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Monday Economic Report – August 19, 2013

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

For much of the past few weeks, economic data seemed to show manufacturing activity picking up. This was welcome news given the weaknesses in the sector over the past year, especially during the spring. The data released last week tended to find that gains in output and sales might be smaller than hoped. Manufacturing production, for instance, declined by 0.1 percent in July, and the year-over-year rate continues to be a disappointing 1.3 percent. A broad spectrum of segments in the sector saw softness, with capacity utilization edging lower again—a downward trend that has occurred all year. In addition, surveys from the New York and Philadelphia Federal Reserve Banks found that sentiment had eased in both regions. While both districts continue to grow, the pace has decelerated this month.

These surveys also continue to reflect cautious optimism for the next six months, with generally higher expectations for new orders and production. Plans to increase hiring or capital spending were also predicted to be higher, albeit more modestly. Similarly, the National Federation of Independent Business’s (NFIB) optimism index was higher last month, with a slight increase in the percentage of respondents saying the next three months were a good time to expand. In fact, many key variables have reflected improvements in the past few months, even as earnings and overall sentiment remain subpar. Of those saying the next three months were not a good time for expansion, the economy and political environment were the main reasons.

Meanwhile, the University of Michigan and Thomson Reuters reported that consumer confidence was somewhat lower in August, with higher gasoline prices and borrowing costs most likely reducing optimism. Americans remain more confident today than they were at the beginning of the year; yet, they tend to react to pocketbook issues in general. So far, the reduced perceptions of the current economic environment has not altered consumer spending significantly. July’s retail sales figures were mostly higher. At the same time, higher interest rates have perhaps dampened monthly purchases in motor vehicles, home improvement, home furnishings and electronics. On the residential front, new housing starts and permits were higher in July, but single-family unit construction was marginally lower. While the prospects for growth in housing remain strong, the data suggest that higher mortgage rates probably will dampen activity moving forward.

On the pricing front, core consumer and producer inflation, excluding food and energy costs, continues to be under control—at least for now. Core prices remain below 2 percent on an annual basis, the stated goal of Federal Reserve Board policymakers. This has allowed the Federal Reserve to pursue “highly accommodative” monetary policies in an effort to stimulate economic growth. However, the producer price data report higher costs at the crude level, mainly stemming from recent petroleum increases. This could suggest accelerated prices in the coming months as these costs work through the production process.

This week, monetary policy will again come into focus with the release of the minutes from the Federal Open Market Committee’s July meeting and with news coverage of the annual symposium in Jackson Hole, Wyo. The Kansas City Federal Reserve Bank will hopefully show continued improvements in manufacturing activity in its region. On the international front, Markit will publish Flash Purchasing Managers’ Index (PMI) data for the Eurozone and China. Recent data have suggested some stabilization in both regions, including the announcement last week that real GDP in the Eurozone grew for the first time since the third quarter of 2011. Other highlights this week include data on existing and new home sales, leading economic indicators and state employment.

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

Dallas Fed: Manufacturing Activity Expands for the Second Straight Month

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The Dallas Federal Reserve Bank noted slight expansions in manufacturing activity in July, building on the progress made in June. With that said, there was a modest easing in sentiment relative to the month before. The composite measure of general business activity declined from 6.5 in June to 4.4 in July. The good news was that it was the second straight month of modest growth, following sharp declines in activity in both April and May.

The trend of positive growth — albeit less so than the month before — carried through to many of the other measures, as well. For instance, the index for new orders decreased from 13.0 to 10.8. This still indicates decent sales growth, with 28.7 percent of respondents saying that orders were higher this month. At the same time, a little over half reported no change in sales. Similar findings were seen in the production, capacity utilization, and capital expenditures indices.

Meanwhile, two key variables noted improvements in July. First, the index for shipments rose from 15.4 to 17.7, with over 29 percent saying that their shipment levels had increased since June. Second, hiring has moved from being stalled to growing moderately, with the employment index accelerating from 0.2 to 9.3 for the month. Given the recent sluggishness in the jobs market, this is a good sign. Yet, the fact tha three-quarters of respondents reported unchanged employment levels suggests that there is still a lot of room for future progress.

Speaking of which, the forward-looking components were mostly optimistic. Manufacturers were cautiously positive about the next 6 months. For example, 40.6 percent expect increased sales and 49.5 percent anticipate higher production in the second half of 2013. In addition, hiring and capital investments were also predicted to grow.

Nonetheless, even with these figures, it is also clear that manufacturers remain somewhat tentative in their views about the coming months. You can definitely see this in the sample comments. For instance, a chemical manufacturer said, “Business for July and August has increased, but it is still too early to know if this is a step increase in business or just a blip.” Others cited uncertainties with the implementation of the Affordable Care Act, other possible regulations, and federal government spending.

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

Kansas City Fed: Manufacturing Activity Experiences Modest Growth in July

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In the most recent Beige Book from the Federal Reserve Board, activity in the Kansas City Fed was singled out for one of the few districts where manufacturing activity had weakened in June. Severe weather disruptions were the primary contributors of last month’s decrease, reversing the modest gain that was observed in May.

With that as a background, the July manufacturing survey was destined to be closely watched, looking for progress. Indeed, the Kansas City Fed found that manufacturing activity rebounded this month, with its composite index improving from -5 to 6. Chad Wilkerson, a vice president and economist at the Kansas City Fed, noted, “We saw several positive things in this month’s survey. Production and shipments rebounded after being disrupted by storms last month, [and] while some firms remain hesitant to expand, overall capital spending and hiring plans remain positive.”

The various subcomponents show the progress made since the past survey, with the index for new orders rising from -10 to 5 and the production index up from -17 to 21. This suggests a fairly healthy turnaround in activity, from contraction to modest growth. Export orders also turned positive, up from -5 to 2. Still, roughly half of the respondents suggest that sales and output activity was unchanged between June and July, with three-fourths noting flat export orders. This indicates that growth is perhaps not as broad-based or robust as we might like to see.

In fact, employment was negative for the month (down from -1 to -2), and the average workweek continued to shorten, even as there was a slowing in its decline (up from -13 to -6). The sample comments tend to back this up, with it clear that there is some hesitance to bring on new workers right now.

The good news, though, is that manufacturers are cautiously optimistic about future growth, with higher levels of new orders, production, capital spending, and employment expected. This is essentially the basis of the Kansas City Fed’s statement quoted above. The index for expected employment six months from now was unchanged at 7, indicating moderate growth in hiring moving forward. Behind this figure are higher anticipated sales, with 38 percent of respondents expecting orders to increase in the second half of this year. The more-positive perception of possible growth in the coming months is a consistent finding, and one that we have seen in other sentiment surveys, as well.

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

Europe Grows (Barely) for the First Time in Two Years, While China Contracts for the Third Straight Month

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After contracting for 23 straight months, manufacturing activity in the Eurozone grew (barely) in July, according to preliminary data from Markit. The Markit Flash Eurozone Manufacturing PMI rose from 48.8 in June to 50.1 in July, just above the all-important threshold of 50 which signifies expansion in the sector on net. The last time that the manufacturing PMI figure was over 50 was June 2011. While Europe continues to have political and economic issues, we have seen the pace of the decline slow in recent months. July’s increase is the culmination of gains made since March’s 46.7 reading and the 44.0 value observed in June 2012.

Increased output was the main driver of this month’s higher figure, with the index for production up from 49.5 to 52.3. Demand rose both in the Eurozone and for exports, with the new orders index up from 49.1 to 50.4 and exports rising from 49.0 to 50.9. This should bode well for manufacturing activity moving forward, but it is also clear that weaknesses persist. While there are small gains in output and sales, employment remains negative, albeit less so, up from 47.5 to 49.0. Similarly, sellers continue to have to lower their prices to sell their goods, even some easing in the decline in output prices (up from 47.9 to 48.5). Nonetheless, the general consensus about these data have been overwhelming positive, with many perceiving the shift from contraction to growth as a sign that Europe might be starting to turn a corner.

In contrast to Europe’s gains, China’s manufacturing activity appears to be slipping. The HSBC Flash China Manufacturing PMI declined from 48.2 in June to 47.7 in July. Growth in China has been decelerating for much of this year, spilling over into data on production and demand. This was the third straight month of sub-50 PMI readings for the manufacturing sector. Index values were lower for output (down from 48.8 to 48.2), new orders (down from 47.1 to 46.6), and employment (down from 47.9 to 47.3). On a somewhat positive note, while they were still contracting, new export sales were decreasing at a slower rate (up from 44.0 to 47.7). Moreover, output price declines also eased for the month (up from 42.9 to 47.2), even as sellers continue to have to reduce their prices to sell goods.

Meanwhile, manufacturing activity in the U.S. appears to be picking up, a conclusion that we have seen in other economic indicators, as well. The Markit Flash U.S. Manufacturing PMI increased from 52.2 in June to 53.2 in July. This was the fastest pace since February’s 54.9 reading, perhaps a sign that the sector has returned to modest growth after pervasive softness in the market in the spring months. The improvements in July’s data stem largely from a faster pace of growth for new orders (up from 53.7 to 55.1), with gains in export orders, as well (up from 47.5 to 52.3). The international piece is key, particularly given the weakness that we have seen in manufacturing goods exports so far in 2013.

In addition, employment, which has been relatively flat in June, edged slightly higher in July (up from 50.4 to 52.6). Despite the uptick in new orders, the index for output was virtually unchanged for the month (up from 53.9 to 54.0), but still reflects modest gains. The news about higher sales, though, should push production higher in coming months, particularly as stockpiles of finished goods remain low. The inventory index contracted in July (down from 51.0 to 47.0) and has had sub-50 readings in 9 of the past 12 months.

Flash data utilize most, but not all, of the survey responses. Markit says that it usually includes 85 percent of the incoming data for its Flash releases. The final data will include all information, with the final PMI releases for each of these data points scheduled for August 1.

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

Monday Economic Report – July 22, 2013

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

The manufacturing sector received a bit of good news last week with new data suggesting that the sector has improved in June and July from the weaknesses during the spring. Both the Empire State Manufacturing Survey from the New York Federal Reserve Bank and the Business Outlook Survey from the Philadelphia Federal Reserve Bank showed gains in their July reports, with mostly higher activity levels. Respondents were also cautiously optimistic about the second half of 2013, with nearly 60 percent of those taking the Philly Fed survey anticipating higher sales in the next six months. However, employment still lags behind. While the hiring measures in these surveys indicated positive growth, it was only up slightly, and in the Empire State study, the average workweek was down on net.

For its part, the Federal Reserve Board concurred with this assessment. The Beige Book reported that manufacturing activity was picking up in almost all of its districts. The one exception was the Kansas City Fed, where severe weather disruptions contributed to the decline in production in its June survey. At the same time, the Federal Reserve reported that industrial production grew 0.3 percent in June, an improvement from May’s flat reading and April’s decline of 0.3 percent. Manufacturing production has had small gains during the past two months. Manufacturing production is up just 0.4 percent during the first six months of 2013, or perhaps more positively, up 1.8 percent over the past 12 months. Still, soft demand has dampened sales and output. Ideally, we would like to see industrial production growth of 4 percent or greater.

In his semiannual congressional testimony, Federal Reserve Chairman Ben Bernanke said, “The economic recovery has continued at a moderate pace in recent quarters despite strong headwinds created by federal fiscal policy.” Moreover, he added, “The economy remains vulnerable to unanticipated shocks, including the possibility that global economic growth may be slower than currently anticipated.” With that in mind, he reiterated his view that the Federal Open Market Committee will maintain its “highly accommodative” policies for the foreseeable future—something that would not be altered by possibly scaling back its asset purchases later this year. For its part, the latest Consumer Price Index data—much like the producer price reports released the week before—show that core inflation is under control, with year-over-year rates below the Federal Reserve’s stated target of 2 percent. However, the significant increase in energy costs during the past few weeks have caused prices at both the consumer and producer level to accelerate, which the Federal Reserve will continue to monitor.

As noted in last week’s report, interest rates have also been on the rise. The average 30-year fixed-rate mortgage, according to Freddie Mac, was 4.37 percent last week, a full percentage point higher than the first week of May. We would expect that higher mortgage rates would dampen some of the enthusiasm for housing (even with rates that are still historically low). Indeed, new residential construction and permits in June declined sharply. Fortunately, much of the decrease was in the highly volatile multifamily unit segment, with single-family starts off less dramatically. Moreover, new housing permits for single-family units edged slightly higher, perhaps indicating that the housing recovery will continue its upward ascent, even with some downward pressure from higher rates. From the homebuilder perspective, the Housing Market Index (HMI) suggests that builders remain very confident, with the index up six points in July.

This week, we will see if the improvements in manufacturing activity were limited to just a few reports, or if it is more broad-based. New durable goods orders, with preliminary numbers out on Thursday, are expected to show modest gains in June. In addition, sentiment surveys from the Kansas City and Richmond Federal Reserve Banks will be out, with the former hopefully showing recoveries from weaker storm-related data in June. Internationally, we will also get Flash Purchasing Managers’ Index (PMI) data from Markit for both Europe and China, both of which contracted in their last reports. Look for continued slowness in China and for Europe’s recession to produce yet another negative PMI reading for July (which would be its 24th consecutive monthly sub-50 figure). Other data of note include Flash PMI data for the United States, the Chicago Fed’s National Activity Index and a final consumer sentiment statistic from the University of Michigan and Thomson Reuters.

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

Monday Economic Report – July 15, 2013

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Here is a summary of this week’s Monday Economic Report:

Federal Reserve Chairman Ben Bernanke made news last week in a speech before the National Bureau of Economic Research. He said that monetary policy would stay highly accommodative “for the foreseeable future.” Financial markets soared on this news, but long-term interest rates have already moved steadily higher since the last Federal Open Market Committee (FOMC) meeting, where it was suggested that a “tapering” of asset purchases might be possible later this year. For instance, Freddie Mac reports that 30-year mortgage rates have risen from 3.35 percent at the beginning of May to 3.91 percent at the start of June to 4.51 percent last week. Not surprisingly, this has led to a decline in mortgage applications in June, which could impact housing starts and permits data out this Wednesday.

Meanwhile, the cost of petroleum has skyrocketed over the past few weeks, with political instability in Egypt and reduced supplies in the United States sending prices higher. As recently as June 21, the spot price of West Texas Intermediate crude was $93.81 per barrel, but on Friday, it closed at $106.17 a barrel. This will lead to higher gasoline prices at the pump, which could zap some optimism we have seen recently. The University of Michigan’s July consumer sentiment numbers edged slightly lower than what we saw in June, but the data generally suggest that Americans are more positive now than earlier this year. Higher energy costs could also accelerate inflationary pressures, which have been mostly in check for much of the year. Even before the recent run-up in crude oil costs, the Producer Price Index rose 0.8 percent in June, largely on increased energy prices. Producer prices have been modest over the past year, up just 1.4 percent. If the current oil prices are sustained, look for pricing pressures to accelerate.

Two manufacturing surveys released last week echoed other studies, which have found some recent progress in the sector regarding new orders and production. Yet, both the California Manufacturing Survey from Chapman University and the Business Outlook Survey from the Manufacturers Alliance for Productivity and Innovation (MAPI) also noted some persistent weaknesses. Respondents in California still had a high degree of caution moving forward, and hiring plans were less positive than other indicators. At the same time, MAPI’s analysis noted shrinking export sales, with weaker global demand dampening enthusiasm for foreign investment as well. Worldwide manufacturing activity has grown very slowly in the past month, according to the most recent Global Manufacturing Economic Update, with Europe’s recession and a deceleration of growth in China hurting exports.

This week, we will see if recent improvements in manufacturing activity—modest as they might be—continue, or if the slowing global environment hurts sales and production figures. The New York and Philadelphia Federal Reserve Banks will release their latest surveys. Both had shifted from a slight contraction to modest growth in last month’s reports. In addition, the Federal Reserve Board is expected to show a slight gain in industrial production in June, after being unchanged in May. Overall, manufacturing production has grown just 1.7 percent over the course of the past 12 months, a figure that is subpar and that we hope picks up in the coming months. Other key data releases out this week include the Consumer Price Index, leading economic indicators, new residential construction, retail sales and state employment.

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

Monday Economic Report – January 28, 2013

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Here is a summary of this week’s Monday Economic Report:

Several economic variables pertaining to manufacturing continue to show weaknesses in the marketplace, despite the fiscal cliff compromise reached earlier this month. In December, our NAM/IndustryWeek survey showed that uncertainty due to the fiscal cliff had forced firms on average to pull back on hiring and capital spending, and this trend appears to be continuing—at least for now. Over the course of the past two weeks, there have been four regional Federal Reserve Bank manufacturing surveys (Kansas City, New York, Philadelphia and Richmond), each showing contraction in their January reports. The nation’s fiscal challenges—and the concern over how Washington will deal with them—remain on business leaders’ minds.

However, manufacturers continue to be mostly positive about improved activity in 2013, even if their optimism has diminished somewhat over the past few months. For instance, the four regional Fed surveys anticipate higher sales and production over the next six months, with employment and investment also increasing, albeit more slowly. Other data points also indicate possible gains in the months ahead. Markit’s Flash Manufacturing Purchasing Managers’ Index (PMI) bucked the other surveys by rising from 54.2 in December to 56.1 in January. Strong gains in new orders and output fueled the increase. Meanwhile, the Conference Board’s Leading Economic Index rose 0.5 percent in December (although this forward-looking measure’s gains benefitted mostly from non-manufacturing variables).

Increased building permits contributed positively to the Leading Economic Index. Housing, in general, continues to be a bright spot, despite some of December’s numbers being weaker than November’s. Both existing and new home sales data declined in December. In each case, however, the longer-term trend reflects a significant turnaround in the sector. Existing home sales rose 12.8 percent in 2012, and new single-family home sales were up 8.8 percent for the year.

This week, we will be closely following a number of economic releases. On the employment front, I anticipate non-farm payrolls will rise at roughly the same rate as last month, up around 150,000 or so, with manufacturing hiring increasing more modestly. We will also get our first glimpse of real GDP growth for the last quarter of 2012, with my estimate being around 1.8 percent. The other big news of the week will be the Federal Open Market Committee (FOMC) meeting. While it will have new voting members this year, it is widely expected to continue its accommodative policies in an attempt to stimulate growth. Other data highlights for the week include regional manufacturing surveys from the Chicago and Dallas Federal Reserve Banks and new data on durable goods orders, consumer confidence, personal spending and construction activity.

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

Monday Economic Report – December 26, 2012

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

We end the year with mixed news on the economy and ever-present uncertainty about the U.S. fiscal situation. The Bureau of Economic Analysis upwardly revised its figure for third-quarter real GDP to 3.1 percent—a healthy increase from its original estimate of 2 percent. However, slowing global sales and anxieties about the fiscal cliff have caused consumers and businesses to pull back. Both the Manufacturing Alliance for Productivity and Innovation (MAPI) and the National Association for Business Economics (NABE) suggest that industrial production will grow more slowly in 2013. Overall employment is also not anticipated to change much from this year.

Several other data points suggest continued sluggishness, even as some point to modest improvements during the past month. The Conference Board’s Leading Economic Index declined in November and has been flat over the course of the past six months. The Chicago Federal Reserve Bank’s National Activity Index finds that the U.S. economy continues to operate below its historical average. Meanwhile, manufacturing surveys from the Kansas City and New York Federal Reserve Banks observe contracting activity levels, with uncertainties about the fiscal cliff negatively impacting hiring and sales. However, the Philadelphia Fed Manufacturing Survey noted improvements among manufacturers in its region, with the recovery from Hurricane Sandy explaining part of the progress.

The latest personal income and spending numbers also show the bounce back from the storm. Both had fallen in October but recovered somewhat in November. New durable goods orders also improved, with healthy gains across-the-board except for the aerospace sector. To be fair, durable goods activity remains below its peak in July, but the recent data are still a sign of progress. The key will be whether this can be sustained given the uncertainties noted elsewhere. Manufacturers appear to be cautiously optimistic about future activity despite their concerns about the fiscal cliff.

Housing continues to be a bright spot in the economy, much as it has throughout 2012. Permits rose to 899,000 in November, the fastest pace in more than four years. This is an important proxy of future residential construction. Overall housing starts remain on a slow-but-steady upward trajectory, even as they dipped slightly in November to 861,000. The sector is experiencing greater confidence, and while hurdles still hold back even stronger growth, the prospects are for housing starts to grow to at least 950,000 by the end of 2013.

This will be a shortened week due to Christmas, but there are some key economic indicators that will be released. Regional manufacturing activity in Chicago and Richmond is expected to show continued weaknesses. The other highlight will be the latest consumer confidence figures from the Conference Board. We will see if consumer sentiment declines in the Conference Board’s index, much as it did in the University of Michigan’s survey.

Chad Moutray is the chief economist, National Association of Manufacturers. Note that there will not be a report next week, with the scheduling resuming on Monday, January 7, 2013.