A Publication of the National Association of Manufacturers
October 27, 2014
NAM/IndustryWeek Survey of Manufactures Business Outlook by Quarter, 2012-2014

What a difference a week makes. After a volatile week in financial markets amid worldwide economic worries, things calmed down last week. While the Dow Jones Industrial Average remains 2.7 percent below its all-time high on September 19, it gained 425 points last week, or 2.6 percent. Attitudes shifted to a more positive stance on decent earnings reports and on news that firms remain mostly upbeat in their outlook. Of course, downside risks to the economy continue, including news of terrorism in Canada and still sluggish growth abroad. However, at least for now, cautious optimism is outweighing these concerns.

A fair share of the concern lately has stemmed from slowing growth in China and worries that Europe might slip back into a recession. Last week, there was better news for these regions, most notably in Europe. The Markit Flash Eurozone Manufacturing Purchasing Managers’ Index (PMI) increased from 50.3 in September to 50.7 in October, a better-than-expected figure on higher output and employment. This was good news, as September’s figure had been the lowest level since July 2013, when Europe first emerged from its recession. Still, the Eurozone’s challenges remain far from over, with new orders contracting for the second straight month and exports easing. In addition, while Germany improved somewhat for the month, French manufacturers  (down 48.4 to 47.6) continue to report weaknesses. 

At the same time, Chinese manufacturing activity rose to its highest level in three months, up from 50.2 to 50.4. It was the fifth consecutive monthly expansion in manufacturing activity in China, with demand and production growing, albeit slower than we might prefer. In general, we continue to see Chinese growth decelerating. For instance, real GDP slowed from 7.5 percent year-over-year growth in the second quarter to 7.3 percent in the third quarter. The paces of fixed real investment and retail sales have also eased considerably so far this year. On the positive side, industrial production picked up a little in September, even as its trend line also reflects sharply lower growth rates.

Meanwhile, in the United States, the Markit Flash Manufacturing PMI dropped slightly, down from 57.5 to 56.2. Yet, new orders, output and hiring continue to grow at decent rates, with each measure reflecting progress from earlier in the year. The Kansas City Federal Reserve Bank also reported expanding activity levels, albeit at a slower pace, in October. Exports were a concern in both releases, but given the softness in international markets, this should not be a surprise.

Other economic indicators released last week mostly focused on prices and housing. Consumer prices rose 0.1 percent in September, but the annual pace of inflation remained largely in check at 1.7 percent. This will be relevant this week with the Federal Open Market Committee meeting, particularly as it debates when to raise short-term rates. Lower energy costs have been helpful in this regard, with the average price per gallon of regular gasoline falling to $3.070 last week. The Federal Reserve is expected to end its quantitative easing initiative. Regarding the housing market, both existing and new home sales were higher in September, reflecting progress from just six months ago. We hope this suggests that the market is moving in the right direction.

This week, the highlight will be the release of third-quarter real GDP data, which come out on Thursday. I estimate that the U.S. economy grew by 3.25 percent in the third quarter—a relatively healthy pace after the sluggish first-half performance. Beyond this measure, other items to watch include surveys from the Dallas and Richmond Federal Reserve Banks and the latest data on consumer confidence, durable goods orders, employer costs and personal income and spending.

Chad Moutray
Chief Economist
National Association of Manufacturers
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Economic Indicators
Last Week's Indicators:
(Summaries Appear Below)

Monday, October 20

Tuesday, October 21
Existing Home Sales
State Employment Report

Wednesday, October 22
Consumer Price Index

Thursday, October 23
Conference Board Leading Indicators
Flash PMIs for China, the Eurozone and the United States
Kansas City Fed Manufacturing Survey

Friday, October 24
New Home Sales

This Week's Indicators:

Monday, October 27

Dallas Fed Manufacturing Survey

Tuesday, October 28
Conference Board Consumer Confidence
Durable Goods Orders and Shipments
Richmond Fed Manufacturing Survey

Wednesday, October 29
FOMC Monetary Policy Statement

Thursday, October 30
Gross Domestic Product (Third Quarter 2014)

Friday, October 31
Employment Cost Index
Personal Income and Spending
University of Michigan Consumer Sentiment (Revised)

Summaries for Last Week`s Economic Indicators
Conference Board Leading Indicators
The Conference Board reported that the Leading Economic Index (LEI) rose 0.8 percent in September, rebounding from being unchanged in August. Despite a softer August, the LEI has grown steadily for much of the year, expanding 3.5 percent over the past six months. This bodes well for future activity. In September, the largest contributors to the LEI were favorable credit conditions, housing permits, the interest rate spread, the stock market and unemployment claims. Manufacturers were also a positive factor in the latest LEI report, largely due to better new orders data and a longer workweek. 

Meanwhile, the Coincident Economic Index (CEI), which assesses current conditions, increased 0.4 percent in September. It was the fastest monthly pace of growth for the CEI since March. 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 rose 0.1 percent in September, returning to positive growth after falling 0.2 percent in August. Energy costs were lower for the third straight month, but food prices were once again higher, much as we have seen all year so far. Indeed, consumer costs for food items were up 0.3 percent in September, or 3.0 percent year-over-year. Meat, dairy and egg products continue to be the largest source of food inflation, with prices for cereal and bakery products lower for the month.

Consumers continue to benefit from lower energy costs, down 0.7 percent in September. Gasoline costs alone were off 1.0 percent, or 3.5 percent year-over-year. In fact, we have seen the price of regular conventional gasoline fall from its 2014 peak of $3.639 per gallon on average for the week of June 23 to $3.070 last week, according to the Energy Information Administration. This has helped to offset pricing pressures elsewhere, and it is expected to provide a stimulatory effect to consumer spending over the coming months, assuming it continues.

Core consumer prices, excluding food and energy costs, were also up 0.1 percent in September. Appliances, medical care commodities and shelter expenses saw the largest monthly price increases, but these were offset by declining costs for computers, household furnishings, used cars and trucks and women’s apparel, among other categories.

The annual pace of inflation was 1.7 percent in September, unchanged from August. This was an improvement from June’s 2.1 percent year-over-year rate, but it represents an acceleration from February’s 1.1 percent pace. Core inflation was also 1.7 percent, and as such, it remains in an acceptable range for now.

Existing Home Sales
The National Association of Realtors® (NAR) reported that existing home sales rebounded in September from softness in August. The number of existing home sales increased 2.4 percent, up from an annualized 5.05 million in August to 5.17 million in September. This represents an improvement from six months ago, when the pace was 4.59 million in March; however, it was down from the recent high of 5.38 million in July 2013.

NAR Chief Economist Lawrence Yun spoke about the better existing home sales figures, saying, “Low interest rates and price gains holding steady led to September’s healthy increase, even with investor activity remaining on par with last month’s marked decline.”

Inventories fell somewhat, down from 5.5 months of supply on the market in August to 5.3 months in September. Existing home sales were higher in every region except the Midwest, with the largest gains in the West. The median home price in September was $209,700, or 5.6 percent higher than the year before.

Flash PMIs for China, the Eurozone, Japan and the United States
The HSBC Flash China PMI rose to its highest level in three months, up from 50.2 in September to 50.4 in October. It was the fifth consecutive monthly expansion in manufacturing activity in China, an improvement from the contracting activity levels experienced in the first five months of 2014. Yet, despite the better headline figure, many of the underlying data points reflect some easing in growth rates for the month, including new orders (down from 51.5 to 51.4), exports (down from 54.5 to 52.8) and output (down from 51.3 to 50.7). Hiring continued to decline but at a slower rate (up from 47.5 to 48.6).

As such, Chinese manufacturers are expanding but not by as much as we might prefer. This finding is consistent with the deceleration in other Chinese data, including real GDP, which slowed from 7.5 percent year-over-year growth in the second quarter to 7.3 percent in the third quarter. Fixed real investment (down from 16.5 percent year-over-year in August to 16.1 percent in September) and retail sales (down from 11.9 percent year-over-year to 11.6 percent) also declined. On the positive side, industrial production picked up, increasing from the year-over-year rate of 6.9 percent in August to 8.0 percent in September; yet, that remained lower than July’s 9.0 percent pace.

Meanwhile, the Markit Flash Eurozone Manufacturing PMI increased from 50.3 to 50.7. That is good news, as the September figure had been the lowest level since July 2013, when Europe first emerged from its recession. October’s reading was higher largely due to a pickup in output (up from 51.0 to 51.9) and employment (up from 50.1 to 50.6). Still, new orders (unchanged at 49.3) contracted for the second straight month, with exports (down from 51.6 to 50.5) easing. The Eurozone continues to face challenges in manufacturing, especially in terms of falling sales. The results also vary by country, with Germany (up from 49.9 to 51.8) improving somewhat, while French manufacturers  (down 48.4 to 47.6) continue to report weakness. 

Closer to home, the Markit Flash U.S. Manufacturing PMI dropped slightly, down from 57.5 to 56.2. The pace of activity was down across-the-board, including new orders (down from 59.8 to 57.1), output (down from 59.6 to 58.0), hiring (down from 56.4 to 56.2) and exports (down from 54.1 to 51.9). While the index for new orders was at its lowest level since January’s 53.9 reading, it is hard to get too worked up over October’s decline for these indicators. After all, demand, production and employment continue to grow at decent rates, and manufacturers are reporting higher activity levels than earlier in the year.

Still, we would like to see better results to begin the fourth quarter, particularly for exports. Given the softness in worldwide markets, however, this weakness should not be a surprise.

Kansas City Fed Manufacturing Survey
The Federal Reserve Bank of Kansas City reported that manufacturing activity expanded for the 10th straight month. Yet, the composite index of business conditions eased slightly, down from 6 in September to 4 in October. Many of the underlying indicators also decelerated for the month, including new orders (down from 5 to 2), production (down from 12 to 3), shipments (down from 14 to 0) and employment (down from 7 to 6). The good news was that each of these measures, except shipments, was still growing, albeit at a slower pace.

In contrast, the average workweek (down from 2 to -3) and export orders (down from -1 to -9) both contracted. This continues a trend of struggling sales abroad in the region, with the export sales index negative in all but three months over the past year. Softer global economic growth has not helped.

On the other hand, manufacturers in the district remain mostly upbeat in their outlook for the next six months, with the forward-looking composite index unchanged at 17. Forty-four percent of respondents expect higher sales in the months ahead, with 37 percent planning to increase their capital expenditures. At the same time, one-third anticipate bringing on new workers. Moreover, the index for expected exports shifted from 0 to 8, suggesting some hopefulness for better global markets. The one downside is that nearly half of respondents expect higher raw material costs over the next six months.

New Home Sales
The Census Bureau and the U.S. Department of Housing and Urban Development reported that new single-family home sales edged marginally higher, up from an annualized 466,000 in August to 467,000 in September. New home sales have been highly volatile so far this year, ranging from a low of 403,000 in March to September’s 467,000 figure. We hope this report suggests that the single-family housing market has begun to stabilize, moving in the right direction.

The Midwest saw the largest gains in new home sales in September, with weakness in the West. There were 5.3 months of supply on the market, unchanged from the month before but better than the 6.0 months in July. The median home price for new single-family units was $256,600.

State Employment Report
The Bureau of Labor Statistics reported that Indiana added the most net new manufacturing jobs in September, up 5,900 from August. Other states with significant manufacturing employment growth for the month included Ohio (up 3,600), Pennsylvania (up 2,700), North Carolina (up 2,000) and Tennessee (up 1,900). Indiana’s strong September performance was a continuation of what we have seen so far in 2014, with the state generating 20,500 additional manufacturing workers year-to-date, the most of any state. Runners-up included Ohio (up 12,600), Texas (up 7,000), Minnesota (up 6,700) and Georgia (up 6,100).

North Dakota continues to have the lowest unemployment rate in the United States (2.8 percent), with Georgia having the highest (7.9 percent).

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Contact Chief Economist Chad Moutray at cmoutray@nam.org.
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