NAM Monday Economic Report – February 23, 2015

Despite these challenges, the FOMC remains on track to begin normalizing rates later this year. While its January statement stressed its patience in doing so, conventional wisdom continues to hold that the Federal Reserve will begin raising short-term rates in mid-2015. Of course, even when the Federal Reserve starts to ease up on its accommodative policies, they will continue to be stimulative for the foreseeable future. As such, the fact that pricing pressures have lessened considerably—with the producer price index falling for two straight months—frees the Federal Reserve to pursue such actions without worry about inflation, at least for now.

There were a number of reports released last week that examined the current state of manufacturing. Manufacturing production edged marginally higher in January, up 0.2 percent. This represented an improvement from being flat in December, but the data also suggest that output in the sector has been quite soft in both December and January. On the positive side, manufacturing production has risen a whopping 5.6 percent over the past 12 months. Of course, sharply reduced output in January 2014 due to a number of winter storms helped to buoy this year-over-year figure. Still, the year-over-year pace last month was 4.3 percent, illustrating decent growth in manufacturing output last year overall.

Survey data also show some easing in manufacturing activity, likely due to the headwinds discussed above, even as they continue to indicate modest growth overall. The Markit Flash U.S. Manufacturing PMI increased on stronger production growth; nonetheless, the pace of new orders, exports and hiring decelerated for the month. The export measures slowed to a crawl, highlighting the global challenges that currently exist. Similarly, the New York and Philadelphia Federal Reserve Banks both observed eased sentiment in their February surveys, particularly regarding demand. The good news was that manufacturers in both districts remained mostly positive in their outlook for the next six months. Indeed, this helps to explain the intent to bring on more workers and increase capital investments, which were relative strengths noted in the Philadelphia Federal Reserve report.

Looking abroad, European manufacturing activity edged ever so slightly higher in February on better sales and production figures. Employment growth in the sectors was unchanged, but still somewhat positive. At the same time, these figures vary from country to country, with France and Germany moving in opposite directions. French manufacturers have reported contracting activity levels for 10 straight months, whereas demand was slightly stronger in Germany. Despite some signs of marginal improvement, the European economy remains sluggish, with the European Central Bank attempting to stimulate growth, and market watchers continue to follow developments in Greece.

Meanwhile, the housing market has made incremental progress over much of the past year. However, both housing starts and permits were lower in January, with single-family starts down sharply. With that said, December’s activity levels were quite robust, and the longer-term trend is more encouraging. Housing starts have exceeded 1 million for five consecutive months, and I still expect them to stabilize around 1.1 million units in the coming months. For their part, homebuilders are also more positive than negative, albeit with less optimism than the month before. Heavy snow could be a factor, according to the National Association of Home Builders, in some of the reduced sentiment in the latest report, particularly in the Midwest and Northeast.

This week, there will be a number of reports released on the manufacturing sector, including regional surveys from the Dallas, Richmond and Kansas City Federal Reserve Banks. In addition, we will get preliminary durable goods orders and shipments data on Thursday from the Census Bureau. Beyond these reports, the biggest headline will come on Friday, with the first revision for fourth-quarter real GDP growth. Other highlights include the latest data on consumer confidence, consumer prices and existing and new home sales.

Chad Moutray is the chief economist, National Association of Manufacturers.