Economic Report: June 29, 2015

Last week, there were several reminders that the manufacturing sector has not recovered fully from economic weaknesses earlier in the year, even as business leaders remain cautiously optimistic about activity in the coming months. Durable goods orders declined 1.8 percent in May, extending April’s 1.5 percent decrease. Much of this softness stemmed from reduced aircraft sales, with orders excluding transportation modestly higher. Nonetheless, durable goods demand has been quite weak for much of the past year. On the positive side, we would expect stronger durable goods orders in the June data, with the recent Paris Air Show lifting aircraft sales, and the broader measure, which excludes transportation, has edged marginally higher over the past three months. We hope that this is the start of a rebound.

Other measures of manufacturing activity were mixed. The Markit Flash U.S. Manufacturing PMI grew at its slowest pace since October 2013, decelerating for the third consecutive month. Sales and output continued to expand modestly, however, and hiring growth accelerated to a seven-month high. Meanwhile, the Richmond Federal Reserve Bank’s monthly survey found that new orders grew at their fastest pace since October, a sign that the sector has made progress since the spring. Shipments also stabilized after contracting for four straight months. In contrast, the Kansas City Federal Reserve reported continued declining levels of demand, production and hiring in June, with lower crude oil prices and the stronger dollar challenging the district, which includes energy-intensive areas in Colorado and Oklahoma, among other states. Nonetheless, manufacturers in both regional districts were cautiously positive in their outlook for the next six months, particularly in the Richmond survey.

Looking abroad, the fundamentals in Europe’s economy have improved a bit, even as debt uncertainties in Greece continue to haunt the markets. Manufacturing activity in the Eurozone grew at the fastest pace since April 2014, boosted by better production and employment growth. Meanwhile, Chinese and Japanese manufacturers reported contracting activity in June, but with mixed levels of progress. The HSBC Flash China Manufacturing PMI increased to its highest level in three months, even as it has contracted in six of the past seven months. On the positive side, new orders shifted to a slight expansion. The Chinese economy continues to decelerate, but recent indicators suggest that at least some of this softness might have begun to stabilize. At the same time, Japan’s economy has been somewhat volatile this year, with its PMI data up one month and down the next. Reduced new orders pushed the Markit Flash Japan Manufacturing PMI just barely into contraction territory in June. 

Meanwhile, the Bureau of Economic Analysis reported that the U.S. economy shrank by 0.2 percent in the first quarter, an improvement of sorts from the 0.7 percent decline estimated earlier. The largest drag on real GDP growth in the first quarter continued to be net exports, which subtracted 1.9 percentage points from the headline number. Consumer and business spending also showed weakness. The good news is that we have started to see some rebounds, which should bode well for second quarter growth. (I forecast 2.8 percent real GDP growth for the second quarter.) Personal spending rose 0.9 percent in May, its fastest monthly pace since August 2009 and we hope a sign that Americans are once again starting to open their wallets. Consumer confidence also picked up in its latest release. At the same time, existing and new home sales both increased strongly in May, recovering from softer numbers earlier in the year.

We will continue to look for rebounds in manufacturing activity in a number of indicators this week, including the new Dallas Federal Reserve survey later this morning, the latest Institute for Supply Management Purchasing Managers’ Index report on Wednesday and factory orders on Thursday. The other big economic news of the week will be June jobs numbers, which will have a rare Thursday release instead of Friday (due to the upcoming Independence Day holiday). New figures on consumer confidence and construction spending are other economic highlights to watch this week.

Chad Moutray
Chief Economist
National Association of Manufacturers (NAM)

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