A Publication of the National Association of Manufacturers
 
MONDAY ECONOMIC REPORT
July 28, 2014
NAM/IndustryWeek Survey of Manufactures Business Outlook by Quarter, 2012-2014

The International Monetary Fund (IMF) released its latest World Economic Outlook last week. The report reflected slower growth rates in the United States and elsewhere for 2014 mostly because of disappointing figures during the first half of the year. The IMF now predicts that U.S. real GDP will grow 1.7 percent in 2014, down from the 2.8 percent forecast in April. Much of this downgrade stemmed from the dismal 2.9 percent decline in real GDP in the first quarter, with output contracting for the first time in three years. At the same time, the manufacturing sector provided a positive contribution to growth in the first quarter, according to new data, despite bleakness in other areas. Fortunately, manufacturers are more upbeat about activity during the second half of this year and for next year. The IMF’s outlook for 2015 is for real GDP growth of 3.0 percent in the United States, which is in line with other predictions.

News regarding manufacturing activity was mostly positive last week, with surveys from the Kansas City and Richmond Federal Reserve Banks both reflecting a pickup in shipments and employment in July. New orders continued to grow at a moderate pace in each region, and respondents were mostly upbeat about sales and production over the next six months. Nonetheless, raw material costs have accelerated a bit in the Richmond district, and new export orders have contracted in eight of the past 12 months in the Kansas City district. Meanwhile, new durable goods orders rebounded in June, with year-to-date growth at a reasonably healthy rate of 4.4 percent. This indicates that the sector has recovered for the most part from winter-related softness, even if some components, such as motor vehicle sales, were lower for the month. Similarly, the Markit Flash U.S. Manufacturing Purchasing Managers’ Index (PMI) reflected relatively strong growth in sales and output for the sector despite some easing in the headline number in July.

Overseas, the data indicate that the Chinese economy has continued to stabilize from weakness in the first five months of the year. The HSBC Flash China Manufacturing PMI expanded for the second straight month in July, with the pace of activity up for new orders, exports and output. The sales pace was the fastest since January 2011, suggesting that recent measures taken by the Chinese government to stimulate growth have had a positive impact. Likewise, Japanese manufacturers also reported expanding levels of sentiment for two consecutive months, but activity decelerated overall and output stagnated. Export sales from Japan, on the other hand, grew. In other news, the European manufacturing sector made marginal progress in July, particularly for production and exports, and the Eurozone has now expanded for 13 straight months. Yet, growth varied from country to country. For instance, German manufacturing activity picked up in July, while the French economy continued to contract.

The other highlights last week centered on housing and pricing. The housing market remains weaker than we would like, as illustrated by the sharp drop in new home sales in June. Still, the June figure was consistent with the annual paces in March and April, with May’s sales numbers appearing to be an outlier. With the slower pace of sales, inventories of homes have increased. In contrast, existing home sales improved for the third straight month, with some progress in the second quarter relative to the softer first quarter. Even in the existing home sales release, however, there were some discouraging findings, including the fact that sales remain below where they were last year and that first-time homebuyers are still having difficulties making purchases. Meanwhile, on the inflation front, the consumer price index increased in June, led by higher gasoline costs. Yet, pricing pressures remain mostly in check, with core inflation up 1.9 percent over the past 12 months.

This week, the focus will be on second-quarter GDP and jobs. The expectation is that output will rebound from the drop in the first quarter, with consensus forecasts ranging from 2.5 percent to 3.5 percent growth. My view is that real GDP in the second quarter should exceed 3.0 percent. Regarding hiring, manufacturers have added, on average, more than 12,500 each month since August, and I would anticipate seeing a comparable figure for July. Nonfarm payrolls should increase by at least the roughly 230,000 average so far in 2014. Other items to look for this week include manufacturing survey results from the Dallas Federal Reserve Bank and the latest numbers for construction spending, consumer sentiment, employment 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, July 21
Chicago Fed National Activity Index

Tuesday, July 22
Consumer Price Index
Existing Home Sales
Richmond Fed Manufacturing Survey

Wednesday, July 23
None

Thursday, July 24
Kansas City Fed Manufacturing Survey
Markit Flash PMIs (China, Japan, Eurozone and the United States)
New Home Sales

Friday, July 25
Durable Goods
Real GDP by Industry (First Quarter 2014)

This Week's Indicators:


Monday, July 28

Dallas Fed Manufacturing Survey

Tuesday, July 29
Conference Board Consumer Confidence

Wednesday, July 30
ADP National Employment Report
FOMC Monetary Policy Statement
Gross Domestic Product (Second Quarter 2014)

Thursday, July 31
Employment Cost Index

Friday, August 1
BLS National Employment Report
Construction Spending
ISM Purchasing Managers' Index
Personal Income and Spending
University of Michigan Consumer Sentiment (Revised)

Summaries for Last Week`s Economic Indicators
Chicago Fed National Activity Index
The Chicago Federal Reserve Bank reported that U.S. economic growth eased somewhat in June, according to the latest National Activity Index (NAI) report. The index dropped from 0.16 in May to 0.12 in June, with the three-month moving average down from 0.28 to 0.13. The NAI measures economic growth relative to its historical trend, with positive figures indicating above-average growth. It has been softer over the past three months (April to June) than in the two before that (February and March), but the data also continue to show a rebound from softness in January due to winter storms.

In the June data, manufacturing production provided a neutral contribution despite growth of 0.1 percent for the month. This was the slowest pace since January’s weather-induced decline. Positives in this report came from labor market and retail sales growth. However, the latter’s contribution was only slightly above neutral, with consumers more cautious in their purchases in June. In contrast, housing remained a drag on the NAI, with disappointing housing starts figures for the month.

Consumer Price Index
The Bureau of Labor Statistics reported that consumer prices increased 0.3 percent in June, easing a bit from May’s 0.4 percent growth. Still, prices have accelerated in the second quarter, led by higher food and energy costs. The annualized growth rate in the second quarter was 3.5 percent, a substantial jump from the 1.8 percent annual pace in the first quarter. Of course, this figure perhaps overstates the significance of the past three months, with the consumer price index up 2.1 percent over the past 12 months. Even there, however, the year-over-year rate has jumped from just 1.1 percent in February.

In the June data, the largest jump in consumer prices came from energy, up 1.6 percent for the month and building off of the 0.9 percent increase in May. Indeed, the price of West Texas Intermediate crude has increased from an average of $97.63 per barrel in December to $100.80 in March to $105.79 in June. Much of the latest rise in prices has stemmed from turmoil in the Middle East, particularly in Iraq. Energy costs have risen 2.8 percent during the past three months alone, primarily from higher gasoline prices.

Meanwhile, food prices were up 0.1 percent, its slowest pace of growth in four months. In fact, home food prices were unchanged in June, the first non-positive growth figure in six months. Higher prices for meats and eggs were offset by some easing in costs for bakery items, cereals, dairy products and fruits and vegetables. Nonetheless, the food costs for consumers have risen 1.8 percent over the past six months, something that Americans are bound to notice in the grocery store.

Outside of food and energy, core consumer inflation decelerated to 0.1 percent growth in June. Over the past 12 months, core consumer prices have risen 1.9 percent, unchanged from May but up from 1.6 percent in January. In June, the largest increases were in airfare, apparel, housing, medical care and tobacco.

While pricing pressures have picked up in the second quarter, the year-over-year pace still remains mostly in line with the Federal Reserve Board’s stated goals. It will no doubt continue to watch inflation numbers closely, but the Federal Open Market Committee is unlikely to deviate from its current monetary policy trajectory at this week’s meeting.

Durable Goods
The Census Bureau reported that new durable goods orders increased 0.7 percent in June, rebounding from a 1.0 percent decline in May. This suggests that durable goods sales have continued to recover from winter-related softness in December and January, and it was mostly in line with consensus estimates. Through the first six months of this year, new durable goods orders have risen 4.4 percent, which indicates reasonably healthy growth year to date.

Unlike previous reports, transportation orders did not skew the data by much, with the sector having sales growth of 0.6 percent for the month. Excluding transportation, June’s new durable goods orders would have increased by 0.8 percent, with a year-to-date gain of 4.4 percent.

The underlying sector-by-sector data were mostly positive. The largest increases were in defense aircraft and parts (up 15.3 percent), nondefense aircraft and parts (up 8.2 percent), machinery (up 2.4 percent), primary metals (up 0.9 percent) and computers and electronic products (up 0.8 percent). On the other hand, motor vehicles and parts (down 2.1 percent), which have been a bright spot in general of late, were a drag on growth in June. Year to date, motor vehicles and parts orders have increased 2.2 percent.

Meanwhile, durable goods shipments were up a more paltry 0.1 percent in June, offsetting the 0.1 percent decrease in May. Excluding transportation (which was up 0.7 percent, mainly on nondefense aircraft), durable goods shipments would have fallen by 0.1 percent. This indicates that shipments activity was weaker than the headline figure suggests. In fact, the data were mixed. Increased shipments for communications equipment (up 3.3 percent), primary metals (up 0.8 percent) and fabricated metal products (up 0.7 percent) were largely counterbalanced by declines in defense aircraft and parts (down 2.3 percent), motor vehicles and parts (down 2.0 percent) and machinery (down 2.0 percent). 

Existing Home Sales
The National Association of Realtors® (NAR) reported that existing home sales improved for the third consecutive month, up 2.6 percent in June. Existing home sales have increased from an annualized 4.59 million units in March to 5.04 million units in June, suggesting that the housing market has made some progress in the second quarter after softening in the first quarter. Each region of the country had sales gains during the month, with the largest increases in the Midwest (up 6.2 percent).

There were 5.5 months of supply on the market in June, unchanged from May but an improvement from the 4.6 months observed in December. NAR Chief Economist Lawrence Yun said, “Inventories are at their highest level in over a year, and price gains have slowed to much more welcoming levels in many parts of the country.” The median existing home sales price in June was $223,300, or 4.3 percent more than a year ago.

Kansas City Fed Manufacturing Survey
The Kansas City Federal Reserve Bank reported that manufacturing activity has expanded every month so far in 2014, picking up slightly in July. The composite index of general business conditions rose from 6 in June to 9 in July. The pace of growth accelerated in many of the key indicators, including new orders (up from 8 to 12), production (up from 2 to 11), shipments (up from 2 to 14) and employment (up from 1 to 8). One-third of survey respondents said their production had increased in the month.

The report included two negatives as well. The average workweek (down from 7 to -3) shifted into its first contraction in six months. The percentage of respondents who noted a reduced workweek increased from 12 percent in June to 17 percent in July, enough to tip the diffusion index. In addition, new export orders (up from -11 to -6) continued to fall, albeit at a slower pace of decline for the month. This measure has been in contraction territory in eight of the past 12 months, indicating weakness on the trade front in the district.

Nonetheless, there are encouraging signs for the months ahead. The forward-looking composite index increased from 12 to 15, with relatively strong growth anticipated over the next six months. Manufacturers in the region expect higher new orders (up from 14 to 24), production (up from 17 to 23), shipments (up from 20 to 28), employment (up from 14 to 23) and capital expenditures (up from 23 to 25) at rather healthy rates of growth. In fact, more than 40 percent predict increased sales, output and shipments, with more than one-third seeing additional hiring and capital spending. Yet, the sample comments also suggest frustration with attracting qualified workers. Exports are predicted to grow just modestly (unchanged at 6).

Respondents expect pricing pressures to remain elevated, with nearly half saying that raw material prices should increase over the next six months. Still, 24 percent feel that input costs for them might fall, and the diffusion index for this measure (down from 49 to 46) eased slightly in July.

Markit Flash PMIs (China, Japan, Eurozone and the United States)
The HSBC Flash China Manufacturing Purchasing Managers’ Index (PMI) expanded for the second straight month in July, rebounding from softness experienced January through May. The headline index rose from 50.7 in June to 52.0 in July, its highest level since March 2011. The underlying data were mostly higher, including new orders (up from 51.8 to 53.7), output (up from 51.8 to 52.8) and exports (up from 50.6 to 52.7). The sales pace marks the fastest since January 2011, and these measures illustrate that recent stimulative actions taken by the Chinese government have had a positive impact. Some downsides in the PMI survey include contracting hiring rates for the 16th consecutive month (up from 48.7 to 49.5) and slightly accelerated raw material prices (up from 50.8 to 52.9).

Meanwhile, Japanese manufacturing activity also expanded for the second straight month, but it eased slightly in July. The Markit/JMMA Flash Japan Manufacturing PMI declined from 51.5 to 50.8. The recent uptick in activity has materialized as the Japanese economy has recovered from an increase in taxes that took effect on April 1. Still, manufacturers in the country cannot cheer yet, as output growth came to a halt in July (down from 51.8 to 50.0, or neutral). Other indicators were mixed. Export sales (up from 49.0 to 51.6) and employment (up from 49.8 to 50.8) both shifted to positive growth, but the pace of new orders decelerated somewhat (down from 52.0 to 51.1).

In other news, the Markit Flash Eurozone Manufacturing PMI edged marginally higher, up from 51.8 to 51.9. The Flash Eurozone PMI Composite Index was up more strongly, increasing from 52.8 to 54.0, suggesting healthier growth in the service sector. For manufacturers, the data suggest slightly faster growth in production (up from 52.8 to 53.0) and exports (up from 52.4 to 52.7), but the pace of growth for new orders (51.9) and employment (50.3) remained unchanged.

Overall, these figures provide a limited degree of encouragement for the manufacturing sector in Europe, which has worried of late about slow economic and income growth. The data vary on a country-by-country basis, with German manufacturing activity accelerating in July (up from 52.0 to 52.9) but French manufacturers noting yet another deterioration in sales and output. Indeed, the French economy remains in a rut, with manufacturing activity positive in just three of the months since January 2013.

Closer to home, the Markit Flash U.S. Manufacturing PMI decreased from 57.3 to 56.3. Despite the slight easing in July, manufacturing activity continues to grow at relatively decent rates. Through the first seven months of 2014, the top-line index has averaged 55.9, stronger than the 53.5 average noted for 2013 as a whole. The July data show both new orders (down from 61.7 to 59.8) and output (down from 61.0 to 60.4) growing at a healthy pace, albeit with some deceleration for the month. Yet, hiring growth remains more modest (down from 53.8 to 52.1), and export sales (down from 50.9 to 50.6) were just barely growing, suggesting room for improvement.

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 on August 1.

New Home Sales
The Census Bureau and the U.S. Department of Housing and Urban Development reported that new home sales dropped 8.1 percent in June. New single-family residential home sales declined from an annualized 442,000 in May to 406,000 in June. However, May’s figure was an outlier, with new home sales in June consistent with the data from March and April. Year to date, the average sales rate was 424,667, with the sales volume down sharply since peaking at 457,000 in January. For the month, sales were off in every region of the country, with the largest declines in the Northeast and South.

With the slower pace of sales, inventories of homes have increased, up from 5.2 months of supply on the market in May to 5.8 months in June. Through the first six months of 2014, the average has been 5.4 months of supply, higher than the 4.7 months experienced in all of 2013. The median home price for new home sales in June was $276,700, down 1.1 percent year-over-year.

Real GDP by Industry (First Quarter 2014)
The Bureau of Economic Analysis reported that manufacturers added 0.30 percentage points to real GDP in the first quarter of 2014. Nondurable goods output provided 0.86 percent to growth, whereas durable goods activity subtracted 0.57 percent. Winter weather and other factors helped to lead the country to its first quarterly contraction in real GDP in three years, with output down a very disappointing 2.9 percent.

Manufacturers made a positive contribution to growth overall in an otherwise bleak first quarter. Real value-added contributions from manufacturing increased 2.1 percent in the first quarter, its slowest growth rate in five quarters and below the 3.1 percent pace in all of 2013. Sectors with the largest quarterly declines during the first quarter included the following:

  • Agriculture, forestry, fishing and hunting (down 31.0 percent)
  • Utilities (down 16.4 percent)
  • Construction (down 8.9 percent)
  • Wholesale trade (down 8.7 percent)
  • Professional and business services (down 6.4 percent)
  • Mining (down 5.6 percent)
  • Transportation and warehousing (down 4.6 percent)
  • Educational services, health care and social assistance (down 3.0 percent)
  • Finance, insurance, real estate, rental and leasing (down 2.9 percent)

With that said, value-added contributions in manufacturing dropped from $2.14 trillion in the fourth quarter of 2013 to $2.09 trillion in the first quarter of 2014. Manufacturing accounted for 12.3 percent of GDP in the first quarter, down from 12.5 percent in the prior quarter.

This suggests that the increase in the “real” measure was influenced by price changes. Indeed, the price index for value-added output in manufacturing fell by an annualized 10.3 percent in the first quarter. Despite the quarterly decline, value-added contributions in manufacturing have continued to move higher in the longer term, up from $2.05 trillion in the first quarter of 2013.

Richmond Fed Manufacturing Survey
The Richmond Federal Reserve Bank reported that manufacturing activity grew at a modest pace, expanding for the fourth straight month. The composite index of general business conditions edged slightly higher, up from 4 in June to 7 in July. Note that historical data in the Richmond Federal Reserve survey were revised in this edition to reflect new seasonal adjustments.

Despite the improved top-line figure, the underlying data were largely mixed. The biggest positive was hiring, with the employment index up from 4 to 13. This was the fastest pace of hiring growth since December. Wages (up from 12 to 16) and shipments (up from 2 to 3) were also higher. Yet, new orders (5) expanded at the same pace, and both capacity utilization (down from 7 to 4) and the average workweek (down from 5 to 3) decelerated for the month.

Still, manufacturers in the district were mostly upbeat about the next six months, with forward-looking measures increasing in July for many indicators. For instance, new orders (up from 27 to 34), shipments (up from 24 to 36), capacity utilization (up from 18 to 29), employment (up from 12 to 19) and capital expenditures (up from 18 to 19) were all higher, with each suggesting relatively healthy paces of growth. 

Inflationary pressures have picked up a bit for the month, but remain mostly in check. Manufacturers in the region said that prices paid for raw materials grew 1.99 percent at the annual rate in July, up from 1.47 percent in June. Looking ahead six months, respondents expect input costs to increase an annualized 1.89 percent, up only marginally from 1.84 percent the month before.

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