight month, and January’s data also show an increased willingness to add workers. The net percentage planning to hire in the next three months rose to its highest level since September 2007. Along those lines, the number of manufacturing job postings increased from 283,000 in November to 297,000 in December. We have seen job openings in the sector recover from weaknesses midyear in 2013. Nonetheless, manufacturing net hires eased in December, and there was notable softness in the larger economy, both for new hires and job openings.

This week, we will get new numbers for the housing market and the latest data on manufacturing activity from a number of sources, including surveys from the New York and Philadelphia Federal Reserve Banks and Markit. The latter will report Flash Purchasing Managers’ Index (PMI) findings for the United States, China and the Eurozone. We will be looking for further evidence on the impact weather has had for manufacturers in the United States and for signs of improvement overseas. The Chinese PMI data had contracted in January’s report, but with output continuing to grow modestly. (For more information on worldwide trends, see the Global Manufacturing Economic Update, which was released on Friday.) Other highlights for the week include the latest data on consumer and producer prices, leading indicators and existing home sales.

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

retail sales - feb2014

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Manufacturing Production Declined 0.8 Percent in January, Likely Pulled Lower by Poor Weather

The Federal Reserve Board said that manufacturing production declined 0.8 percent in January, the first decrease in output in six months. The reduction in production was likely pulled lower by poor weather conditions, which we have seen in other indicators, as well. Still, the decrease was larger than anticipated, with overall industrial production well below the consensus expectation of a 0.3 percent increase. Mining production was also lower for the month, down 0.9 percent; whereas, utility output – most likely driven by colder temperatures – was up 4.1 percent.

The year-over-year pace of manufacturing output declined from 2.0 percent in December to 1.3 percent in January. Moreover, manufacturing capacity utilization fell from 76.7 percent to 76.0 percent. While these declines are significant, they are likely temporary, to the extent that weather was the main contributing factor.

Looking specifically at the January data, manufacturing output was off mostly across-the-board, with all but four of the 19 major sectors experiencing declines. Durable and nondurable goods production each decreased by 0.8 percent. The largest decline came in the motor vehicle sector, with monthly output down 5.0 percent. Other sectors with substantial losses included wood products (down 2.6 percent), electrical equipment and appliances (down 1.9 percent), textile and products mills (down 1.7 percent), printing and support (down 1.3 percent), food, beverage and tobacco products (down 1.2 percent), and furniture and related products (down 1.1 percent).

At the same time, there were increases in production observed in the computer and electronic products (up 0.9 percent), nonmetallic mineral products (up 0.7 percent), machinery (up 0.6 percent), and apparel and leather (up 0.2 percent).

In short, production and capacity utilization figures for the manufacturing sector were off sharply in January. This was particularly disappointing given the strong increases in demand and output that we saw at year’s end. Indeed, manufacturing production rose 3.0 percent at the annual rate in the second half of 2013, providing some momentum for 2014. Yet, January’s reductions in output were more than likely due to poor weather conditions, which closed some facilities and hampered shipments. To the extent that weather was a contributing factor, I would expect for manufacturing production to rebound in the coming months.

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

industrial production

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Monday Economic Report – February 10, 2014

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

Hiring in the manufacturing sector continued to expand in January, averaging 15,500 per month since August. This uptick in employment for manufacturers has corresponded to the acceleration in product demand and production in the second half of 2013, with cautious optimism for 2014. However, the overall jobs numbers were disappointing for the second straight month. Nonfarm payrolls grew by just 75,000 and 113,000 in December and January, respectively, which was well below the consensus expectation of 175,000 and the 2013 average monthly gain of 193,500.

Some of the releases out last week show the negative impact that weather has had on activity. For instance, new factory orders declined 1.5 percent in December, with broad-based weaknesses in the durable goods sector pulling the data lower. Shipments were also down. Likewise, manufacturing construction spending fell 5.1 percent in December, which was notable because of a mostly upward trend from June to November. Overall construction activity edged marginally higher in December, boosted by strong residential construction activity, but nonresidential and public spending was down.

The Institute for Supply Management’s Purchasing Managers’ Index (PMI) report showed a considerable decline in manufacturing sentiment, down from 56.5 in December to 51.3 in January. The biggest declines were in new orders, output and employment, but the pace of export orders was off only slightly. The pace of export orders was off only slightly. This indicates that domestic factors were the main contributors of the decline.

Meanwhile, the U.S. trade deficit rose from $34.56 billion in November to $38.70 billion in December, but the deficit narrowed for 2013 as a whole. Petroleum was a major factor in the smaller trade deficit last year, with increased petroleum exports and fewer imports. Unfortunately, manufactured goods exports did not increase as much last year as we would have preferred, up just 2.4 percent in 2013 versus 5.7 percent in 2012. We hope stronger global economic growth will produce improved manufactured goods exports in 2014.

In other news, the Congressional Budget Office released its 10-year budget and economic outlook. The deficit will be $514 billion in fiscal year 2014, an improvement from the more than $1 trillion deficits in fiscal years 2009–2012 and the $680 billion deficit in fiscal year 2013. The report shows the growth of mandatory spending rising from $2.03 trillion in fiscal year 2013 to $3.74 trillion in fiscal year 2024. Because of this, federal deficits will start to rise again beginning in fiscal year 2017, with deficits exceeding $1 trillion in fiscal year 2022. With such facts, it should not be a surprise that 86.3 percent of manufacturers want policymakers to find a long-term federal budget deal that tackles the debt and deficit, including reining in entitlements.

This week, we will get new industrial production data on Friday. The last report showed manufacturing output rising at an annualized 4.2 percent rate in the second half of 2013, but we will see if the data show production easing somewhat in January due to weather or other factors. The consensus expectation is for modest output gains of roughly 0.3 percent. Other highlights will be the latest figures on consumer confidence, job openings, retail sales and small business optimism.

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

cbo entitlement spending - feb2014

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Monday Economic Report – January 21, 2014

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

Manufacturing production rose 2.6 percent in 2013, slowing from the 3.5 percent and 3.2 percent growth rate experienced in 2011 and 2012, respectively. Yet, the lower 2013 figure stemmed largely from weaknesses in the first half of the year, with manufacturing output rising an annualized 4.2 percent in the second half. As such, the sector ended the year on a strong note, with a pickup in demand and cautious optimism for 2014. Indeed, a number of other reports reached the same conclusion. Surveys from the New York and Philadelphia Federal Reserve Banks and from the Manufacturers Alliance for Productivity and Innovation (MAPI) both observed expanding levels of activity in their latest releases. Respondents to these surveys tended to be mostly upbeat about new orders, shipments, exports and hiring over the coming months—which is definitely good news.

Over the past couple years, the rebound in the housing sector has been one of the bright spots in the U.S. economy. Housing starts were lower in December, but it seems the November data were a bit of an outlier. Absent that soaring figure, new residential construction was generally higher to end 2013, particularly for single-family units. New single-family starts increased 7.6 percent year-over-year. Housing permits also eased slightly in December but increased 4.6 percent from the year before. The reduction in housing activity could have been due to severe winter storms, with somewhat higher borrowing costs as another possible contributing factor. The average 30-year mortgage rose from 4.29 percent in the week of November 27 to 4.48 percent in the week of December 26, according to Freddie Mac. Nonetheless, this still historically low rate helps to explain the generally upbeat assessment of home builders.

Meanwhile, the pace of retail sales slowed in December, with reduced auto sales dragging the overall figure lower. Still, motor vehicle sales increased 5.9 percent in 2013, making it one of the stronger components of consumer spending growth. Excluding autos, retail sales would have risen by 0.7 percent last month, suggesting broader strength than the headline figure implies. On a year-over-year basis, total retail spending increased 4.1 percent, a modest pace that marks the slowest since 2009.

The two measures of sentiment moved in opposite directions. Preliminary data from the University of Michigan and Thomson Reuters on consumer confidence was surprisingly lower for the month, down from 82.5 in December to 80.4 in January. The December data has noted a recovery in perceptions about the economy after falling in the wake of the government shutdown, and the expectation had been for January’s data to extend those gains. With a reduction in sentiment instead, this suggests that the public remains somewhat anxious about economic conditions. At the same time, the National Federation of Independent Business (NFIB) noted an increase in optimism for the second straight month. Underneath the main reading, however, the data were mixed, with more small business owners calling it a “good time to expand” but with sales and earnings remaining subpar.

In terms of news events, outgoing Federal Reserve Chairman Ben Bernanke delivered a speech at the Brookings Institution that provided his take on the lessons learned from the financial crisis. This “exit interview”—as it has been widely dubbed—was mostly a valedictory address defending the Fed’s monetary actions to help stimulate growth in the economy. Coincidently, Bernanke gave it on the same day that the Bureau of Labor Statistics reported that core consumer inflation had risen by just 1.7 percent over the past year. A similar conclusion on producer prices had been released the day before, and in each case, the data suggested that pricing pressures were increasing within an acceptable range, at least for now, according to the Fed’s stated targets.

There will only be a handful of economic data releases this week. From the manufacturing perspective, the highlights will come on Thursday. Markit will provide “flash” estimates for its purchasing managers’ index (PMI) reports for the United States, the Eurozone, and China. In addition, the Kansas City Fed will discuss the latest results of its regional manufacturing survey. In each instance, the expectation will be for manufacturers to note continued growth, building on recent gains. Other data releases include updates on the leading economic index and existing home sales.  

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

manufacturing production - jan2014

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