After tremendous stock market volatility earlier in the week, financial markets around the world began to stabilize somewhat by the end of last week. There are continuing economic challenges to watch out for, especially in China and the emerging markets, but equities have begun to recover from their steep losses for the most part (even as they remain more than 9 percent below the all-time high in May).
One thing that has helped shift the focus has been stronger economic numbers in the United States, particularly for real GDP growth. The estimate of growth in the U.S. economy was revised sharply higher, up from 2.3 percent in the original estimate to 3.7 percent in the latest report. This reflected better consumer and business spending data than previously thought, even as many of the underlying trends remained the same. Nonresidential fixed investment on structures and equipment was still soft, and net exports, while rebounding in the second quarter somewhat, have been a drag on growth so far this year. As such, it is hard not to be disappointed with growth in the first half of 2015, which expanded by 2.2 percent at the annual rate. While this was higher than the 1.5 percent annual rate in the previous estimate, it is more consistent with the low growth rates experienced since the end of the Great Recession than with the optimism for traction in the economy that manufacturers had when we started the new year.
At the same time, one could look at the GDP release as a sign of encouragement, too, as it is another indication that the economy has rebounded from weaknesses earlier in the year. Personal income and spending data have both increased modestly, improving from pullbacks during the spring, and the Conference Board’s consumer confidence measure recovered in August from an unexpected decline in July, led by an improved assessment of the availability of jobs. Housing market data have also been stronger, with new single-family home sales picking up in July, mirroring the starts data. To be fair, consumer sentiment was less upbeat in the University of Michigan and Thomson Reuters survey, suggesting that Americans remain somewhat cautious in their perceptions of the economy. Yet, even with the University of Michigan’s decline, confidence has largely improved from this point last year.
For their part, manufacturers are still seeking a stronger recovery, and the releases out last week provided mixed news about the state of the sector right now. On the positive side, new durable goods orders rose 2.0 percent in July, extending the 4.1 percent jump in June. Much of the gains in the past two months have come from the transportation equipment sector, and excluding that segment, new orders increased 0.6 percent in July. Yet, new orders excluding transportation have fallen 0.8 percent year-over-year, suggesting that manufacturers have struggled outside of aircraft and motor vehicles over the past 12 months.
Along those lines, the regional surveys out last week were both disappointing. Manufacturing activity stalled in the Richmond Federal Reserve Bank district in August, and the Kansas City Federal Reserve’s headline index has now contracted for six straight months. Reduced crude oil prices, the strong dollar and weaknesses abroad have taken their toll on demand and production. While respondents to the Richmond Federal Reserve’s survey were still cautiously optimistic about the next six months, the Kansas City Federal Reserve report was less hopeful in its expectations for the future. In that report, capital spending and exports were seen falling over the coming months, as manufacturers in that district remained anxious.
Such nuances in the economy show the conundrum that the Federal Reserve faces as it approaches the next Federal Open Market Committee (FOMC) meeting on September 16–17. I had long felt that the FOMC would act in September but have now begun to shift my thinking. In my view, action will likely be delayed until the FOMC’s December 15–16 meeting. Still, in light of stronger real GDP data, the pressure to act will only increase more, especially if we get strong jobs numbers later this week and if other data continue to show a rebound.
In addition to employment growth numbers, we will also get additional insights on the current health of the manufacturing sector this week. Tomorrow, the Institute for Supply Management will release the Manufacturing Purchasing Managers’ Index data for August, and we will be looking to see if the sector builds on the better new orders and production growth in the July report. In addition, the Dallas Federal Reserve Bank will release its survey of manufacturing activity, which will likely still be negatively impacted by lower crude oil prices, and the Census Bureau will extend upon the durable goods release discussed above with new factory orders data. Other highlights include new figures on construction spending, international trade and productivity.
Update provided by Chad Moutray, Chief Economist for the National Association of Manufacturers.