April 23, 2012

April 23, 2012

While the U.S. economy continues to expand, the pace of growth has slowed in the past month or two. Industrial production was flat in March for the second month in a row, with manufacturing production and capacity utilization down slightly. Some sectors saw growth in March – including motor vehicles, computers, machinery and chemicals – but most of the durable and nondurable goods sectors pulled back on activity in the month. Reports from the New York and Philadelphia Federal Reserve Banks backed this up, with both surveys showing weaker-than-expected growth in manufacturing activity. The housing market also experienced some easing, with new residential construction down 5.8 percent. This was mainly due to reduced multi-family housing starts, and it is safe to say that some of the additional activity in previous months was facilitated by warm weather. The long-term trend, however, remains positive, and the fact that building permits were significantly higher (up 4.5 percent, mostly on multi-family units) is an encouraging sign for the future. I still anticipate that housing starts will gradually increase as the year progresses. A similar degree of cautious optimism exists among manufacturers regarding future production and employment. Surveys continue to show a generally positive picture for new orders, shipments, job creation and capital spending in the coming months. This was confirmed once again in the New York and Philadelphia Fed reports released last week. The Conference Board’s Leading Economic Index also forecasts modest growth ahead, with the index growing for the sixth straight month (albeit slower than the month before, and with manufacturing providing a slight drag). Moreover, consumers continue to spend despite higher energy costs and reduced sentiment. Retail sales in March were up across the board. The recent slowing activity – even if it is just a bump in the road – shows the tenuousness of this economic recovery. The growth trajectory for the economy continues to be positive overall, with real GDP expected to increase 2.5 percent this year. Obstacles that surface – whether higher energy prices or new developments in Europe – tend to be over-magnified. Businesses and consumers continue to be anxious, mindful that economic growth is not yet on a firm footing. Policymakers need to focus on pro-growth strategies that reduce uncertainties and produce a recovery that is self-sustaining. This week, we will get additional measures on the health of the manufacturing sector and the economy as a whole. On Friday, the Bureau of Economic Analysis is likely to show that real GDP grew around 2.2 percent in the first quarter of this year, with manufacturing continuing to make a significant contribution. New data on regional activity in Kansas City and Richmond and on March durable goods orders will probably observe the easing of activity discussed above. The other key highlight of the week will be the Federal Reserve’s announcement about future directions in monetary policy. I expect little news from this statement, with the Fed maintaining its current policy of exceptionally low interest rates through late 2014. Chad Moutray Chief Economist National Association of Manufacturers