Economic Report: May 31, 2015

The U.S. economy shrank in the first quarter for the second year in a row, with revised data showing thatreal GDP declined by 0.7 percent. This was down from an earlier estimate of 0.2 percent growth. Overall, this was a disappointing start to 2015. That is particularly true when you look at the optimism that many businesses had at the start of the year. Yet, manufacturers faced a number of significant headwinds in recent months, including weaknesses abroad, a strong U.S. dollar, lower crude oil prices, the residual effects of the West Coast ports slowdown, bad weather in some regions of the country and a still-cautious consumer.

There were several releases out last week that examined the current health of the manufacturing sector, and each noted continuing softness in overall activity. New durable goods orders declined by 0.5 percent in April, pulling back from the 5.1 percent increase in March. Strong defense and nondefense aircraft orders in March helped to buoy that month’s figures, with April’s data reflecting a slight decline from those levels. Excluding transportation, the data were somewhat better, up 0.5 percent in April, increasing for the second straight month. Still, new durable goods orders excluding transportation have fallen 0.9 percent year-over-year, reflecting recent weaknesses in the overall market.

Manufacturing surveys from the Dallas and Richmond Federal Reserve Banks also show softness, but at varying degrees. Respondents to the Dallas survey continue to struggle with lower crude oil prices, and as a result, the composite index of general business conditions fell to its lowest level since June 2009. The news was somewhat better in the Richmond district, with new orders and capacity utilization shifting to slight expansions in May. Despite the increased index values, activity in the region remains well below the more robust growth rates from last autumn.

Moving forward, manufacturers are cautiously upbeat about the coming months—a finding that has been consistent in all of the most recent regional surveys, including the ones from the Dallas and Richmond Federal Reserve Banks. I now expect real GDP growth of 2.4 percent for 2015, with growth in the second quarter of roughly 2.8 percent. That suggests modest growth over the coming months, but it also indicates some disappointment after manufacturers were hoping for some long-sought traction in the U.S. economy this year. As such, we will be closely watching upcoming indicators, including Purchasing Managers’ Index data from the Institute for Supply Management (ISM) coming out today and the latest jobs numbers out on Friday, for signs of a possible rebound.

On the consumer front, the two reports out last week moved in different directions, but they both noted persistent anxieties about income and labor market growth. Consumer confidence pulled back sharply in May, according to the University of Michigan and Thomson Reuters, but the decline was less steep than in the original estimate. In contrast, consumer sentiment rebounded a little in May in the most recent report from the Conference Board. Still, perceptions about the economy remain lower than in January, a post-recessionary peak, as Americans have grappled with weak economic performance of late. More respondents said that jobs were hard to get and expect their incomes to decrease, highlighting how softer economic data have led to more nervousness.

In addition to the latest ISM and employment numbers, we will get a number of important data points on the economy this week. These include reports on construction spending, factory orders, international trade, personal income and spending and productivity.

Chad Moutray
Chief Economist
National Association of Manufacturers (NAM)