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.