Economic Report: July 20, 2015

 In particular, she referred to uncertainties in the economic outlook posed by global uncertainties in China and Greece and headwinds stemming from a stronger dollar and lower crude oil prices. Despite those issues, the Federal Reserve anticipates stronger economic growth in the second half of 2015, including faster rates of spending and continued improvements in the labor market. Inflationary pressures also appear to remain quite minimal, as seen in the most recent consumer and producer price data. The Federal Open Market Committee is likely to begin raising short-term interest rates by the end of the year, either at its September or December meeting, based on progress made in the overall economy. However, Yellen cautioned against making too much of the timing of such an increase, saying the following:

“…the importance of the initial step to raise the federal funds rate target should not be overemphasized. What matters for financial conditions and the broader economy is the entire expected path of interest rates, not any particular move, including the initial increase, in the federal funds rate. Indeed, the stance of monetary policy will likely remain highly accommodative for quite some time after the first increase in the federal funds rate in order to support continued progress toward our objectives of maximum employment and 2 percent inflation.”

The housing market is one area where improvement clearly can be seen in the overall economy. Housing starts and permits both rose to nearly eight-year highs in June—a sign that residential construction activity continues to move in the right direction. Housing starts reached 1,174,000 units at the annual rate in June, with permits soaring to 1,343,000. However, much of the monthly increase came from the highly volatile multifamily segment, with starts in single-family construction edging slightly lower. Still, the longer-term trend remains positive, and homebuilders are mostly upbeat about the coming months. The Housing Market Index from the National Association of Home Builders and Wells Fargo rose to its highest level since November 2005 in July. Overall, housing data are very encouraging for those manufacturers who have long sought a recovery in the market.

In contrast, the manufacturing sector continues to struggle from recent headwinds. Production in the sector was unchanged in both May and June. Indeed, manufacturing activity has been sluggish since November of last year, when the year-over-year rate of growth was a more robust 4.5 percent. In June, that pace fell to 1.8 percent. Capacity utilization for manufacturers has also fallen, down from 78.1 percent in November to 77.2 percent today. Beyond the national numbers, regional reports released last week were mixed. The New York Federal Reserve Bank’s monthly survey noted some progress in overall sentiment, even as new orders remained negative on net. Meanwhile, activity eased in the Philadelphia Federal Reserve district on slower growth for orders, shipments and the workweek. Each report, however, reflects a more optimistic assessment of the next six months, with more than half of respondents expecting demand to increase.

Consumers also remain anxious. The Consumer Sentiment Index from the University of Michigan and Thomson Reuters dipped slightly in July after rebounding in June, according to preliminary findings. While Americans are more confident today than a year ago, the data show that the public continues to be worried about the economy, perhaps spurred on by global challenges in the news over the past few weeks. This has translated into some cautiousness in consumers’ willingness to open their pocketbooks. Retail sales fell by 0.3 percent in June on disappointing spending figures in a number of key categories, including building materials, home furnishings and motor vehicles. To be fair, at least some of the deceleration in consumer spending can be attributed to reduced gasoline prices, with modest gains in retail spending noted year-over-year when gasoline sales are excluded.

Next week, we will continue to get new information on the health of the global economy. Most notably, Markit will release preliminary Purchasing Managers’ Index data for the United States, China, Japan and the Eurozone on Friday, which we hope will reflect improvements from softness earlier in the year. In addition this week, the Kansas City Federal Reserve Bank will report on activity in its district, which has struggled in recent months due to lower energy prices and the stronger dollar. Beyond those measures, we will also be closely following new data on existing and new home sales, leading economic indicators and state employment.

Chad Moutray
Chief Economist
National Association of Manufacturers (NAM)

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