A Publication of the National Association of Manufacturers
March 3, 2014
The U.S. economy grew 2.4 percent in the fourth quarter, down from the earlier estimate of 3.2 percent. Given some of the recent weaker manufacturing, retail and housing data, the downward revision was largely expected. Still, there are some positives in the report, with strength in consumer spending, business investment and net exports. Fixed investment was higher in this revision, which was welcome news. Federal government spending accounted for the biggest drag on growth during the fourth quarter, subtracting one percentage point from the total figure.
The bottom line is that real GDP increased 3.3 percent in the second half of 2013, providing some momentum for growth moving into this year. While weather and other factors have dampened the economy recently (and will also reduce real GDP in the current quarter), we still expect 3.0 percent growth for 2014. Manufacturers continue to be mostly upbeat about demand and production over the coming months.
Despite such optimism in the outlook for the year, the current environment for manufacturers clearly has its challenges. Weather has negatively impacted production and shipments in a number of regions around the country, and surveys from the Dallas, Kansas City and Richmond Federal Reserve Banks all observed some easing in activity in February. This followed similar reports from the New York and Philadelphia Federal Reserve Banks the week before. Meanwhile, the Census Bureau has reported lower new durable goods orders for two straight months, with poor weather conditions likely a factor, particularly for auto sales. At the same time, new durable goods orders excluding transportation were higher, suggesting that the broader manufacturing market was slightly better than the headline figure indicated.
Some of the other data remain mixed. New home sales were up sharply in January to their highest level since July 2008, but year-over-year growth was more modest, and inventories of new homes have fallen over the past few months. Nonetheless, the positive report on new home sales stands in contrast to much weaker residential construction figures of late, including housing starts and existing home sales, which have seen negative impacts from the weather. Similarly, the two major reports about consumer confidence moved in opposite directions, with the Conference Board’s measure lower in February and the University of Michigan’s figure edging slightly higher. Doubts about income and labor growth have possibly fed some anxieties in sentiment in both surveys, but the two reports differ in their findings about the economic outlook.
This week, the focus will be on manufacturing activity, employment growth and international trade. We will get February Purchasing Managers’ Index (PMI) data from the Institute for Supply Management (ISM) later this morning. After falling from 56.5 in December to 51.3 in January, the ISM PMI is expected to increase modestly, still indicating weaknesses in new orders and production for the month. On the trade front, we will be looking for better manufactured goods exports in 2014, improving on the modest 2.4 percent growth rate seen in 2013. Still, manufactured goods exports hit an all-time high last year, providing a positive for economic growth.
The biggest news of the week will come on Friday with the release of new jobs numbers. Nonfarm payroll growth has been soft over the past two months, with just 75,000 and 113,000 net new workers added in December and January, respectively. The consensus expectation is for roughly 165,000 nonfarm workers added in February. In contrast, manufacturing job gains have been fairly decent over the past six months, averaging 15,500 since August, and we should get modest gains again in February. One of the bigger conversation pieces will be whether the unemployment rate falls to 6.5 percent in February, which is the rate specified in the Federal Reserve Board’s forward guidance. (Either way, look for the Federal Open Market Committee to change its guidance at its next meeting.) Other highlights this week include the latest data on construction spending, factory orders, personal income and spending and productivity.
Chicago Fed National Activity Index
Reduced manufacturing output helped to pull the NAI lower in January. Manufacturing production declined 0.8 percent for the month, with capacity utilization for the sector falling from 76.7 percent to 76.0 percent. As a result, production-related indicators subtracted 0.36 points from the NAI, a shift from the +0.06 contribution in December. Slower residential construction activity also provided a drag on the NAI, reducing the index by 0.18 points in January.
Despite softness in the latest jobs numbers, employment-related indicators provided a bigger lift to the NAI for the month, up from +0.06 to +0.13. The unemployment rate decreased to 6.6 percent, and nonfarm payrolls rose from 75,000 in December to 113,000 in January. (This remained well below the 274,000 nonfarm payroll workers added in November.) In addition, manufacturers created 15,500 net new workers on average across the past six months.
Conference Board Consumer Confidence
The underlying Conference Board data were mixed, with reduced perceptions about the future economy spurring February’s modest decrease. The expectations component declined from 80.8 to 75.7. Respondents were less confident about future business conditions, including employment and income growth.
Interestingly, this did not affect views about the current economic climate, with the index for present conditions increasing from 77.3 to 81.7, the highest level for that index since April 2008. Along those lines, the percentage of respondents saying that jobs were more plentiful right now increased from 12.5 percent to 13.9 percent.
Dallas Fed Manufacturing Survey
February’s data were mixed, but mostly encouraging. New orders decelerated from 14.4 to 9.5, with the percentage of those saying sales had risen for the month dropping from 31.7 percent to 28.1 percent. At the same time, other indicators suggested increases in production (up from 7.1 to 10.8), shipments (up from 9.2 to 13.3), employment (up from 8.6 to 9.9) and hours worked (up from 3.4 to 12.0).
As such, the drop in outlook stemmed mainly from slower sales, most likely due to the weather. However, the data also show that manufacturers continued to increase output, hiring and capital spending in the region despite softness in new orders and weather-related effects elsewhere in the country.
Looking ahead six months, Texas manufacturers remain positive about future activity levels. For example, 48.5 percent of respondents anticipate higher sales over the coming months. To be fair, this was down from 55.8 percent the month before, mirroring the drop in sentiment discussed above. Yet, respondents still indicate strong growth ahead. Similar findings can be noted for production, capacity utilization, shipments, employment and capital spending over the next six months.
Excluding transportation sales, new orders were up 1.1 percent, mostly offsetting the 1.9 percent decline from the month before. As such, the broader market was slightly better than the headline figure suggested. New orders were higher for the month for fabricated metal products (up 7.3 percent) and computers and electronic products (up 4.7 percent). Still, there were notable decreases for primary metals (down 2.3 percent), electrical equipment and appliances (down 2.1 percent) and machinery (down 0.4 percent).
On a year-over-year basis, durable goods orders rose 4.6 percent. Yet, that only tells part of the story. New orders were quite volatile over the past 12 months, ranging from a low of $215.1 billion in January 2013 to a high of $244.4 billion in June 2013. A similar story could be said for new durable goods orders excluding transportation, which increased 3.4 percent over the past 12 months but were also quite volatile throughout the year. In fact, this broader sales measure has been essentially flat since May.
Meanwhile, durable goods shipments were down 0.4 percent in January, building on December’s 1.8 percent decrease. Excluding transportation, shipments would have fallen 0.5 percent for the month, with fewer motor vehicle shipments (down 2.1 percent) pulling the overall figure lower. For shipments, increases for defense aircraft and parts (up 13.8 percent), nondefense aircraft and parts (up 4.0 percent), computers and electronic products (up 1.6 percent) and electrical equipment and appliances (up 1.4 percent) offset decreases in machinery (down 2.6 percent) and primary metals (down 1.6 percent).
Gross Domestic Product (Fourth Quarter 2013 Revision)
The revisions came in a number of areas, including consumer spending, inventories, net exports and federal government spending. One of the brighter spots in this report was the upward revision for fixed investment growth. Fixed investments had added just 0.14 percentage points to real GDP in the earlier estimate, but with this revision, the contribution was 0.58 percent. Strengths were seen in business spending for computers and peripherals; transportation and other equipment; and software-related intellectual property products. At the same time, residential construction activity declined 8.7 percent for the quarter, with inventory replenishment decelerating (down from a 1.67 percent contribution in the third quarter to 0.14 percent).
On the consumer side, personal expenditures grew an annualized 2.6 percent in the fourth quarter, down from the earlier estimate of 4.9 percent. The reduced growth rate stemmed from an easing in purchases for durable goods, nondurable goods and services. Personal consumption expenditures added 1.73 percentage points to growth in the fourth quarter, down from the original estimate of 2.26 percent. Of that figure, 0.72 percentage points came from the consumption of goods.
Net exports continued to be a strong point in the latest data, albeit less so than earlier. Net exports added 0.99 percentage points to the total real GDP growth rate, down from the 1.48 percent contribution noted before. Yet, the contribution remains the largest since the fourth quarter of 2010. The healthy trade numbers stemmed from an annualized growth rate of 11.7 percent for goods exports, outstripping the 1.5 percent increase for goods imports.
The main drag on economic growth during the fourth quarter was federal government spending, subtracting one percentage point from real GDP. The government shutdown might explain part of this decline, although this was also the fifth consecutive month with a negative contribution at the federal level as budgets have become tighter.
Overall, the data show that the U.S. economy continues to grow modestly, and the slower rate of growth noted in this revision was largely anticipated. Estimates for growth for the current quarter have also been downgraded somewhat, with real GDP growth of 2.1 percent expected for the first quarter of 2014. Nonetheless, manufacturers continue to be mostly positive about demand and production for this year, and I still forecast real GDP growth of 3.0 percent for the year. Some of the current challenges are temporary ones, including (but not limited to) weather.
At the same time, this report also indicates the difficulty of sustaining robust growth, with real GDP in the fourth quarter down from the third quarter’s 4.1 percent gain. To be fair, a sizable percentage of the third quarter’s growth figure stemmed from inventory replenishment. With that in mind, policymakers should continue to pursue pro-growth measures like those laid out in the NAM’s Growth Agenda that would allow manufacturers to expand and seek new opportunities.
Kansas City Fed Manufacturing Survey
The pace of shipments (up from 3 to 10), production (up from -8 to 3) and the average workweek (up from -6 to 1) improved for the month, but new orders were unchanged at 5. A larger percentage of survey respondents said their sales were flat in February (39 percent) than those who noted increases (35 percent), with nearly one-quarter observing declines. Export orders contracted slightly (down from 4 to -1), whereas hiring slowed (down from 11 to 3).
Sample comments were equally varied, but more negative than positive. While some manufacturers felt that business was improving, others cited problems due to weather, financing, economic uncertainties, the tax and regulatory environment and delivery times.
Despite some current challenges, manufacturers in the region continued to be cautiously optimistic about the coming months. Nearly half expect shipments and production will be higher six months from now. Moreover, the percentage of respondents saying new orders, capital spending and employment levels will increase during that time frame was 40 percent, 35 percent and 27 percent, respectively. Still, that positivity wavered somewhat in February, with the forward-looking composite index dropping from 26 to 11.
New Home Sales
These relatively positive figures stand in contrast to other residential construction data of late, including housing starts and existing home sales, both of which have seen negative impacts from the weather. All regions of the country experienced monthly gains except for the Midwest.
The inventory of new homes for sale has generally fallen since peaking at 5.5 months of supply in July (not coincidently when new home sales were at a low point). The number of months of supply on the market declined from 5.2 in December to 4.7 in January. The median home price was $265,100, which was unchanged from the month before but up 3.4 percent from the year before.
Richmond Fed Manufacturing Survey
The effects of weather can be seen in a number of February’s indices, including new orders (down from 14 to -9), shipments (down from 14 to -6), capacity utilization (down from 11 to -7) and the average workweek (down from 8 to -5). The Richmond Federal Reserve’s release notes that “manufacturing facilities experienced downtime in February, with some reductions in shipments” due to the recent dismal weather conditions. Hiring also slowed to a halt, with its index down from 6 to zero for the month.
Despite these soft figures, manufacturers continued to be mostly upbeat in February, albeit with a deceleration in sentiment from January. The forward-looking index for new orders declined from 30 to 15. This indicates that sales growth is still anticipated to grow over the next six months for most manufacturers in the region, but at a slower pace than predicted the month before. Similar figures were seen for shipments, capacity, the workweek and capital spending. On a positive note, hiring is still expected to grow modestly, with its pace unchanged (12) in February.
Meanwhile, pricing pressures eased for the month but were expected to pick up in the months ahead. Prices paid for raw materials increased 1.19 percent at the annual rate in February, down from 1.53 percent in December and 1.32 percent in January. Yet, over the next six months, raw material costs are anticipated to grow an annualized 2.25 percent, up from 1.64 percent predicted last month.
University of Michigan Consumer Sentiment (Revision)
These types of surveys tend to react to pocketbook issues, and worries about labor and income growth might be factors in the reduced sentiment in the present economy. Recent nonfarm payroll growth has been quite soft. Another factor might be weather, with some Americans losing income temporarily due to severe storms. To the extent that weather has had a negative contribution, we should expect confidence to rise in the coming months.
Questions or comments? Please contact Chad Moutray at firstname.lastname@example.org
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