Economic Report May 2016

After disappointing manufacturing activity in the first quarter of 2016, the sector rebounded somewhat in April. Manufacturing production grew 0.3 percent in April, offsetting the 0.3 percent decline in March. This was led by renewed strength in machinery (up 2.4 percent) and motor vehicles and parts (up 1.3 percent), among other segments. Capacity utilization in the sector also edged higher, up from 75.1 percent to 75.3 percent. As such, these were further signs that manufacturing might be stabilizing. Yet, the data also illustrate the significant challenges facing the sector over the past year, including a strong dollar, weak export markets and still-low commodity prices. On a year-over-year basis, manufacturing production has risen just 0.4 percent since April 2015. With that in mind, it should be no surprise that manufacturing leaders remain cautious in their outlook.

Total industrial production also rallied in April, up 0.7 percent, after declining in both February and March. Utilities output jumped 5.8 percent in April, but mining production fell 2.3 percent, down for the eighth straight month. Indeed, mining output has plummeted 13.4 percent year-over-year, pushing overall industrial production down 1.1 percent over the past 12 months. At the same time, regional manufacturing sentiment surveys from the New York and Philadelphia Federal Reserve Banks both slipped back into contraction territory in May, suggesting that the sector’s challenges persist even with recent signs of progress. Despite that current weakness, manufacturers in both districts remained cautiously upbeat about the next six months.

New residential construction activity improved in April after unexpected softness in March. Housing starts rose 6.6 percent, up from an annualized 1,099,000 in March to 1,172,000 in April. While this pace remained below the February level of 1,213,000, it was a step in the right direction. Starts for both single-family (up from 753,000 to 778,000) and multifamily (up from 346,000 to 394,000) were higher, with both achieving multi-month highs. Existing home sales also moved in the right direction, up 1.7 percent in April and extending the 5.7 percent gain in March. Homebuilders were also more positive about sales of single-family homes over the next six months. This should provide some encouragement moving forward that the residential market should pick up in the second half of this year. I continue to predict 1.24 million units started by the end of 2016.

Meanwhile, one of the larger news stories last week came from the minutes of the April 26–27 Federal Open Market Committee (FOMC) meeting. Specifically, participants left open the possibility of an increase in the federal funds rate at the June FOMC meeting. While the Federal Reserve acknowledged softer-than-desired economic growth in the first quarter and ongoing global challenges, the outlook for the coming months was “encouraging,” with recent progress in labor market, housing and consumer spending data. The economic projections during the March 15–16 meeting indicated that FOMC participants predict two increases in short-term rates in 2016. With that said, this news was a shock for those in financial markets who had begun to price out a June rate hike, particularly after weak jobs numbers in April. In the end, the FOMC will be data-dependent, making news between now and then highly relevant. Fortunately, core inflation remained modest in new data out last week, even as consumer prices have begun to edge higher, mainly on increased energy costs.

We will get further evidence about the health of the manufacturing sector this week, hopefully providing more clues about stabilization in the sector. This will include Flash Manufacturing PMI data for the United States and Eurozone as well as regional surveys from the Richmond and Kansas City Federal Reserve Banks. In addition, the Census Bureau will release preliminary numbers on durable goods orders and shipments. Other releases to look for this week include the latest data on consumer confidence and new home sales.