The manufacturing economy has hit some speed bumps, according to recent data. Industrial production declined 0.5 percent in April—more than expected—with capacity utilization levels back to where we were at the beginning of the year. The slower pace of domestic and global sales has negatively impacted activity, with production down mostly across-the-board. Only four of the 19 major manufacturing sectors experienced an increase in output for the month. Moreover, annual growth in manufacturing production of just 1.3 percent is insufficient, and such low rates of industrial growth are not enough to help boost hiring and output. Ideally, we would like to see annual output growth of 4.5 percent or greater, as outlined in the NAM’s “20/20 Vision” earlier this year.
The national pullback in manufacturing activity extends to two of the regional manufacturing surveys released last week. Sentiment surveys from the New York and Philadelphia Federal Reserve Banks found contracting levels of new orders, shipments and the average workweek. In addition, manufacturers were more negative in their overall views of the current business environment. However, employment was mixed between the two reports, with a pickup in hiring reported in the Empire State survey, and manufacturers in both Fed districts were cautiously optimistic about future growth. As a result, capital investments are expected to increase in the coming months.
The Conference Board’s Leading Economic Index—a forward-looking measure of the U.S. economy—rose a healthy 0.6 percent in April, with strong growth in housing permits. New residential permits exceeded the 1 million mark for the first time since June 2008, even as housing starts fell for the month. The long-term trend for the housing market remains positive, with permits data highlighting growth in future activity. Other good news can be seen in the latest University of Michigan consumer sentiment survey, with Americans reporting optimism levels not seen since mid-2007. Retail sales were also higher, even with declines in gasoline station spending due to lower petroleum costs.
Businesses and consumers continue to benefit from lower energy costs, according to the most recent inflation numbers. Core inflation—which excludes food and energy prices—is rising at less than 2 percent for consumers and producers, suggesting that pricing pressures have eased significantly over the past year. The 2 percent threshold is important, as that is the Federal Reserve Board’s stated target for price increases. With inflation under control, at least for now, the Federal Open Market Committee feels free to pursue accommodative policies.
This week is a somewhat slower one on the economic front, with only a handful of key indicators being released. From the manufacturing perspective, we will be closely watching the Kansas City Federal Reserve Bank survey and the preliminary figures on durable goods orders, both of which will come out toward the end of the week. In addition, the Markit Flash purchasing managers’ indices for the United States, Eurozone and China should provide some clues as to whether some of April’s weaknesses have continued into May. Certainly, the European situation is not expected to improve (as we saw in last week’s lower Eurozone GDP figure), but there should be modest growth in the U.S. and Chinese manufacturing activity reports.
Chad Moutray is the chief economist, National Association of Manufacturers.
