September 6, 2011

September 6, 2011


I hope everyone had a great Labor Day holiday. Appropriately, the policy focus this week will be on job creation. On Thursday, President Obama will address both houses of Congress to present his vision for getting the economy moving again. Republicans in Congress will offer their agenda, as well. In addition, Ben Bernanke and the Federal Open Market Committee will meet on September 20 and 21 to discuss if they will pursue any new measures to prop up economic activity, perhaps including another round of quantitative easing.

The focus is on jobs because the economy is clearly stalling. Last week, the Bureau of Labor Statistics reported that there was no change in net employment between July and August, with the unemployment rate remaining at 9.1 percent. Manufacturers have been a driving force in the economy since the official end of the recession, generating over 300,000 new jobs since December 2009. Yet, overall weaknesses in the economy are dragging down sales, and production has slowed. The manufacturing sector lost 3,000 jobs in August.

Manufacturing activity has slowed significantly in recent months. Three studies released last week confirm this. Nationally, the Institute for Supply Management found that activity grew, but only barely, with its Purchasing Managers Index at 50.6 in August. This is just above the threshold of 50, signifying that growth in the sector -- and most worrisome looking ahead, new orders and production – contracted. Similarly, regional surveys from Chicago and Texas also found slowing manufacturing output. In addition, we have seen significant decreases in both individual and business optimism, with consumer sentiment plunging to a two-year low.

Interestingly, these numbers conflict with official statistics on consumer spending and production. The Federal Reserve noted a couple of weeks ago that industrial production rose 0.9 percent in July, and the Census Bureau revised its estimate for new factory orders in July up 2.4 percent. Meanwhile, consumers increased their spending by 0.8 percent in July, led by strong increases in durable goods consumption.

The challenge moving forward will be how to turn overall confidence around to jumpstart an economy that appears to be in neutral. Federal budget deficits and the recently-passed budget deal will hamper fiscal policy efforts to move ahead with a stimulus package of any significant size, yet, it is clear that policymakers will see what they can do to enact pro-growth policies that can restart the economic recovery. Meanwhile, advocates for another round of quantitative easing (or "QE3") will meet resistance from those who question its effectiveness and/or worry about the impacts of such actions on long-term inflation.

This week, the Federal Reserve Board will release its Beige Book, highlighting how its each of its regions are faring in the economy. The slowing of overall manufacturing production will almost certainly be part of this analysis. On Thursday, we will receive new international trade numbers. Many manufacturers have said that trade represents a huge opportunity for growth for their firms, yet, with a slowing global economy, these new figures on exports will be closely watched.

Chad Moutray
Chief Economist
National Association of Manufacturers