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Chicago Fed National Activity Index (December)
The Chicago Federal Reserve Bank's National Activity Index rose from -0.46 in November to +0.17 in December. This measure looks to see if the U.S. is expanding at its historical growth rate; therefore, positive numbers reflect above-average growth. This month's data suggest a significant improvement, with manufacturing output the leading contributor. The production-related variables shifted from -0.28 to +0.24 for the month, led by stronger manufacturing production and capacity utilization.
Other positive contributors included higher employment and sales. Housing, on the other hand, remains a weak spot. Overall, 85 indicators provided a positive contribution, offset by 32 others.
The three-month moving average for the composite index improved from -0.19 to -0.08 in December. This suggests that, while the overall economy remains below its long-term trend, it is moving in the right direction. Moreover, the risk of recession is reduced, as the index has moved further away from the -0.70 threshold which suggests an increased likelihood of recession.
This is good news as we enter 2012. The economy is improving, with manufacturers playing an important role in its recent rebound.
Conference Board Leading Indicators (December)
The Conference Board announced that its Leading Economic Index rose 0.4 percent in December, the third consecutive month of gains. Manufacturing played an important role in this month's increases, with increased new orders and a longer average workweek. Improvements in the employment situation, equity markets and the interest rate spread also made positive contributions to this figure, with consumer confidence dragging it lower.
The index has changed, effective with this month's release, by replacing a measure of the money supply (M2) with a newly-created Leading Credit Index. The switch was made so that the indicator will do a better job of predicting the impact of credit crunches on the business cycle, and this new measure is an improved predictor of the recent downturn. In this month's analysis, the index was lower, providing a slight drag on the composite figure.
The Coincident Economic Index, which measures the current environment, increased by 0.3 percent. All of the subcomponents of this index rose, including industrial production, manufacturing and trade sales, nonfarm employment and personal income.
Durable Goods (December)
The Census Bureau reported that new orders for durable manufactured goods rose 3 percent in December. While slower than the 4.3 percent growth rate of November, it does mark the second consecutive month of strong gains – a sign that the sector has recovered from weaknesses in the middle of the year. Capital goods orders increased 4.5 percent for the month, or 2.9 percent for nondefense capital goods items excluding aircraft (also known as "core" capital goods).
Overall, there were several areas of strength in the new orders figures. The fastest monthly gains were in nondefense aircraft and parts (up 18.9 percent), machinery (up 6 percent) and primary metals (up 5.1 percent).Declines were observed in defense aircraft and parts (down 6.8 percent), computers and related products (down 2.6 percent) and fabricated metal products (down 1.4 percent).
Durable goods shipments also rose in December, up 2.1 percent and reversing the 0.3 percent decline last month. Among shipments, defense capital goods had a strong increase of 8.9 percent. Other leading sectors were communication equipment (up 9.6 percent), primary metals (up 8.2 percent), defense aircraft and parts (up 4.9 percent) and machinery (up 4 percent).
Unfilled orders and inventories grew 1.5 percent and 0.3 percent, respectively, in December, continuing a long streak for both of them.
FOMC Monetary Policy Statement (January)
The Federal Reserve Board's Federal Open Market Committee (FOMC) is extending its policy of "exceptionally low" levels of interest through late 2014. Previous Fed statements – at least since August – had suggested that the federal funds rate would stay low through mid-2013.
The extension through 2014 was met with dissention from Richmond Federal Reserve Bank President Jeffrey Lacker, an inflation hawk and new member of the FOMC in 2012. Other new additions rotating on the FOMC this year include Dennis Lockhart (Atlanta), Sandra Pianalto (Cleveland) and John Williams (San Francisco). Each of them voted with the majority.
In addition to extending its time horizon, the Fed plans to continue rebalancing its portfolio toward holding more long-term securities ("Operation Twist") and reinvesting principal payments in mortgage-backed securities. The intent of this policy is to push interest rates lower – particularly those impacting mortgages.
As part of Ben Bernanke's new communication strategy, the Fed has begun providing a more complete view of its economic assumptions and targets. According to its new release, the FOMC states that its interest rate target is 2 percent. By clearly stating this goal, it will allow the public to "keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances."
In addition, the Fed released its economic projections over the coming years. Despite some improvements in the domestic economy, the Federal Reserve remains worried about Europe and the continuing drags from an elevated unemployment rate and still-depressed (but slowly progressing) housing market. Real GDP is expected to grow between 2.2 and 2.7 percent this year, which is slightly lower than its forecasts made in November.
The employment picture, though, improved from its earlier assessment, with the unemployment rate ranging from 8.2 to 8.5 percent. The November projection was between 8.5 and 8.7 percent. Note that the unemployment rate is still expected to fall very slowly, ranging from 6.7 to 7.6 percent in 2014, depending on the differing projections provided by various Fed officials.
Gross Domestic Product (Fourth Quarter)
The Bureau of Economic Analysis announced that real gross domestic product (GDP) rose 2.8 percent in the fourth quarter. This was mostly in line with forecasts of 3 percent for the quarter. For 2011, real GDP increased 1.7 percent, down from the 3 percent growth rate of 2010.
This quarter's growth was led by strong increases in fixed investment (including residential), with healthy gains in consumption, inventories and exports. Specifically, consumers contributed 1.45 percentage points (or roughly half) to GDP, with 1.07 percent from durable goods consumption and another 0.27 percent from nondurables. Gross private domestic investment contributed 2.35 percentage points to growth, with the bulk of that coming from the replenishment of inventories. Both residential and nonresidential spending made positive contributions, as well.
Contributions from net exports were slightly negative, with higher imports offsetting the rise in exports. The largest drag on growth, though, came from government contributions. With defense and state and local government spending cuts, government reduced GDP by 0.93 percentage points.
Overall, these numbers reflect the stronger rebound in economic growth at the end of 2011 that many other indicators reported earlier. Manufacturing activity, in particular, appeared much healthier in November and December than in the mid-months. With moderate growth in consumer and business spending, the economy turned in its fastest growth pace since the second quarter of 2010.
Moving ahead, manufacturers are optimistic about production, employment and capital spending for 2012, yet a number of significant headwinds (particularly from Europe) persist. Moreover, the government sector – which is already providing a drag – will continue to dampen GDP, especially as more austerity measures (including defense and other nondiscretionary spending cuts) start to have real effects on the manufacturing community.
Despite the concerns, we are seeing some positive news and reports that manufacturing is strengthening, as seen in this report from the Financial Times. While growth may be slow, it is on the rise and is expected to continue.
Kansas City Fed Manufacturing Survey (January)
The Kansas City Federal Reserve released its latest manufacturing survey. The composite index of manufacturing activity rose from -2 (a slight contraction) in December to +7 (modest growth) in January. Improvements were seen across the board, with turnarounds in production, shipments, new orders, employment and exports.
Raw material inventories remained lower, with no change in finished goods inventories. Pricing pressures were evident, though, with an escalation in raw material costs. The prices paid index rose from 27 to 42, suggesting strong increases in these costs.
Looking ahead, manufacturers remain optimistic about future production, employment, exports and capital spending. The composite index of 12, however, has been the same for the three consecutive months, suggesting that the overall level of optimism remains unchanged. Some easing of new orders has taken place, falling from 25 to 18, offsetting the increased pace of growth elsewhere.
Overall, this shows moderate growth in manufacturing activity and a nice rebound from the slowdown in the fall months. The optimism for future activity bodes well as we move further into 2012; however, most manufacturers would admit that such optimism is cautious, especially as a number of significant headwinds persist both domestically and globally.
NABE Industry Outlook Survey (January)
In releasing its latest Industry Survey, the National Association for Business Economics (NABE) noted recent improvements in U.S. growth. (Note that I am a member of the survey committee and contributed to the report.) Sixty-five percent of business economists responding to this survey felt that real GDP growth would exceed 2 percent in 2012. This reflects a significant upward revision from the prior survey, which was released in October, in which 70 percent predicted growth of between 1 and 2 percent this year.
With that said, several of the indicators were mixed from the past survey. For instance, fewer individuals noted rising sales overall. In the goods-producing sector (which includes manufacturing), 40 percent of respondents observed rising sales, and 30 percent stated falling sales. The number of firms reporting profits as unchanged or rising (80 percent) remained mostly the same from the past survey. On the international front, sales have fallen in recent months, reflecting some weaknesses in foreign operations.
The bulk of goods-producing respondents (67 percent) plan no change in capital spending, but none of them suggests lower spending levels.
While 30 percent of goods-producing firms observed higher material costs, that figure was lower than the 54 percent who said the same three months ago. This reflects some of the easing observed elsewhere with regard to pricing pressures.
There was less positive news on employment. No respondents in the goods-producing sector reported falling employment in October; in this survey, that figure is 20 percent. The outlook numbers are also poor. Interestingly, this conflicts with many of the other sentiment surveys on manufacturing, which are more upbeat in both of these areas.
Overall, this survey reflects the dynamic nature of the current economy. On the one hand, the larger macroeconomic picture is much improved, helping to lift optimism among the many business economists who filled out the survey. Yet, many of the company-specific indicators remain weak, including slower growth in the goods-producing industries for sales, employment and capital spending. Reduced inflationary pressures are obviously welcome news, though.
Regional and State Employment (December)
The Bureau of Labor Statistics reported mostly positive news about regional and state employment. This should not be a surprise, as it corresponds with the gain of 200,000 nonfarm payroll workers announced earlier in the month. Nonfarm employment grew in 25 states plus the District of Columbia, with Texas, Indiana and California experiencing the fastest gains. Nevada has the highest unemployment rate in the country with 12.6 percent; North Dakota's 3.3 percent rate is the lowest.
States with the fastest growth in manufacturing in December included Michigan (up 4,200), Indiana (up 3,600), Wisconsin (up 3,300) and Pennsylvania (up 2,600). Looking at year-over-year gains in the manufacturing sector, Michigan (up 26,400), Texas (up 25,200), Ohio (up 18,300) and Washington (up 14,600) had the largest gains in 2011.
Richmond Fed Manufacturing Survey (January)
The Richmond Federal Reserve Bank reported much-improved manufacturing activity, with the composite index up from 3 in December to 12 in January. This is the highest level since April, and a sign that the region is entering the new year on a stronger footing. As with other regions (especially on the East Coast), this reflects a turnaround from the contractions experienced from July to October.
Looking at its various components, the rate of growth for new orders rose. The index grew from 7 to 14 for the month. A similar trend was observed for shipments and capital expenditure plans. Also, after contracting last month, manufacturers in the Richmond region plan to start hiring again, with the index going from -4 to 4.
Moreover, the prospects for growth are positive for 2012, with high levels of optimism across the board. This mirrors other comparable surveys that show both a rebound in activity and positive prospects for the new year.
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Please contact Chad Moutray at cmoutray@nam.org |
