One of the larger headlines of the past week was the renewed strength of the euro, which closed at $1.1449 on Friday. To put that exchange rate in perspective, the euro traded for $1.0582 on April 13, and Friday’s close was the highest level for the euro since February 2. To be fair, the U.S. dollar remains strong against the euro, up 17.8 percent since May 6, 2014. Yet, the recent weakness in the dollar (and strength in the euro) has been the result of weaker-than-expected economic data in the United States and better-than-anticipated numbers coming out of Europe. Many of the underlying long-term fundamentals in these two regions remain the same, but those manufacturers worried about the negative impact of a soaring dollar got some welcome relief last week in the recent easing of the greenback.
Still, overall manufacturing activity remains quite soft. Production in the sector was unchanged in April, and there have now been five straight months of weakness. Manufacturers have struggled with a number of significant headwinds in the U.S. and global economies, including challenges in growing exports, residual impacts from the West Coast ports slowdown, regional weather challenges and an anxious consumer. As a result, the year-over-year pace has slowed from 4.5 percent in November to 2.3 percent in April. Similarly, capacity utilization in manufacturing has dropped from 79.8 percent five months ago to 78.2 percent today. In the larger economy, total industrial production declined 0.3 percent in April, falling for the fifth consecutive month. At the same time, the New York Federal Reserve’s monthly survey reported activity turning slightly positive in May—perhaps a harbinger of better data to come.
The slow economic start so far in 2015 has weighed heavily on consumers as well. Americans appear to be quite anxious about income and labor market growth. The University of Michigan’s Index of Consumer Sentiment fell from 95.9 in April to 88.6 in May, erasing the gains in perceptions made since November. This indicates that Americans continue to be cautious. Indeed, retail sales were unchanged in April, softening from the rebound in March. Overall, spending has decelerated significantly over the past few months, down from a year-over-year rate of 4.7 percent in November to just 0.9 percent in April. On a more positive note, however, retail spending data reflect recent declines in gasoline prices. When gasoline station sales are excluded, retail sales have risen 3.6 percent year-over-year.
Meanwhile, producer prices for final demand goods and services fell 0.4 percent in April, with prices for goods down 0.7 percent. Final demand goods prices have declined in nine of the past 10 months, driven lower largely on reduced energy costs. On a year-over-year basis, producer prices have declined 1.3 percent, remaining in negative territory for the fourth straight month. Meanwhile, core inflation for producers, excluding food and energy costs, has risen 0.7 percent year-over-year, down from 2.0 percent in December and 0.9 percent in March.
As such, we continue to experience decelerating growth in overall core pricing pressures. This provides only mixed comfort, however, to the Federal Reserve. Yes, it allows the Federal Reserve to remain stimulative in terms of monetary policy, but slowing price growth can be troublesome if it persists, prompting growth worries. We would expect some acceleration moving forward, particularly in the year-over-year comparisons and especially given that energy prices appear to have stabilized somewhat.
We will get a number of reports next week on the housing market, which has struggled in the early months of this year, particularly on poor weather conditions in some regions. The highlight will be new residential construction starts and permits data on Tuesday. In addition, several surveys will be released on Thursday discussing the manufacturing sector, including Markit Flash PMIs for the United States, China and the Eurozone and regional activity from the Kansas City and Philadelphia Federal Reserve Banks. Other economic indicators to watch next week include the latest figures on consumer prices and leading economic indicators, among others.
Provided by Chad Moutray, Chief Economist - NAM