Economic Report: April 20, 2015

Manufacturing production increased 0.1 percent in March. This followed three months of weaker data, including declines in both January and February. There have been some significant headwinds hitting the manufacturing sector over the past few months, including a strong U.S. dollar, weakened economic markets abroad, lower crude oil prices, the West Coast ports slowdown and weather. These challenges have slowed activity in the sector since November. The latest Beige Book discussed these headwinds. The year-over-year pace of manufacturing production in March was 2.4 percent, down from 4.5 percent in November. Meanwhile, total industrial production, which includes mining and utilities, fell 0.6 percent in March, declining for the third time in the past four months. As such, the data suggest manufacturers have started the new year on a very soft note despite optimism for better demand and output moving forward.

Surveys of business leaders in the sector tend to echo these sentiments, but to varying degrees. The Empire State Manufacturing Survey from the New York Federal Reserve Bank contracted in April, ending three consecutive months of expansion in the district. The decline stemmed from reduced new orders, with nearly one-third of respondents suggesting that orders were lower for the month. The Manufacturers Alliance for Productivity and Innovation (MAPI) Foundation’s quarterly survey reflected some easing in activity, but exports turned negative as manufacturers struggled with a strengthened U.S. dollar. Still, the MAPI report continued to reflect relatively strong growth overall, particularly with domestic orders, shipments and investments. Along those lines, the Philadelphia Federal Reserve Bank noted an improvement in its composite index, with notable gains on the labor front and continued optimism over the next six months. Yet, growth in new orders and exports struggled, and the pace of shipments remained negative.

Several other indicators reflected some rebounds in their latest releases, even as the data remain below where they were just a few months ago. Housing starts rose 2.0 percent in March with gains in each region. At the same time, the annualized 926,000 units started in March remain well below the 1,072,000 rate in January. Similarly, retail sales grew 0.9 percent in March following declines in the previous three months, with strong growth in motor vehicles and parts. This increase in retail spending in March, however, was not enough to make up for the decreases since November. On a brighter note, consumers continue to spend overall, with year-over-year growth in retail sales of 4.0 percent with gasoline station spending excluded. (Gasoline station sales have decreased a whopping 22.0 percent since March 2014 on lower prices.) Consumer confidence was also higher in April, according to preliminary data from the University of Michigan and Thomson Reuters. 

Overall, the weaker-than-desired economy in the first quarter of this year has begun to lead many to downgrade their outlook for the coming months. This has increased speculation that the Federal Reserve Board might push back its normalization plans for short-term interest rates from June to September, or perhaps even later. The Federal Open Market Committee (FOMC) has long said that it wants to see strong signs of economic progress in the data before starting to move rates higher. With that said, if the U.S. economy rebounds strongly between now and the June 16–17 meeting, a rate increase would still be on the table. Either way, rates are expected to increase this year, barring unforeseen economic developments. Fortunately, the FOMC has been given a relatively free hand in deciding when to raise rates, with pricing pressures largely in check. Core consumer prices have now remained below 2 percent year-over-year for 26 straight months.

This week, we will get a good sense of manufacturing activity globally, with Markit Flash PMI data for the United States, China, Japan and the Eurozone being released on Thursday. (For more information on current international trends, see the latest Global Manufacturing Economic Update, which was released on Friday.) In addition, the Kansas City Federal Reserve Bank will also report on its latest manufacturing survey on Thursday, with preliminary durable goods orders and shipments numbers out on Friday. Other economic highlights for the week include new data for existing and new home sales, the Chicago Federal Reserve’s national activity index and state employment. 

Chad Moutray
Chief Economist
National Association of Manufacturers (NAM)

For more news from NAM, visit www.nam.org.