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Manufacturing & The Economy

NAM Monday Economic Report for November 25, 2013

The latest forecast from the Organisation for Economic Co-operation and Development (OECD) calls for continuing improvements in markets around the world, with global GDP accelerating from 3.7 percent in 2013 to 5.5 percent in 2014. According to the OECD, the U.S. economy, which should grow by 2.1 percent this year, is predicted to strengthen to 3.2 percent next year. If true, it would be the first year since 2005 that annual output would expand by more than 3.0 percent. However, weaknesses persist in emerging markets, and continued political risks could dampen the prospects for better growth.

The latest data tend to reflect the recent pickup in the global economy. Manufacturers in China and Europe have seen improvements in sales, exports and production over the past few months as their respective economies have begun to stabilize. At the same time, manufacturing activity in the United States has accelerated in the past few months from midyear weaknesses. The Markit Flash U.S. Manufacturing Purchasing Managers’ Index (PMI) rose from 51.8 in October to 54.3 in November, with output at its fastest pace since February. Meanwhile, surveys from the Kansas City and Philadelphia Federal Reserve Banks have reported expanding activity levels since the summer, even as some weaknesses continue. Hiring growth remains quite soft, with new orders slowing in the Philadelphia region and exports falling for manufacturers in the Kansas City region. Nonetheless, respondents tend to be mostly upbeat about the sector over the next six months in most sentiment surveys, including these.

Consumer spending and the rebound in the housing sector have both been bright spots in the economy over the past few years, but in data released last week, the two were moving in opposite directions. Retail spending increased 0.4 percent in October, with year-over-year growth of 3.9 percent. While the annual pace of retail sales has decelerated since June, October’s modest gains were a sign that consumer purchases were beginning to strengthen, especially for automobiles.

In contrast, existing home sales have fallen for two consecutive months, down from an annualized 5.39 million units in July and August to 5.12 million units in October. Higher mortgage rates were to blame for the decrease, with many buyers rushing to close in-process deals during the summer when interest rates were soaring. This made the levels in those months an outlier. The good news is that existing home sales are still on an overall upward pace, and mortgage rates have declined from their early September highs. Of course, long-term interest rates are likely to move higher again in the coming months, which could once again dampen housing purchases. My guess, however, is that homebuyers will become accustomed to the new normal in mortgage rates, which, while higher than earlier in the year, are still at historic lows. This will allow housing to once again move in the right direction.

Monetary policy actions are behind the moves in interest rates. Fortunately, pricing pressures remain extremely modest. Consumer and producer prices were both lower in October, led by declining energy costs. With overall inflation mostly in check, at least for now, the Federal Reserve has been able to utilize highly accommodative measures to pursue its dual mandate of price stability and higher employment. The minutes of its October Federal Open Market Committee (FOMC) meeting and Federal Reserve Board Chairman Ben Bernanke’s remarks at the National Economists Club both suggested that the Federal Reserve does not plan to tighten its monetary policy anytime soon. While the FOMC will probably vote to taper (or reduce) its asset purchases in the coming months, it will keep short-term rates effectively at zero—at least until the unemployment rate hits 6.5 percent. Chairman Bernanke’s address made it clear that 6.5 percent was the threshold at which the Federal Reserve would begin to debate possible changes, and not a “trigger” that would automatically mean increased fund rates. That would suggest “easy money” policies for at least the next year and perhaps beyond.

This week will be a shorter one due to the Thanksgiving holiday, but there will be several important economic releases of note. First, we will finally get housing starts and permits data, which were delayed due to the government shutdown. As noted earlier, residential construction ebbed somewhat during the summer with higher mortgage rates, but the consensus estimate is for roughly 910,000 new starts at the annual rate in October, up from 891,000 in August. There will also be a number of key data points on manufacturing activity, including durable goods orders and regional reports from the Chicago, Dallas and Richmond Federal Reserve Banks. Other highlights include consumer confidence and leading indicators data.

Chad Moutray is the chief economist, National Association of Manufacturers



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