Economic Report: March 30, 2015

As we have seen in past weeks, economic data continue to reflect dampened activity in the early months of 2015 as a result of a number of significant headwinds. These challenges range from weak economic growth abroad, to a significantly strengthened U.S. dollar, to the sharp drop in crude oil prices. Weather and the West Coast ports slowdown have also been relevant factors in some of the softness that we have seen in the reports released since December. As a result, the first quarter is likely to grow around 1.8 percent. This would be less than the 2.2 percent growth rate in real GDP seen during the fourth quarter. Nonetheless, I am predicting 2.8 percent growth in real GDP in 2015, reflecting a slight deceleration in my outlook for the year. The expectation is that we will see some rebounds moving forward, with manufacturers continuing to be more upbeat about the coming months, even with some challenges likely to continue.

Several reports provide a mixed picture of the current state of the manufacturing sector globally. Last week, manufacturing surveys from the Kansas City and Richmond Federal Reserve Banks both contracted for the first time in 12 months in March. On the positive side, respondents in these regions remain more upbeat in their outlook for the next six months, even as their enthusiasm has diminished somewhat. Along those lines, new durable goods orders declined 1.4 percent in February, falling for the fifth time in the past seven months. Much of the decrease in February stemmed from reductions in demand for transportation equipment, but the broader market was also soft. Durable goods shipments were also lower. Still, they were a bit more encouraging over a longer time horizon, up 3.9 percent over the past 12 months.

In contrast, the Markit Flash U.S. Manufacturing PMI increased from 55.1 in February to 55.3 in March, indicating relatively decent growth. In particular, there were strong expansions cited in new orders and output, with hiring up modestly but exports declining. That squares with other surveys, including the most recent NAM/IndustryWeek one, showing a mostly positive outlook among manufacturers, even with the headwinds mentioned earlier.

Meanwhile, consumer confidence has also slipped a little, down for the second straight month in March, even as Americans continue to be more positive today than a year ago. Similarly, the housing market has experienced a number of challenges lately, including snowstorms in the Midwest and Northeast and reduced inventory levels. The good news was that both existing and new home sales rebounded somewhat in February. In other news, the consumer price index rose for the first time in four months as gasoline prices began to rebound slightly (but continue to remain well below where they were just a few months ago). On a year-over-year basis, core inflation has increased 1.7 percent. 

On the international front, manufacturing activity improved to its highest level since May 2014 in the Eurozone, but growth on the continent will continue to be sluggish for the foreseeable future. At the same time, Chinese manufacturers reported declines in activity for the third time in the past four months, with growth continuing to decelerate. China has reduced its target real GDP growth rate for 2015 to 7 percent.

This week, there will be a number of high-profile indicators released that will provide additional gauges on the current economy. This includes personal income and spending on Monday, consumer confidence on Tuesday, the Institute for Supply Management’s Purchasing Managers’ Index on Wednesday, international trade on Thursday and new jobs numbers on Friday. In addition, we will learn more about manufacturing activity from the latest Dallas Federal Reserve Board survey and factory orders and shipments data from the Census Bureau.

Chad Moutray
Chief Economist
National Association of Manufacturers (NAM)

P.S. — I am excited to announce that Honeywell Aerospace Global Economist Christopher Reed will prepare the Monday Economic Report for April 6. This will give us an opportunity to gain insights from a well-respected economist with on-the-ground expertise in the sector.