Here are the files for this week’s Monday Economic Report:
Manufacturers and other businesses came into this year with a lot of optimism, particularly given robust growth in the second half of last year. Instead, economic growth has been disappointing year-to-date. A number of significant headwinds have challenged the sector, including a stronger dollar, lower crude oil prices, the residual effects of the West Coast ports slowdown and cautiousness in consumer spending. Much of this can be seen in recent GDP and production figures, which have reflected recent declines in activity, particularly in the first quarter.
As a result, market participants have downgraded their growth estimates for this year. Business economists responding to the National Association for Business Economics (NABE) Outlook Survey now expect real GDP growth of 2.4 percent for 2015, down from 3.1 percent just three months ago. Panelists also anticipate industrial production expanding more slowly, down from 3.7 percent in the March survey to 2.3 percent now. The Manufacturers Alliance for Productivity and Innovation (MAPI) forecast calls for a similar reduction in manufacturing output, with 2.5 percent growth this year. On the positive side, MAPI anticipates 4.0 percent growth in manufacturing production in 2016, suggesting a possible rebound.
These reports mirror the latest NAM Manufacturers’ Outlook Survey, which found that business leaders were less upbeat today than six months ago. The percentage of respondents who were positive about their own company’s outlook has dropped from 91.2 percent in December to 76.3 percent today, a significant decline in such a short period of time, reflecting the challenges noted above. Likewise, the newly created NAM Manufacturing Outlook Index has fallen from 61.7 to 51.7 over that same time frame. This indicates that manufacturers continue to have above-average assessments about growth, but with some definite deterioration in sentiment. Indeed, growth estimates for sales, capital spending and hiring have slipped significantly since the last survey. For instance, manufacturers predict sales growth of 2.7 percent over the next 12 months, down from the 4.3 percent estimate in March. At the same time, exports are anticipated to grow by just 0.4 percent over the next year, indicating continued sluggishness in light of currency concerns and softer growth abroad.
Meanwhile, there were also some encouraging surveys last week that we hope show the beginning of a rebound in sentiment. First, the National Federation of Independent Business (NFIB) reported that optimism rose for the second straight month, with its headline index up from 96.9 in April to 98.3 in May. This was the highest level so far in 2015, with better news on sales, hiring and a desire to expand. In a similar way, consumer confidence picked up again in preliminary data from the University of Michigan and Thomson Reuters. The Consumer Sentiment Index increased from 90.7 in May to 94.6 in June, and while it remains below the 11-year peak in January (98.1), Americans were more upbeat in their assessments of the current and future economic climate. Retail sales were also stronger in the latest release, up 1.2 percent in May, bouncing back from a softer April.
Next week, there will be a number of indicators released showing the current health of the U.S. manufacturing sector, including industrial production and surveys from the New York and Philadelphia Federal Reserve Banks. After several months of softness, we will be looking for signs of a rebound in manufacturing activity in these latest reports. Similarly, the latest housing starts figures will be examined to see if the stronger growth observed in April can be sustained in the May release.
The highlight of the week will come on Wednesday, with the announcement from the Federal Reserve of its monetary policy moves. At one time, it was thought that short-term rates might start to increase at the June meeting, but conventional wisdom now holds that the normalization of rates will begin this fall instead. The latest producer price index report continues to show minimal inflationary pressures overall, freeing the Federal Reserve’s hand to stimulate growth, at least for now. Core inflation has risen just 0.6 percent over the past 12 months, remaining below the Federal Reserve’s threshold of 2 percent for 24 straight months. Other indicators to watch next week include new data on consumer prices, leading indicators and state employment.
Chad Moutray is the chief economist, National Association of Manufacturers.