Economic Report: June 8, 2015

The Federal Reserve’s Beige Book reported that the economy expanded modestly in its recent assessment. More importantly, it said that activity for manufacturers “held steady or increased over the reporting period” in all of its regions except for the Dallas and Kansas City districts. Those two regions have been rocked by lower crude oil prices and sluggish export growth in particular. Yet, beyond those challenges, the Federal Reserve noted some improvements in retail spending (especially for motor vehicles), housing and employment. Despite this mostly upbeat economic analysis, the Federal Reserve is keenly aware of the challenges that exist in the marketplace, as noted in the minutes of the most recent Federal Open Market Committee meeting. Indeed, data released last week continue to reflect a softer-than-desired level of activity in many areas, even as manufacturers might remain cautiously optimistic about the future and some of the measures rebounded somewhat.

The Institute for Supply Management’s Manufacturing Purchasing Managers’ Index increased from 51.5 in April to 52.8 in May. This was good news, particularly given the softness in this index seen year-to-date. Through the first five months of 2015, the headline index has averaged 52.4, well below the 56.9 average during the second half of 2014. Still, growth in new orders rose at the fastest pace so far this year, and production increased at a decent pace despite some easing in the month. Manufacturers also appear to be investing in more structures, with construction spending in the sector up for the third straight month to another all-time high. At the same time, international sales growth continues to be a challenge. Indeed,manufactured goods exports have fallen nearly 4 percent year-to-date relative to the same time period last year. This was true despite a narrowing of the overall trade deficit in April from its ports-influenced highs of March.

Manufacturing employment also showed signs of improvement in May, with 7,000 additional workers in the sector created on net in the month. While this continues to reflect weakness overall, hiring in May was better than in April, and there were some encouraging developments. For instance, motor vehicles and parts hiring increased at the highest level in six months. Beyond that, nonfarm payroll growth was stronger than expected, up 280,000 in May and well above the consensus estimate of around 220,000. In fact, the U.S. economy has added at least 200,000 workers per month in 14 of the past 15 months. Such progress in the labor market should help manufacturing growth moving forward, boosting consumer confidence and fueling more spending.

If we continue to see stronger growth moving forward, there is an increased likelihood that the Federal Reserve will begin raising short-term rates this fall. The conventional wisdom holds that the Federal Open Market Committee will start this process at its September meeting.

Still, there were also some indicators that continued to reiterate recent headwinds in the economy. For example, new factory orders declined 0.4 percent in April, and they have decreased 6.4 percent over the past 12 months. Excluding transportation, new orders have been unchanged during the past two months. Furthermore, personal spending was flat in April, and the savings rate increased as Americans remained somewhat cautious in their purchases. This continued a trend seen over the past six months, with the year-over-year rate of growth for personal consumption declining from 4.3 percent to 2.8 percent over that time frame. On the positive side, personal income growth has been more encouraging, up 0.4 percent in April and 4.1 percent year-over-year.

This week, the NAM will release a revamped version of its Manufacturers’ Outlook Survey on Wednesday. This measure, which dates back to 1997, provides a gauge on economic activity for the sector. Otherwise, it is a light week for economic indicators. The highlights will be new data on consumer confidence, job openings, producer prices, retail sales and small business optimism.

Chad Moutray
Chief Economist
National Association of Manufacturers (NAM)

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