A Publication of the National Association of Manufacturers
 
MONDAY ECONOMIC REPORT
March 16, 2015
NAM/IndustryWeek Survey of Manufactures Business Outlook by Quarter, 2012-2014

Global news dominated the headlines once again last week. The euro sank lower as the European Central Bank began its quantitative easing program, where it plans to purchase 1 trillion euros in government bonds over the next 18 months in an effort to stimulate faster economic growth. As a result, the euro has depreciated by nearly 25 percent over the past 10 months, down from $1.3924 per one euro on May 6 to a close of $1.0497 on Friday. There is also some expectation that it will move to parity soon, a level last seen in November 2002. (For more information on international developments, see the latest Global Manufacturing Economic Update.)

Overall, these developments could hurt the ability of manufacturers in the United States to grow exports. Indeed, 36.3 percent of respondents in the most recent NAM/IndustryWeek Survey of Manufacturers suggested that the stronger U.S. dollar was a primary challenge—a figure that has likely increased since this survey was administered in February. As a result, the pace of expected export growth decelerated sharply over the past few surveys, down from 1.6 percent in June to 1.2 percent in December to 0.9 percent this time. In this survey, 32.7 percent of manufacturers expect export sales to rise over the next 12 months, down from 39.4 percent three months ago. Despite some significant headwinds, manufacturers continue to be mostly positive about their own company outlook, with sales, capital spending and hiring paces moving in the right direction relative to a year ago. The data are consistent with 3.0 percent growth in manufacturing production over the next two quarters.

However, the NAM/IndustryWeek survey also found that manufacturers’ optimism had eased a bit from three months ago, when 91.2 percent of our members were positive. Other economic indicators have seen similar pullbacks in enthusiasm. For instance, the Small Business Optimism Index from the National Federation of Independent Business reached a multiyear high of 100.4 in December, but it has dropped down to 98.0 in February. (That was marginally up from January’s 97.9.) Likewise, the Consumer Sentiment Index from the University of Michigan and Thomson Reuters rose to its highest level in 11 years in January at 98.1, only to slip back for two consecutive months to 91.2 in March in preliminary data.

The good news is that each measure continues to reflect upward movement over the longer term, and yet, they suggest that manufacturers, small businesses and consumers are more anxious than we perhaps thought. Along those lines, retail sales slipped for the third straight month in February, suggesting some lingering caution in the marketplace. Still, much of the recent decline has stemmed from lower gasoline prices, with gasoline station sales down 23.0 percent over the past 12 months. Indeed, retail sales grew 1.7 percent year-over-year, but if you exclude gasoline station spending, the year-over-year rate would have been 4.7 percent. This suggests that consumer spending is better than the headline numbers might indicate.

This week, there are a number of economic indicators being released on the health of the U.S. manufacturing sector, starting with the latest industrial production data today. In addition, there will be regional surveys from the New York and Philadelphia Federal Reserve Banks. Housing will also be in focus with new housing starts and permits figures. Other highlights include the most recent releases for state employment and leading economic indicators.

Financial markets will be closely following the Federal Open Market Committee (FOMC) meeting, with the release of the committee's monetary policy statement on Wednesday. Producer prices surprisingly fell 0.5 percent in February. While much of the deceleration over the past few months was due to energy, it was lower producer prices on food items that pushed the index lower for the month. This is likely to embolden inflationary doves on the Federal Reserve who would like to see normalization efforts on short-term rates slow down. While I still feel that the Federal Reserve will begin raising rates in mid-2015 on the relative strength in the U.S. economy, there have been increasing calls for the Federal Reserve to push that date back in light of global headwinds, including a stronger U.S. dollar. At the FOMC meeting on Tuesday and Wednesday, we could get some hints on how recent economic developments might have shifted the committee’s thinking (or not).

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

Monday, March 9
NAM/IndustryWeek Survey of Manufacturers

Tuesday, March 10
Job Openings and Labor Turnover Survey
NFIB Small Business Survey

Wednesday, March 11
None

Thursday, March 12
Retail Sales

Friday, March 13
Producer Price Index
University of Michigan Consumer Sentiment

This Week's Indicators:


Monday, March 16

Industrial Production
NAHB Housing Market Index
New York Fed Manufacturing Survey

Tuesday, March 17
Housing Starts and Permits
State Employment Report

Wednesday, March 18
FOMC Monetary Policy Statement

Thursday, March 19
Conference Board Leading Indicators
Philadelphia Fed Manufacturing Survey

Friday, March 20
None

 
Summaries for Last Week`s Economic Indicators
Job Openings and Labor Turnover Survey
The Bureau of Labor Statistics reported that manufacturing job openings rebounded in January after easing slightly in December. The number of job postings in the sector rose from 310,000 in December to 330,000 in January, which was just slightly lower than the 332,000 seen in November. November’s pace had been the fastest since August 2007, and the number of openings has risen steadily on a year-over-year pace, up from 263,000 in January 2014. In this latest report, durable goods (up from 195,000 to 202,000) and nondurable goods (up from 115,000 to 127,000) reported more openings for the month.

At the same time, manufacturing net hiring has slowed, consistent with previously released jobs data. Manufacturers hired 262,000 workers in January, down from 276,000 in December. In addition, total separations, including layoffs, quits and retirements, edged marginally lower, down from 253,000 to 252,000. Therefore, net hiring (or hires minus separations) declined from 23,000 in December to 10,000 in January. On the positive side, hiring has picked up overall, with 236,000 hires in February 2014.

In the larger economy, nonfarm job openings rose from 4,877,000 in December to 4,998,000 in January. In January, there were more job openings in construction; leisure and hospitality; and trade, transportation and utilities, in addition to manufacturing. Beyond that, net hiring also decelerated for nonfarm payrolls, down from 338,000 to 175,000. Yet, hiring picked up in government; health care; leisure and hospitality; professional and business services; and retail trade.

NAM/IndustryWeek Survey of Manufacturers
Manufacturers in the latest NAM/IndustryWeek Survey of Manufacturers continued to be mostly optimistic about the economy and their business performance. Indeed, 88.5 percent of respondents were either somewhat or very positive about their own company outlook. Nonetheless, this was down from 91.2 percent who said the same thing three months ago. Sluggish growth abroad, a stronger U.S. dollar, the West Coast ports slowdown, still-cautious consumers and sharply lower energy prices have combined to provide a significant headwind for many manufacturers. As such, sentiment has pulled back a little from the prior survey, even as it remains mostly reassuring. Sales, capital spending and hiring are expected to increase at decent paces over the next 12 months, albeit with some easing since December. The data are consistent with 3.0 percent growth in manufacturing production over the next two quarters.

One of the bigger headwinds of late has been the global market, with slower economic growth in international markets and a stronger U.S. dollar. Indeed, 36.3 percent of respondents said that the dollar was a significant challenge for them right now. Moreover, the pace of expected export growth decelerated sharply over the past few surveys, down from 1.6 percent in June to 1.2 percent in December to 0.9 percent this time. In this survey, 32.7 percent of manufacturers expect export sales to rise over the next 12 months, down from 39.4 percent three months ago.

Despite the stronger economic outlook, manufacturers continue to express frustrations with the political environment. In fact, 73.6 percent of respondents said that the United States was on the wrong track, with 11.7 percent feeling we are headed in the right direction. The remaining respondents were unsure.

In special questions, 68.3 percent of respondents said their family-owned businesses would be adversely impacted by proposed changes to estate tax provisions. Separately, a majority of public company respondents have seen an increase in shareholder activism over the past two years. Of this activism, nearly 30 percent stemmed from activism to change social policies within the company (e.g., environmental reporting, human rights, political spending). Beyond that, 22.8 percent was directed toward changes in corporate governance and 12.3 percent related to executive compensation.

NFIB Small Business Survey
The National Federation of Independent Business reported that optimism rose marginally in February. The Small Business Optimism Index increased from 97.9 in January to 98.0 in February, but remained below December’s peak (100.4). The December level was the highest since October 2006. The good news was that the headline index has trended higher, up from 91.4 in February 2014. However, there continue to be some lingering anxieties about the economic outlook, with some of the underlying data points easing a bit in February.

Along those lines, the percentage of respondents suggesting that now was a good time to expand was unchanged at 13, but down from 16 in December. Weak economic conditions were the top reason cited by those indicating that it was not a good time for expansion. In addition, the net percentages expecting higher sales (down from 16 to 15) and employment (down from 14 to 12) over the next three months were both lower. Capital spending plans for the next three to six months were unchanged at 26 percent. To be fair, however, each of these measures was higher today than a year ago, consistent with progress made over the longer term.

The most important problem was regulatory burdens, cited by 21 percent of respondents, followed by taxes (20 percent), the quality of labor (14 percent) and poor sales (12 percent).  

Producer Price Index
The Bureau of Labor Statistics reported that producer prices for final demand goods and services surprisingly fell 0.5 percent in February. The consensus expectation had been for an increase of 0.3 percent, particularly as petroleum prices have stopped falling. Indeed, final demand energy goods prices were unchanged as a whole in February, the first non-negative number since June. Yet, lower food prices helped to reduce producer prices for final demand goods for the eighth straight month, down 0.4 percent. In particular, there were lower prices reported for dairy products, fruits and vegetables, grains, meats and shellfish—precisely the areas that have seen significant increases over much of the past year. Food prices rose 4.3 percent in 2014, but declines in the first two months of 2015 have reduced these costs by 2.6 percent.

While overall energy goods prices were flat, this tells only part of the story. Gasoline prices increased 1.5 percent in February. This was consistent with the rise in West Texas Intermediate crude oil prices, up from an average of $47.22 per barrel in January to $50.58 a barrel in February. Still, this remained well below the average of $105.79 per barrel in June. At the same time, lower costs for residential natural gas (down 2.1 percent) and diesel fuel (down 1.5 percent) counteracted the increase in gasoline for the month. 

On a year-over-year basis, producer prices for final demand goods and services fell 0.7 percent. This reflects significant easing in raw material costs since the 2.2 percent pace in May, and it was the second consecutive month with deflationary year-over-year figures. Meanwhile, core inflation—which excludes food and energy costs—has also decelerated, with year-over-year producer prices down from 2.1 percent in December to just 1.0 percent in February. Excluding food and energy, producer prices for final demand goods decreased 0.1 percent in February, declining for the second straight month.

This is likely to embolden inflationary doves on the Federal Reserve who would like for the FOMC to slow down its normalization efforts on short-term rates. While I still feel that the Federal Reserve will begin raising rates in mid-2015 on the relative strength in the U.S. economy, there have been increasing calls for the Federal Reserve to push that date back in light of global headwinds, including a stronger U.S. dollar. The FOMC meets this week, and this could provide some hints as to how recent economic developments might have shifted its thinking (or not).

Retail Sales
The Census Bureau reported that retail sales slipped for the third straight month in February. Retail spending fell 0.6 percent for the month, building on the 0.9 percent and 0.8 percent declines in December and January, respectively. Much of the recent decline has stemmed from lower gasoline prices, with gasoline station sales reflecting reduced receipt levels. To illustrate this point, Americans spent $46.3 billion at gasoline stations in February 2014, but that figure has dropped 23.0 percent since then to $35.6 billion in this report. Indeed, retail sales grew 1.7 percent year-over-year, but excluding gasoline station spending, the year-over-year rate would have been 4.7 percent. This suggests that consumer spending is better than the headline numbers might indicate.

Overall, the February data were mixed. The most notable decline was in motor vehicles and parts, with sales down 2.5 percent for the month. Excluding autos, retail sales would have decreased by 0.1 percent. Building materials and supplies (down 2.3 percent), electronics and appliances (down 1.2 percent), general merchandise (down 1.2 percent) and health and personal care (down 0.7 percent) were among the other retailers with declines in February.

Despite the significant declines at gasoline stations over the past few months, sales were actually higher in February, up 1.5 percent. This was consistent with the recent run-up in gasoline prices, with the average price rising from $1.98 per gallon on January 26 to $2.36 a gallon on March 2, according to the Energy Information Administration. Other areas with higher spending levels in February included sporting goods and hobby stores (up 2.3 percent), nonstore retailers (up 2.2 percent) and grocery stores (up 0.5 percent). 

Over the past 12 months, retail sales grew the fastest for the following types of businesses: nonstore retailers (up 8.6 percent), food services and drinking places (up 7.7 percent), furniture and home furnishing stores (up 5.8 percent), motor vehicles and parts dealers (up 5.4 percent), health and personal care stores (up 4.8 percent) and miscellaneous retailers (up 4.8 percent).

University of Michigan Consumer Sentiment
The University of Michigan and Thomson Reuters reported that consumer confidence unexpectedly slipped for the second straight month. The Consumer Sentiment Index has dropped from 98.1 in January to a revised 95.4 in February to 91.2 in March, according to preliminary data. The January figure had been the highest level in 11 years. Americans continue to be more positive today than a year ago, with the index measuring 80.0 in March 2014, and as such, the longer-term trend remains positive.

However, the data also suggest that the public remains anxious, mirroring the caution seen in recent spending data (see retail sales figures above). The University of Michigan survey indicates some easing in both current and expected measures over the past two months. Final data will be released on March 27.

Connect with the Manufacturers
Questions or comments?
Contact Chief Economist Chad Moutray at cmoutray@nam.org.
To unsubscribe from future Monday Economic Report emails, click here.