Economic Report: March 23, 2015

The U.S. economy has sputtered a bit in the early months of 2015. While it continues to grow modestly, several economic indicators are weaker than we would prefer. For example, manufacturing production decreased by 0.2 percent in February, declining for the third straight month. Many headwinds have combined to bring about this softness in the manufacturing sector, including global economic weakness, a strong U.S. dollar, the West Coast ports slowdown, a cautious consumer and the weather in some parts of the country.

On the positive side, manufacturing output has increased 3.4 percent over the past year, and manufacturers continue to be mostly upbeat about the coming months. We continue to expect 3.2 percent growth in manufacturing production in 2015, suggesting better performance moving forward. Surveys from the New York and Philadelphia Federal Reserve Banks mirrored these results, with both reports seeing an easing in current activity. They also continued to reflect brighter demand and output over the next six months, with employment and capital spending also expected to increase moving forward. Such findings provide some encouragement in our outlook for the sector.

Challenges in the current economy go well beyond manufacturing. As noted in last week’s report, retail sales were also lower for the third consecutive month in February, suggesting some lingering caution in the marketplace. Much of the recent decline has stemmed from lower gasoline prices, but there were also muted sales seen in other categories as well, including motor vehicles.

In addition, housing starts were quite disappointing, with the annualized pace of new residential construction activity plummeting from 1,081,000 in January to 897,000 in February. Weather was likely a factor, particularly with major snowstorms in the Northeast and the Midwest. On the other hand, housing permits data provided a little comfort, increasing from 1,060,000 units at the annual rate to 1,092,000. The data could suggest that the decline in starts will be temporary. Yet, the data also mirrored larger weaknesses, with single-family permitting down for the second straight month. Homebuilders were also less confident in their latest survey, but respondents continue to be more positive than negative in their assessments of current conditions.

For its part, the Federal Reserve recognized that there have been some significant headwinds in the economy, specifically saying that “economic growth has moderated somewhat” in the press statement following the March 17–18 Federal Open Market Committee (FOMC) meeting. The Federal Reserve also cited economic progress, such as improvements in the labor market, growth in household spending and increased business fixed investment. In conjunction with the FOMC meeting, the Federal Reserve released its latest economic projections, reflecting slightly eased growth from what it saw three months ago. Federal Reserve officials now predict real GDP growth of between 2.3 and 2.7 percent in 2015, with similar rates in 2016. On the positive side, the labor market appears to be doing better than anticipated. The Federal Reserve now forecasts the unemployment rate falling to 5.0 to 5.2 percent in 2015 and to 4.9 to 5.1 percent in 2016.

The larger headlines from the FOMC meeting stemmed from the removal of the word “patient” from the Federal Reserve’s statement. This suggests that short-term rates will not increase until at least the June 16–17 meeting. However, the federal funds rate will change only when data warrant such actions. For the most part, the Federal Reserve has been on automatic pilot with its intentions for a midyear hike, and this action clears the way for that to happen. In her press conference, however, Federal Reserve Chair Janet Yellen asserted, “Just because we removed the word ‘patient’ from the statement doesn’t mean we are going to be impatient.” While financial markets initially reacted positively toward this statement—assuming that it meant rates would go up later rather than sooner—the fact remains that short-term rates will move higher at some point in 2015, likely in June, July or September.

This week, there will be a number of economic reports released showing the current state of the manufacturing sector, starting with Flash PMIs from Markit for the United States, China and the Eurozone on Tuesday. In addition, there will be new surveys from the Richmond and Kansas City Federal Reserve Banks and preliminary durable goods and shipments numbers. On Friday, the Bureau of Economic Analysis will provide a second revision for fourth-quarter real GDP, which had previously been estimated to be 2.2 percent. Other highlights this week include the latest figures for consumer prices, consumer sentiment and existing and new home sales as well as February state employment data.

Chad Moutray
Chief Economist
National Association of Manufacturers

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