Economic Report: January 25, 2016

Manufacturing leaders are grappling with how to interpret the financial market volatility seen in the first three weeks of 2016, much of which has stemmed from worries about a global economic slowdown and plummeting crude oil prices. Fortunately, markets recovered a little of the losses on Friday, but equities were down for the week as a whole, with the Dow Jones Industrial Average off 7.6 percent year-to-date. It had been down more than 11 percent at one point midweek.

Much of the improvement in stock values on Thursday and Friday came from two sources. First, crude oil prices rebounded, with West Texas Intermediate (WTI) crude closing at $32.15 per barrel on Friday, up from $28.35 a barrel on Wednesday. (For a while on Wednesday, WTI prices flirted with $26 per barrel, levels not seen since early 2003.) Still, energy costs have fallen dramatically over the past year, pushing down overall pricing pressures. The average price of regular conventional gasoline was $1.810 per gallon last week, its lowest level in nearly seven years according to the Energy Information Administration.

The second—and perhaps more important—factor in lifting the stock market at week’s end was the European Central Bank (ECB), which suggested that it might be open to additional stimulus measures at its March meeting. ECB President Mario Draghi continues to be worried about low annual inflation and negative impacts of a possible global slowdown. Indeed, the Markit Flash Eurozone Manufacturing PMI slowed from 53.2 in December to 52.3 in January, its slowest pace since October. As such, it suggests that Europe is not immune to the global challenges seen elsewhere, even as the continent has moved generally in the right direction of late. For its part, the International Monetary Fund lowered its outlook for worldwide GDP growth in 2016 from 3.6 percent in October to 3.4 percent in its latest assessment.

The data on the U.S. economy were mixed last week, with some encouraging signs but also lingering weaknesses. On the positive side, the Markit Flash U.S. Manufacturing PMI increased from 51.2 in December to 52.7 in January, with activity rebounding from its lowest level since October 2012. As such, the Markit survey of manufacturing leaders started the new year off with some progress, if it stands in contrast to the competing survey from the Institute for Supply Management, which indicated a contraction in both November and December. The regional manufacturing sentiment surveys have also been discouraging, including the one from the Philadelphia Federal Reserve Bank. Business leaders from that region reported contracting activity levels for the fifth straight month. At the same time, they continue to remain cautiously upbeat about new orders and shipments over the next six months.

Meanwhile, housing starts eased somewhat in December, but they were up 10.8 percent for 2015 as a whole. The data reflect gradual improvements in residential construction over the longer term, even with the slight pullback in December activity in both the single-family and multifamily segments.  Housing permits were also promising, up 12.0 percent in 2015 from the average seen in 2014. Even with some easing in the December figures, permitting of new homes exceeded 1.2 million for the second straight month. Since housing permits can be seen as a proxy of future residential construction activity, this could provide some comfort for 2016.

That likely helps to explain why homebuilders remain mostly optimistic despite a slight pullback in January’s survey. The latest reading was the seventh consecutive month with the Housing Market Index at 60 or higher. In addition, existing home sales jumped 14.7 percent in December, nearly recovering from the declines during October and November. The bulk of that monthly increase came from the single-family segment, up from 4.15 million to 4.82 million, or 16.1 percent. Warmer weather in December likely contributed to that strength. For 2015 as a whole, existing home sales rose 7.7 percent.

This week, we will get our first read on real GDP growth for the fourth quarter, which will likely show much softness in year-end activity in the U.S. economy. Consensus estimates range between 1.0 and 1.5 percent growth for the quarter, down from 2.0 percent in the third quarter. In addition, we will also learn more about manufacturing activity in new surveys from the Dallas, Kansas City and Richmond Federal Reserve Banks, and the Census Bureau will release the latest numbers on durable goods orders and shipments. Other highlights include updates on consumer confidence, employment costs, new home sales and state employment.

Chad Moutray, Ph.D., CBE
Chief Economist
National Association of Manufacturers (NAM)