NAM Monday Economic Report – March 16, 2015

Overall, these developments could hurt the ability of manufacturers in the United States to grow exports. Indeed, 36.3 percent of respondents in the most recent NAM/IndustryWeek Survey of Manufacturers suggested that the stronger U.S. dollar was a primary challenge—a figure that has likely increased since this survey was administered in February. As a result, the pace of expected export growth decelerated sharply over the past few surveys, down from 1.6 percent in June to 1.2 percent in December to 0.9 percent this time. In this survey, 32.7 percent of manufacturers expect export sales to rise over the next 12 months, down from 39.4 percent three months ago. Despite some significant headwinds, manufacturers continue to be mostly positive about their own company outlook, with sales, capital spending and hiring paces moving in the right direction relative to a year ago. The data are consistent with 3.0 percent growth in manufacturing production over the next two quarters.

However, the NAM/IndustryWeek survey also found that manufacturers’ optimism had eased a bit from three months ago, when 91.2 percent of our members were positive. Other economic indicators have seen similar pullbacks in enthusiasm. For instance, the Small Business Optimism Index from the National Federation of Independent Business reached a multiyear high of 100.4 in December, but it has dropped down to 98.0 in February. (That was marginally up from January’s 97.9.) Likewise, the Consumer Sentiment Index from the University of Michigan and Thomson Reuters rose to its highest level in 11 years in January at 98.1, only to slip back for two consecutive months to 91.2 in March in preliminary data.

The good news is that each measure continues to reflect upward movement over the longer term, and yet, they suggest that manufacturers, small businesses and consumers are more anxious than we perhaps thought. Along those lines, retail sales slipped for the third straight month in February, suggesting some lingering caution in the marketplace. Still, much of the recent decline has stemmed from lower gasoline prices, with gasoline station sales down 23.0 percent over the past 12 months. Indeed, retail sales grew 1.7 percent year-over-year, but if you exclude gasoline station spending, the year-over-year rate would have been 4.7 percent. This suggests that consumer spending is better than the headline numbers might indicate.

This week, there are a number of economic indicators being released on the health of the U.S. manufacturing sector, starting with the latest industrial production data today. In addition, there will be regional surveys from the New York and Philadelphia Federal Reserve Banks. Housing will also be in focus with new housing starts and permits figures. Other highlights include the most recent releases for state employment and leading economic indicators.

Financial markets will be closely following the Federal Open Market Committee (FOMC) meeting, which will release its monetary policy statement on Wednesday. Producer prices surprisingly fell 0.5 percent in February. While much of the deceleration over the past few months was due to energy, it was lower producer prices on food items that pushed the index lower for the month. This is likely to embolden inflationary doves on the Federal Reserve who would like to see normalization efforts on short-term rates slow down. While I still feel that the Federal Reserve will begin raising rates in mid-2015 on the relative strength in the U.S. economy, there have been increasing calls for the Federal Reserve to push that date back in light of global headwinds, including a stronger U.S. dollar. At the FOMC meeting on Tuesday and Wednesday, we could get some hints on how recent economic developments might have shifted the committee’s thinking (or not).

Chad Moutray is the chief economist, National Association of Manufacturers