Manufacturing & The Economy
The data released last week were mostly positive regarding improvements in the economy. For instance, manufacturing activity has largely picked up since the summer, an acceleration that is welcome after softness over the past year or so. Reports from the Chicago, Dallas and Richmond Federal Reserve Banks support this, with stronger paces for new orders and production in each region. This is especially true when you look at the mostly positive assessments of future sales and output, with large percentages of survey respondents anticipating rising activity levels. The good news extends to better—although still modest at best—hiring plans. The pickup in the manufacturing sector has also been one of the positive factors helping the Conference Board’s Leading Economic Index (LEI) expand for four straight months, an encouraging sign for the economy for the coming months.
Yet, even among these promising reports, there were signs of continuing softness for the sector. In the Dallas Federal Reserve survey, respondents were more upbeat about their own company’s outlook than they were about the larger macroeconomy. In fact, the index for perceptions about the economy as a whole declined from 3.6 to 1.9, with 65.0 percent of respondents not expecting macroeconomic conditions to improve over the next six months. In addition, the data on new durable goods orders found broad-based softness in the sector in contrast to the various sentiment surveys. Declines in October sales went beyond the decrease in aircraft orders. Moreover, while new durable goods orders have risen 5.3 percent since October 2012, year-to-date growth in durable goods orders—excluding the highly volatile transportation sector—has increased just 0.9 percent.
Similarly, the latest housing market data were also somewhat mixed. New housing permits in October soared to more than 1 million annualized units for the first time since April. To the extent that permits serve as a proxy for future residential construction activity, this was an encouraging development. Yet, the ascent in the permitting data came entirely from multifamily units, with single-family home permits essentially stalled. Higher mortgage rates have been a factor in dampening current demand for new construction; however, the average 30-year mortgage rate of 4.29 percent last week was better than early September’s 4.57 percent. Meanwhile, new housing starts data were delayed until the December 18 release due to the government shutdown, somewhat hampering our ability to analyze the housing market beyond permits.
By now, the holiday shopping season is in high gear. We will need to wait for final numbers on whether retail spending increased over last year, although the National Retail Federation reported mixed results despite deep discounting over the Thanksgiving holiday weekend. We also need to closely look at consumer confidence, particularly in determining how willing Americans will be to open their wallets. The two measures of consumer sentiment released last week moved in opposite directions, providing a bit of confusion regarding current attitudes. The Conference Board’s consumer confidence data fell again in November, with respondents suggesting reduced buying intentions. October’s budget impasse was not helpful, but overall sentiment has been lower since June. In contrast, the University of Michigan and Thomson Reuters surprised many with a better-than-expected final reading of its consumer sentiment index, improving from the preliminary report released just two weeks prior. Despite the recent gain, however, this report remains below the six-year high achieved in the summer.
This week will be a very busy one on the economic front. Later this morning, we will learn more about the strength of the pickup in manufacturing activity in the Institute for Supply Management’s Purchasing Managers’ Index, and on Wednesday, new international trade figures will show whether improving economies in many of our major trading partners will increase our exports. In addition, the bigger headlines will come on Thursday and Friday with a revision to third-quarter real GDP and the jobs report for November. Other highlights will be the Federal Reserve’s Beige Book and new releases on construction spending, factory orders, personal income and vehicle sales.
Chad Moutray is the chief economist, National Association of Manufacturers