Economic Report: June 22, 2015

Last week, one media outlet reported that manufacturing has been in a “technical recession” for the past six months. I am more hesitant to use the R-word to describe the sector’s performance year-to-date, and in my view, this description somewhat overstates the significance of broader market trends, particularly for expectations moving forward. At the same time, manufacturing production has declined since late last year, as illustrated in the graphic above. A number of significant economic headwinds have reduced output in four of the past six months, reducing the year-over-year pace of growth in the sector from 4.5 percent in November to 1.8 percent in May. Capacity utilization has also declined for five consecutive months, down from 78.1 percent in December to 77.0 percent in May.

Looking ahead, the most recent National Association of Manufacturers (NAM) Manufacturers’ Outlook Survey found that respondents continue to predict modest growth in sales and production over the next 12 months, even as their assessments about their own company’s outlook have clearly diminished since December. Other surveys also point to a possible rebound in activity, with 56.9 percent of manufacturers completing the Philadelphia Federal Reserve Bank’s monthly survey anticipating faster growth in the second half of 2015 than in the first half. Even the New York Federal Reserve Bank’s survey, which reported a contraction for the second time in three months in June, predicts that new orders, shipments, employment and capital spending will grow strongly over the coming months, providing me with some cautious optimism moving forward.

The housing market was also softer-than-desired earlier this year, but it has begun to show signs of stabilizing. New housing starts were lower than expected in May, even as they continue to reflect progress from three months ago. More importantly, housing permits rose to 1,275,000 units at the annual rate, the fastest rate since August 2007. With permits foreshadowing future activity, this news was encouraging. This increase was spurred by a significant jump in multifamily permitting, which rose to a 28-year peak, despite the segment’s month-to-month volatility. Overall, these findings mirror the uptick in sentiment observed in the latest Housing Market Index, with the National Association of Home Builders Chief Economist David Crowe suggesting a “growing optimism among builders.”

These developments have not gone unnoticed. The Conference Board’s Leading Economic Index has increased strongly for three straight months, boosted by housing permits in particular in May. This bodes well for improvements in the overall economy in the months ahead, even as the data continue to reflect softness in the manufacturing sector. The Federal Open Market Committee has also observed progress since the first quarter, with participants feeling that the U.S. economy will rebound from “transitory” factors earlier in the year.

Nonetheless, the Federal Reserve did downgrade its estimates for growth for 2015, and it now plans to start increasing short-term rates sometime before the end of the year. At one time, conventional wisdom held that rates would rise at the meeting last week, but that thinking has now shifted to September or perhaps later. Fortunately for the Fed, reports continue to indicate that inflationary pressures remain minimal, as evidenced by the latest news on consumer prices. While higher gasoline costs pushed consumer prices higher in May, core inflation has remained below 2 percent for 27 consecutive months and dipped to 1.7 percent year-over-year for the month.

This week, we will get a number of key reports, providing a strong sense of the current state of the manufacturing sector. Markit’s preliminary manufacturing activity figures for the United States, China, Japan and the Eurozone will provide a window into potential, continued improvements in Europe and better growth in China. Meanwhile, closer to home, we will get our first look at May durable goods orders and new manufacturing surveys from the Kansas City and Richmond Federal Reserve Banks. On Wednesday, the Bureau of Economic Analysis will provide a second revision for first quarter real GDP growth, which declined 0.7 percent in the most recent estimate. Other economic highlights will include the latest figures for consumer sentiment, existing and new home sales, and personal income and spending.

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