Economic Report: May 26, 2015

The minutes of the April 28–29 Federal Open Market Committee (FOMC) meeting highlighted the nuance that many of us see in the economy right now. The Federal Reserve highlighted a number of challenges facing consumers and businesses in the early months of 2015, noting how these headwinds have dampened overall activity year-to-date. On the other hand, the FOMC felt that slowing economic growth was largely due to “transitory factors,” with its outlook mostly unchanged for the rest of this year. The Federal Reserve projects growth of 2.3 to 2.7 percent in 2015, and it expects the unemployment rate to fall to 5.0 to 5.2 percent.  

Despite this cautious optimism for a rebound in the economy, the main headline coming out in these minutes was the possible timing of increasing short-term interest rates. The Federal Reserve had been operating on automatic pilot in its pursuit of normalized policies, with quantitative easing ending in October 2014 and the FOMC on a path toward raising the federal funds rate at its June 16–17 meeting. Yet, weaker-than-desired data of late have caused participants to question the June timing, with conventional wisdom now suggesting that short-term rates are likely to go up at the September 16–17 meeting instead. The FOMC meeting minutes seem to confirm this, stating the following:

Although participants expressed different views about the likely timing and pace of policy firming, they agreed that the Committee’s decision to begin firming would appropriately depend on the incoming data and their implications for the economic outlook. A few anticipated that the information that would accrue by the time of the June meeting would likely indicate sufficient improvement in the economic outlook to lead the Committee to judge that its conditions for beginning policy firming had been met. Many participants, however, thought it unlikely that the data available in June would provide sufficient confirmation that the conditions for raising the target range for the federal funds rate had been satisfied, although they generally did not rule out this possibility.

For those looking for a rebound in manufacturing activity, we have not seen one yet. Surveys released last week from Markit and the Kansas City and Philadelphia Federal Reserve Banks continued to reflect softness in the sector. The Kansas City report was the weakest, with its composite index contracting for the third straight month. In contrast, the other two releases noted expanding levels of new orders, production and employment, albeit with some easing for the month. While exports are expected to remain weak moving forward, respondents to these surveys are hopeful that demand, output, hiring and capital spending will pick up in the coming months.

Meanwhile, manufacturing activity in the Eurozone improved to its highest level since April 2014, and Japan’s economy also continues to edge higher. Yet, the HSBC Flash China Manufacturing PMI has now contracted in five of the past six months, reflecting decelerated growth. (For more information on these trends, see the most recent Global Manufacturing Economic Update.)

There was more encouraging news on the housing front. New housing starts jumped from an annualized 944,000 in March to 1,135,000 in April, its fastest pace since November 2007, the month before the start of the Great Recession. As such, it appears that the housing market has begun to move past the weather-related softness seen in some regions of the country in February and March. On a year-over-year basis, housing starts have risen 9.2 percent since April 2014. The housing permits data were equally reassuring. Housing permits increased from 1,038,000 units at the annual rate to 1,143,000, hitting its highest level since June 2008. In other news, homebuilder confidence ebbed slightly in May but remained positive overall. Existing home sales declined in April; yet, reduced supplies of homes for sale have pushed prices higher.

On Friday of this week, the Bureau of Economic Analysis will issue a revision to first quarter real GDP, which is expected to fall slightly into negative territory after originally being estimated as a 0.2 percent increase. We also will see several indicators on the health of the manufacturing sector on Tuesday, including April durable goods orders and shipments and May sentiment surveys from the Dallas and Richmond Federal Reserve Banks. Other highlights next week include the latest data on consumer confidence, new home sales and state employment.

Chad Moutray
Chief Economist
National Association of Manufacturers (NAM)