Economic Report: Sept. 21, 2015

In deciding not to start raising short-term interest rates, the Federal Open Market Committee (FOMC) said, “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” As such, the Federal Reserve has chosen to see how the next few months transpire before opting to begin the process of normalizing rates, likely at the December 15–16 meeting, depending on the strength of incoming data between now and then. It is also possible (but not likely) that the FOMC might choose to act at the October 27–28 meeting. The Federal Reserve released its latest economic projections, with real GDP forecasts for 2015 improving slightly from 1.9 percent in June to 2.1 percent now. The outlook is also for 2.3 percent growth in 2016, with the unemployment rate falling to 4.8 percent next year. Fortunately, pricing pressures remain minimal, with the Federal Reserve’s outlook for core inflation being 1.4 percent and 1.7 percent in 2015 and 2016, respectively.

In the most recent NAM Manufacturers’ Outlook Survey, 64.2 percent of respondents want more time before the Federal Reserve begins raising rates. More than anything, this was a recognition that there are still significant headwinds challenging firms, ranging from the stronger dollar, to reduced crude oil prices, to weak export markets abroad. Much of the manufacturing data released last week tended to highlight those hurdles. For instance, manufacturing production declined 0.5 percent in August, falling in three of the past four months. Capacity utilization for manufacturers decreased from 76.2 percent to 75.8 percent. On a year-over-year basis, manufacturing production increased 1.4 percent in August. This represented a sharp deceleration in output from the 4.3 percent year-over-year pace in January.

Moreover, both of the regional surveys out last week reflected contracting sentiment. The Empire State Manufacturing Survey from the New York Federal Reserve Bank contracted for the second straight month, with each month being the lowest since April 2009. In addition, the Philadelphia Federal Reserve Bank’s manufacturing survey declined for the first time since February 2014, likely reflecting recent anxieties in the U.S. and global economy. Nonetheless, the underlying measures in the Philadelphia Federal Reserve report were more encouraging, with growth expanding modestly, albeit at a slower pace in some cases. Looking ahead, respondents in both surveys were cautiously optimistic about better demand, production, hiring and capital spending across the next six months.

Meanwhile, consumer spending and housing have been bright spots of late, even as manufacturing continues to seek a stronger rebound. Homebuilder confidence reached a level not achieved in nearly a decade, and housing starts and permits have both risen steadily over the past 12 months, up 16.6 percent and 12.5 percent, respectively, year-over-year. Nonetheless, both single-family and multifamily housing starts edged lower in August, even as the long-term trend remained positive. This mirrors the data for retail sales, which slowed in August after a more robust pace in July. Still, the public remains cautious in their willingness to open their pocketbooks. As an illustration of that point, retail sales growth was 4.9 percent year-over-year 12 months ago, or more than double the current pace of 2.2 percent.

There are a number of economic reports out this week that will give a better glimpse on the health of the U.S. and global manufacturing sector. Given the challenges in China, the Markit Flash PMI data for that country will be closely watched on Wednesday, with manufacturing activity also being released for the United States and the Eurozone. In addition, regional surveys from the Kansas City and Richmond Federal Reserve Banks and the latest durable goods figures will provide additional insights on the U.S. market. At the end of next week, the final revision for GDP will be released. Other highlights to look for include new data on consumer confidence and existing and new home sales.

Chad Moutray
Chief Economist
National Association of Manufacturers (NAM)

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