Manufacturing & The Economy
The U.S. economy grew a surprisingly strong 4.1 percent in the third quarter, according to the most recent revision of real GDP from the Bureau of Economic Analysis. While inventory replenishment accounted for a large portion of this increase, consumer and business spending continue to boost overall economic activity. I expect real GDP growth of 2.5 percent in the current (fourth) quarter, essentially the same pace for 2013 as a whole. For 2014, the economy should expand by 3.0 percent, which would be the first year since 2005 that the annual average would grow by that amount.
A number of data sources supported the view that economic activity has begun to improve, continuing the accelerating pace in the second half of 2013. For instance, manufacturing production rose 0.6 percent in November and 2.9 percent year-over-year. On the latter figure, the annual pace has made definite progress since July’s 1.2 percent pace. The Manufacturers Alliance for Productivity and Innovation (MAPI) predicts that industrial production will accelerate to 3.1 percent in 2014 and perhaps 4.1 percent in 2015.
A number of regional surveys show manufacturers tend to be mostly upbeat about new orders and output in the coming months. This includes the latest reports from the Kansas City, New York and Philadelphia Federal Reserve Banks. The more optimistic future assessment was true despite notable weaknesses in the current environment, particularly in the Kansas City and New York surveys. Similarly, the latest Markit Flash U.S. Manufacturing Purchasing Managers’ Index (PMI) suggested that output growth remained near the more robust pace at the beginning of 2012, with modest growth overall. Meanwhile, we continue to see stabilization in the Chinese and European economies. These releases show hiring growth remains modest at best.
The housing market also bounced back strongly in November. New housing starts soared to 1.09 million units at the annual rate, the highest level since February 2008. Both single-family and multifamily starts were up sharply for the month, and overall, new residential construction has increased nearly 30 percent over the past 12 months. Furthermore, new housing permits have also exceeded 1 million units for two straight months, which should bode well for future activity. The gains in residential activity have also helped to lift homebuilder confidence once more, according to the National Association of Home Builders and Wells Fargo. I expect that housing will continue to be one of the bright spots in the economy, particularly as borrowing costs remain at historic lows and the “sticker shock” of higher rates wears off.
The improvements in the economy have led the Federal Reserve to finally start to pare back its latest quantitative easing program. At the conclusion of its December Federal Open Market Committee (FOMC) meeting, the Federal Reserve decided to begin tapering its purchases of long-term and mortgage-backed securities, down from $85 billion each month to $75 billion starting in January. The expectation is that this will set in motion future reductions in these purchases, with all buying ending sometime in mid-2014. However, the Federal Reserve will still be pursuing a “highly accommodative” monetary policy, with short-term interest rates near zero for the foreseeable future. In his press conference afterward, Federal Reserve Board Chairman Ben Bernanke suggested short-term rates might not move up until after the unemployment rate hits 6.5 percent, which it is not likely to do until the end of 2014. He made a similar comment in his speech to the National Economists Club in November. Fortunately, pricing pressures remain quite low for now, providing the Federal Reserve with more time to pursue its stimulative measures.
This week will be a shortened one due to the Christmas holiday, but there will still be some key data releases. Later this morning, we will get the latest reads on personal spending and consumer confidence, both of great importance in terms of holiday spending. Sentiment had improved in the initial estimate from the University of Michigan and Thomson Reuters, rebounding from the dips in perceptions seen during the government shutdown. This should help retail sales, which have grown modestly of late. We will also learn more about the health of the manufacturing sector with a new report on durable goods sales and the latest survey from the Richmond Federal Reserve Bank.
Chad Moutray is the chief economist, National Association of Manufacturers. Due to the holidays, there will be no report issued during the week of December 30. The schedule will resume on Monday, January 6.