September 19, 2011

September 19, 2011

The current economic environment appears to be stuck in neutral. A number of economic indicators released last week varied little from the previous month, including data for retail sales and producer prices. At the same time, measures for manufacturing production were mixed. The Federal Reserve Board found that industrial production rose 0.2 percent in August, led by strong increases in durable goods sectors including motor vehicles and aerospace. Meanwhile, the New York and Philadelphia Federal Reserve Banks’ monthly surveys observed contracting new orders and production in their regions.

These regional bank surveys have clearly tapped into pessimism that spans both consumers and businesses. The University of Michigan reported a slightly higher level of consumer sentiment in September; yet, the American consumer remains quite pessimistic, particularly about the future. Small business optimism has also dipped lower, with the National Federation of Independent Business reporting another decline in its monthly index. Anxieties about economic growth are paramount to survey respondents, and given that we need increased consumer spending and business investment for future growth, this is worrisome.

Economists and manufacturers have both downgraded their expectations for growth over the coming year as a result. Business economists have lowered their real GDP growth estimates for 2011 and 2012 to 1.7 percent and 2.3 percent, respectively, according to the National Association for Business Economics. Likewise, the NAM/IndustryWeek Survey of Manufacturers estimated that manufacturing sales will grow by 3.2 percent on average over the next 12 months, a decline from the 5.5 percent estimate just three months ago. While manufacturers remain positive about the overall outlook for the next year, their level of optimism has diminished in a relatively short period of time.

Manufacturers expect for new orders, production, employment and capital spending to increase over the next six months. This finding is consistent in the NAM/IndustryWeek and regional Federal Reserve Bank surveys. Yet, some definite headwinds temper this optimism and threaten our economic recovery. At the top of this list is the worry about European financial markets and the possible ramifications to the global economy if this situation spins out of control. There are also domestic challenges -- such as the fiscal situation, housing, unemployment and the business climate -- that pose impediments to growth.

This week, we will receive new data on the still-struggling housing market. Today, the National Association of Home Builders will release its Housing Market Index, and tomorrow, the Census Bureau will release new housing starts numbers. It would be nice to see a turnaround over the coming months in the housing sector, with starts growing from the current rate of approximately 600,000 homes per year, given the importance of the housing sector to manufacturers and the overall economy.

Chad Moutray
Chief Economist
National Association of Manufacturers


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