Economic Report: July 27, 2015

Just two weeks ago, the Greek debt drama overshadowed the plunge in the Shanghai stock market, but with Greece receiving a bailout (and staying in the Eurozone, at least for now), more attention is being paid to China’s decelerating growth. Those worries have become more evident with manufacturing activity in China dropping to its lowest level since April 2014. The Caixin Flash China General Manufacturing PMI has now contracted in seven of the past eight months, with new orders, output and exports each slipping further into negative territory in July. In contrast, Europe has fared pretty well, particularly given the uncertain environment regarding Greece over the past few weeks. The Markit Flash Eurozone Manufacturing PMI fell slightly in July but remained just shy of June’s reading, which had been the highest since April 2014. Notice the coincidence between China and the Eurozone regarding April 2014, a sign that these two regions are moving in opposite directions right now.

Reports on U.S. manufacturing activity were mixed last week. On the positive side, the Markit Flash U.S. Manufacturing PMI rebounded ever so slightly in July from its slowest rate of growth since October 2013 the month before. Demand, production and hiring continue to expand modestly, even as each measure reflects some easing from the more robust paces in the second half of last year. Exports also grew for the first time since February, which was encouraging. Yet, the news from the Kansas City Federal Reserve Bank illustrates that many manufacturers continue to struggle with lower crude oil prices, the strong dollar and weakened sales abroad. Manufacturing activity in the Kansas City Federal Reserve district contracted for the fifth straight month, albeit with the rate of decline slowing a bit in July. Survey respondents were marginally positive on net about the next six months, including for exports.

Along those lines, the Conference Board’s Leading Economic Index (LEI) increased for the fourth consecutive month. The index rose 2.1 percent in the first half of 2015, with relatively strong growth in the second quarter. This measure reflects a rebound in activity from softness earlier in the year and predicts stronger growth over the coming months. It also mirrors a recovery in the Chicago Federal Reserve Bank’sNational Activity Index. Both of these measures follow better employment, housing and spending data.

Regarding residential construction, housing starts and permits soared to pre-recessionary highs in June, and existing home sales rose 3.2 percent in June, extending the 4.5 percent gain in May. In fact, existing home sales in June were the fastest pace since February 2007, which was an encouraging sign that the housing market has recovered from its lull earlier in the year. That is perhaps less true, however, for new home sales following the release of a discouraging report on Friday. New single-family home sales dropped 6.8 percent in June, declining for the second straight month, with sales lower in every region of the country except for the Northeast. Unlike for existing home sales, inventories of new homes jumped higher in June. There were 5.4 months of supply on the market, up from 4.7 months in April and 4.8 months in May.

This week, we will get our first glimpse of economic growth in the second quarter with the release of real GDP data on Thursday. After declining by 0.2 percent in the first quarter, the U.S. economy is expected to rebound with a 2.8 percent to 3.0 percent increase in the second quarter. In addition, we will learn about the regional economic performance in the Dallas and Richmond Federal Reserve Bank districts with the release of their latest manufacturing surveys on Monday and Tuesday, respectively. The Federal Open Market Committee will meet next week, with the release of its monetary policy statement on Wednesday; however, the Federal Reserve is not expected to start increasing short-term rates until at least September. Other highlights to look for next week include the most recent data on consumer confidence, durable goods orders and employment costs.

Chad Moutray
Chief Economist
National Association of Manufacturers (NAM)

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