A Publication of the National Association of Manufacturers
August 25, 2014
NAM/IndustryWeek Survey of Manufactures Business Outlook by Quarter, 2012-2014

Market leaders continue to play the guessing game of when the Federal Reserve Board will start to normalize short-term interest rates. Conventional wisdom suggests that the Federal Open Market Committee (FOMC) will begin to raise the federal funds rate sometime in 2015 from the near-zero levels that have been prevalent since the financial crisis in 2008. The Federal Reserve has already announced that it will cease purchasing long-term and mortgage-backed securities in October. In the July FOMC meeting minutes, participants noted recent improvements in the economy, including increased activity among manufacturers (see below). Most notably, they said the following regarding monetary policy over the next few months:

“…many participants noted that if convergence toward the Committee’s objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated.”

That line, which was widely reported in the media, was seen as hawkish. Indeed, financial markets saw that statement as a sign that short-term rates might rise sooner than expected, perhaps as early as the first quarter of 2015. In her keynote speech at a Kansas City Federal Reserve economic symposium at Jackson Hole, Wyoming, Federal Reserve Chair Janet Yellen reiterated this point, noting the role that upcoming economic data will have on the timing of policy normalization. She cited continued “slack” in labor markets, but also highlighted positive developments more recently. Either way, it remains true that monetary policy will remain highly accommodative for the foreseeable future, with short-term rate hikes (whenever they occur) being gradual. Recent data on consumer and producer prices have shown inflationary pressures easing a bit, even as they remain near the Federal Reserve’s stated target of 2 percent.

Meanwhile, economic data released last week suggest that the manufacturing rebound that we have seen since the winter continues to strengthen. The Markit Flash U.S. Manufacturing Purchasing Managers’ Index (PMI) increased sharply, up from 55.8 in July to 58.0 in August, reaching its highest level since April 2010. The indices for new orders and production were both above 60, suggesting strong growth and closely mirroring similar data from the Institute for Supply Management (ISM). The Philadelphia Federal Reserve Bank’s manufacturing survey also reported healthy gains in August, with activity growing at its fastest pace in more than three years, and respondents were very upbeat in their assessment of the next six months. Still, if there are any weaknesses of note, it would be overseas. Manufacturing demand and output were softer in both China and Europe, for instance.

The housing market also appears to be faring better of late, recovering somewhat from the lull that we saw earlier in the year. Housing starts jumped 15.7 percent in July, offsetting significant declines in both May and June. Starts reached their second-highest pace since November 2007, with an annualized 1,093,000 units in July. Both single-family and multifamily construction activity were higher for the month, and housing permits also reflected progress. In addition, existing home sales also notched improved figures in July, with activity up for the fourth straight month. Overall, this is encouraging news for residential construction. We would expect a solid 1.1 million housing starts at the annual rate by year’s end, representing slow-but-steady progress.

This week, we will get an update on second-quarter real GDP, with consensus expectations calling for a slight downward revision from the 4.0 percent growth rate estimate announced in late July. The new figure would still represent a rebound from the first quarter’s decline of 2.1 percent. We will also see if regional activity continues to expand in the August manufacturing surveys from the Dallas, Richmond and Kansas City Federal Reserve Banks, mirroring what we have seen in the similar New York and Philadelphia Federal Reserve reports. Other highlights include the latest data on consumer confidence, durable goods orders and personal income and spending.

Chad Moutray
Chief Economist
National Association of Manufacturers

P.S.—If you have not already done so, please take a moment to complete the latest NAM/IndustryWeek Survey of Manufacturers. This 20-question survey helps us to gauge how manufacturing sentiment might have changed since June’s survey. It also includes some special questions on labor regulations and health insurance coverage. To complete the survey, click here. Responses are due by Friday, August 29. As always, all responses are anonymous.

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Economic Indicators
Last Week's Indicators:
(Summaries Appear Below)

Monday, August 18
NAHB Housing Market Index
State Employment Report

Tuesday, August 19
Consumer Price Index
Housing Starts and Permits

Wednesday, August 20
FOMC Minutes (July 29–30 Meeting)

Thursday, August 21
Conference Board Leading Indicators
Existing Home Sales
Markit Flash PMIs for China, Japan, Eurozone and the United States
Philadelphia Fed Manufacturing Survey

Friday, August 22

This Week's Indicators:

Monday, August 25

Chicago Fed National Activity Index
Dallas Fed Manufacturing Survey

Tuesday, August 26
Conference Board Consumer Confidence Index
Durable Goods Orders and Shipments
Richmond Fed Manufacturing Survey

Wednesday, August 27

Thursday, August 28
Gross Domestic Product (Second Quarter Revision)
Kansas City Fed Manufacturing Survey

Friday, August 29
Personal Income and Spending
University of Michigan Consumer Sentiment (Revision)

Summaries for Last Week`s Economic Indicators
Conference Board Leading Indicators
The Conference Board’s Leading Economic Index (LEI) rose sharply, up 0.9 percent in July. Since January (when winter storms moved the LEI lower), the index has increased 4.0 percent, a figure that bodes well for strength in the U.S. economy for the coming months. One of the strengths in July was manufactured goods sales, with the ISM’s new orders index alone adding 0.16 percentage points to the LEI. At the same time, a shorter workweek for production workers took much of that increase away, subtracting 0.13 percentage points.

Beyond new orders, the largest contributors last month were increased housing permits (see below), a rising stock market, reduced initial unemployment claims, favorable credit conditions and the interest rate spread.

Meanwhile, the Coincident Economic Index (CEI), which assesses current conditions, increased 0.2 percent. Since January, it has improved at a more modest (but still decent) pace than the LEI, up 1.8 percent over the past six months. All four subcomponents of the CEI made positive contributions for the month, including industrial production, nonfarm payrolls, personal income, and manufacturing and trade sales.

Consumer Price Index
The Bureau of Labor Statistics reported that consumer prices increased 0.1 percent in July, its slowest pace in six months. Nonetheless, food prices continue to rise, up 0.4 percent in July. The price of food purchased for the home has risen 2.2 percent year-to-date, or 2.5 percent in the past 12 months. Meats, eggs, shellfish and fresh produce make up the bulk of this increase. For instance, consumers have spent 9.3 percent more year-over-year on meats (e.g., beef and veal, pork, poultry, and fish and seafood), with an increase of 0.4 percent for the month, mirroring the headline figure.

In contrast, energy prices have eased, echoing producer price data released the week before. Consumers have benefited from lower prices for natural gas and petroleum. For instance, the cost of West Texas Intermediate crude oil declined from a recent peak of $107.95 per barrel on June 20 to $98.23 per barrel on July 31. The consumer price index data suggest that energy prices fell 0.3 percent in July. At the same time, energy expenses have risen 1.2 percent over the past 12 months, largely from higher costs for the home.

Excluding food and energy, consumer prices increased 0.1 percent, matching that of the month before. Higher prices for apparel, medical care, new motor vehicles and shelter were somewhat offset by reduced costs for transportation services and used cars and trucks.

Overall, the consumer price index rose 2.0 percent from July 2013 to July 2014, its fourth straight month with an inflation rate of 2.0 percent or more. With that said, it represents an easing from the 2.1 percent pace in May and June. The core inflation rate, which excludes food and energy, has been 1.9 percent for three consecutive months.

While core pricing pressures have accelerated from earlier in the year, they appear to be stabilizing somewhat this summer. That should be good news for the Federal Reserve, which has targeted 2.0 percent in its stated goals. Still, the FOMC will closely watch to see how pricing pressures develop in the coming months, particularly as it prepares to start normalizing short-term rates in early 2015.

Existing Home Sales
The National Association of Realtors® (NAR) reported that existing home sales rose 2.4 percent, up from an annualized 5.03 million units in June to 5.15 million in July. This marks the fastest pace since October and the fourth consecutive monthly gain. NAR Chief Economist Lawrence Yun added, “More people are buying homes compared to earlier in the year, and this trend should continue with interest rates remaining low and apartment rents on the rise.” At the same time, he cautioned that interest rates are expected to rise and median incomes are growing slowly, both potential drags on housing sales moving forward.

The July data show stronger existing home sales in the Midwest, South and West, with sales in the Northeast unchanged from June. The market had 5.5 months of supply, down from 5.7 months in April but up from 4.6 months in December. Overall, inventories have been rising, which is a good sign. The median home price for existing home sales was $222,900, or 4.9 percent higher than 12 months ago.

Housing Starts and Permits
The Census Bureau and the U.S. Department of Housing and Urban Development reported that housing starts increased 15.7 percent in July, offsetting significant declines in both May and June. Starts increased from an annualized 945,000 in June to 1,093,000 in July. This marks the fastest pace since the 1,105,000 rate in November, making it the second-highest pace since November 2007, demonstrating that the lull so far this year has begun to dissipate. New residential construction starts have increased 21.7 percent year-over-year.

The bulk of the increase in July stemmed from the highly volatile multifamily segment, up from 339,000 to 437,000. This was the fastest pace in multifamily construction activity since January 2006. At the same time, single-family starts also improved, up from 606,000 to 656,000, the highest rate since December. Single-family starts have increased 10.1 percent over the past 12 months.

Meanwhile, housing permits mirrored the progress with starts data, rising 8.1 percent in July after two consecutive decreases in May and June. Housing permits grew from 973,000 at the annual rate in June to 1,052,000 in July, representing an increase of 7.7 percent year-over-year. Single-family (up from 634,000 to 640,000) and multifamily (339,000 to 412,000) permitting both grew, with the latter up a whopping 21.5 percent for the month.

Overall, July’s housing numbers were encouraging, particularly given the softness earlier in the year. Housing starts had averaged 961,000 from January to June, bottoming out at 897,000 in January. Financial difficulties in obtaining credit (particularly for first-time homebuyers) and economic uncertainties were obstacles for some. Moving forward, we would expect August’s housing data to remain above the 1 million mark, with starts solidly at 1.1 million by year’s end, representing slow-but-steady progress in the residential market.

Markit Flash PMIs for China, Japan, Eurozone and the United States
Given the contraction seen in the Eurozone economy in the second quarter, analysts were eagerly anticipating the recent preliminary Markit PMI data. Indeed, the HSBC Flash Eurozone Manufacturing PMI decelerated from 51.8 in July to 50.8 in August, suggesting that growth in manufacturing activity on the continent has slowed to a crawl. Germany (down from 52.4 to 52.0) eased slightly, but with output falling to its slowest pace since June 2013. French manufacturers (down from 47.8 to 46.5) continue to struggle, with the country’s Flash Manufacturing PMI contracting for the fourth straight month and new orders declining at their quickest pace in 16 months.

For the Eurozone as a whole, manufacturing activity slowed across the board. New orders (down from 52.1 to 51.0), output (down from 52.7 to 50.9), exports (down from 52.6 to 52.1) and employment (down from 49.9 to 49.1) were all lower in August, with the latter contracting for the second consecutive month. Production growth fell to its weakest point since Europe emerged from its deep recession 13 months ago. In essence, the good news was that European manufacturing activity did not contract in August, but demand and output are moving in the wrong direction. The data will continue to be fodder for those looking for economic stimulus in the months ahead.

Meanwhile, the HSBC Flash China Manufacturing PMI greatly softened for the month, down from 51.7 in July to 50.3 in August. As such, manufacturing expanded for the third straight month, but only barely. New orders (down from 53.3 to 51.3), output (down from 52.8 to 51.3) and export sales (down from 52.6 to 51.4) downshifted from a modest pace to slower growth, and employment (down from 49.4 to 48.2) deteriorated further. In fact, hiring has been negative in 16 of the past 17 months. While China has begun to stabilize its economy after weaknesses earlier in the year, the data show that room for improvement still remains.

Japan’s economy contracted, falling 1.7 percent in the second quarter or 6.8 percent year-over-year. Yet, the Markit/JMMA Flash Japan Manufacturing PMI (up from 50.5 to 52.4) seems to indicate that manufacturers are in a better mood, with a pickup in demand and output. This marks the fastest pace since March, or before the imposition of a new tax in April that sent the economy lower. Underlying data mostly rose, including sales (up from 51.2 to 54.4), production (up from 49.8 to 53.2), exports (up from 50.8 to 53.0) and hiring (up from 50.2 to 51.1).

Closer to home, the Markit Flash U.S. Manufacturing PMI increased sharply, up from 55.8 to 58.0, reaching its highest level since April 2010. Both new orders (up from 59.5 to 60.8) and output (up from 59.7 to 60.2) were above 60, suggesting strong growth and closely mirroring similar data from the ISM. New export orders (up from 50.3 to 54.4) and employment (up from 51.2 to 54.6) both expanded modestly. Overall, the data were quite positive, indicating that the recent rebound in manufacturing activity in the United States (after softness in the early months of 2014) has begun to take hold.

Flash data give us an advance estimate of manufacturing activity incorporating “approximately 85 percent of the usual monthly survey replies,” with the final PMI data for the month released in early September.

NAHB Housing Market Index
The National Association of Home Builders (NAHB) and Wells Fargo reported rising confidence in August. The Housing Market Index increased for the third straight month, up from 53 in July to 55 in August. The index surpassed 50 for the second straight month, indicating that more homebuilders were positive than negative in their outlook. More importantly, it reached its highest level since January, with builder confidence lagging from February to June with an average of 46.4 over that five-month span. The latest rebound is perhaps a sign that the sector has begun to recover somewhat.

Indeed, the index of expected single-family sales over the next six months rose from 63 in July to 65 in August, its fastest pace in 12 months. However, some of the underlying data indicate that persistent challenges remain. For instance, the index of buyer traffic, while up from 39 to 42, remains below the all-important threshold of 50. Moreover, regional data were mixed, with homebuilder confidence up in the Midwest and Northeast but marginally lower in the South and West.

Philadelphia Fed Manufacturing Survey
The Federal Reserve Bank of Philadelphia reported healthy gains in manufacturing activity in August, with the fastest pace since March 2011. The Business Outlook Survey’s composite index of general business activity increased from 23.9 in July to 28.0 in August. This represents significant progress from earlier in the year, when activity contracted briefly in February. The headline index has been in double digits for five straight months, averaging 20.3 from April to August. This would indicate more than just a rebound; it would suggest relatively strong growth overall.

The various subcomponents of the index also reflect a continued expansion in the manufacturing sector. However, they also suggest that July’s strengths were a bit of an outlier, with many of the key measures pulling back in August while still reflecting solid gains. For instance, the paces for new orders (down from 34.2 to 14.7) and shipments (down from 34.2 to 16.5) both eased; yet, nearly one-third of survey respondents said that each increased for the month, with roughly half suggesting they stayed the same.

The employment data were mixed, but still positive. Hiring growth (down from 12.2 to 9.1) decelerated a bit, but one-quarter of respondents reported additional hires. At the same time, the average workweek (up from 12.5 to 13.3) widened somewhat, with 21.2 percent citing a longer workweek in August.

Looking ahead six months, manufacturers in the district were overwhelmingly upbeat. The future-oriented composite index jumped from 52.0 to 58.1. Moreover, 56.1 percent said they expect their sales to increase in the coming months, with just 2.6 percent predicting declines. Likewise, more than 60 percent foresee increased shipments, nearly one-third plan to hire additional workers, and more than one-quarter intend to increase capital expenditures. Still, pricing pressures remain a worry. In fact, 40.9 percent of manufacturers in the region anticipate increased raw material costs, with 2.7 percent seeing reduced input prices.

State Employment Report
The Bureau of Labor Statistics reported that Indiana created the most net new manufacturing jobs in July, adding 5,500 workers during the month. These gains came from both durable and nondurable goods sectors, with hiring up by 3,400 and 2,100, respectively. Other states with significant growth in manufacturing employment in July included Kentucky (up 5,000), California (up 4,600), Michigan (up 4,200) and Illinois (up 3,900).

Indiana has also generated the most employment gains year-to-date, with 13,900 additional manufacturing jobs added through the first seven months of 2014. Missouri (up 8,100), Texas (up 7,600), Ohio (up 7,600) and Michigan (up 6,800) have also added a sizable number of new manufacturing jobs so far this year. Michigan (up 111,000) continues to lead the pack in net new manufacturing jobs added since the end of the recession.

The national unemployment rate rose to 6.2 percent in July, as we learned in an earlier release. The lowest unemployment rate continues to be North Dakota at 2.8 percent, followed by Nebraska (3.6 percent), Utah (3.6 percent), South Dakota (3.7 percent) and Vermont (3.7 percent). Meanwhile, Mississippi (8.0 percent) had the highest unemployment rate in the country, with several states also experiencing elevated rates, including Georgia (7.8 percent), Michigan (7.7 percent), Nevada (7.7 percent) and Rhode Island (7.7 percent).

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Questions or comments?
Contact Chief Economist Chad Moutray at cmoutray@nam.org.
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