Economic Data and Growth

The fight to get inflation down to the Federal Reserve’s 2% target “has a long way to go,” Federal Reserve Chairman Jerome Powell said Wednesday, according to Reuters (subscription).

What’s going on: In testimony before the House Financial Services Committee, Powell said that “‘[i]nflation pressures continue to run high’” and “‘nearly all’ participants expect further rate increases will be appropriate by the end of the year.”

• Last week at its June meeting, the Fed kept the target federal funds rate unchanged at 5.00% to 5.25%, five times higher than it was in March 2022.
• Investors expect the central bank to raise rates next month.

Why it’s important: The Fed’s 10 consecutive interest-rate raises over the past 15 months have not had a large impact on the broader economy.

• “‘We have been seeing the effects of our policy tightening on demand in the most interest-rate-sensitive sectors of the economy,’” Powell said, citing housing as one example.
• “‘It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation,’” he continued.

New residential construction in the U.S. soared to their highest levels in more than a year in May, according to data from the U.S. Census Bureau.

What’s going on: Construction starts rose 21.7% from April to May, to 1,631,000 units at the annual rate from 1,340,000 units, the largest increase in these numbers in more than a year.  

• Single-family homebuilding jumped 18.5% to 997,000 in May from 841,000 in April. It’s a level last seen in June 2022.
• Multifamily housing starts increased 27.1%, to a 14-month high. 

Permits: New housing permits, which are a proxy for future residential building, increased 5.2% from April to May.

• Single-family permits rose 4.8%, up for the fourth consecutive month, to a 10-month high
• Multifamily permits increased 5.9% in May.

Overall: Housing starts have risen 5.7% overall since May 2022, but starts of single-family homes have dipped 6.6% year-over-year, even in the face of solid gains in the most recent data.

• On a year-over-year basis, housing permits have declined 12.7% from May 2022, with permits for single-family homes falling even more, by 13.2%.

The NAM’s take: “Issues of affordability have impacted the new housing starts negatively over the past year, but Americans have become accustomed to the ‘new normal’ in mortgage rates,” said NAM Chief Economist Chad Moutray.

• “Would-be homebuyers are coming back into the market. With little inventory, the strong growth in housing starts [was] encouraging.”

Manufacturing production crept up 0.1% in May, following a gain of 0.9% in April, according to new data from the Federal Reserve.

Durable vs. nondurable: While durable goods production rose 0.3%, the nondurable goods sector declined 0.1%.

Economic context: Since April of last year, when manufacturing posted its highest production numbers since the end of 2018, output in the sector has declined 0.7% due to geopolitical tensions and a shakier economy.

What’s next? Production is forecasted to fall 0.6% in 2023 but expand 1.2% in 2024.

Mixed data: About half of the manufacturing sectors measured saw a decline in production, and half saw an increase. Those on the upswing included:

• Aerospace and miscellaneous transportation equipment (up 2.5%);
• Petroleum and coal products (up 1.7%);
• Electrical equipment, appliances and components (up 1.4%); and
• Nonmetallic mineral products (up 0.9%).

Producer prices dropped more than expected in May, and the annual producer-inflation increase was the smallest in almost two-and-a-half years, Reuters (subscription) reports.

What’s going on: “In the 12 months through May, the [Department of Labor’s Producer Price Index] climbed 1.1%. That was the smallest year-on-year rise since December 2020 and followed a 2.3% increase in April. The annual PPI rate is moderating as last year’s surge drops out of the calculation.”

• Producer prices for final demand goods fell 1.6% in May, owing largely to falling energy costs, after increasing an unrevised 0.2% in April.
• Economists surveyed by Reuters had predicted the PPI would dip 0.1% from April and rise 1.5% year-on-year.

The backdrop: The report comes a day after the Labor Department reported the smallest year-on-year increase in U.S. consumer prices in more than two years.

Why it’s important: Federal Reserve “officials are expected to keep rates unchanged at the end of their two-day meeting, for the first time since March 2022 when the U.S. central bank embarked on its fastest monetary policy tightening campaign in more than 40 years. … [The central bank] was seen leaving the door open to further rate increases given the economy’s resilience, particularly the labor market.”

The yearly rate of inflation slowed in May to less than half of what it was at its peak last year, but it’s still far higher than the Federal Reserve’s goal, according to The Wall Street Journal (subscription).

What’s going on: Consumer prices increased 4% in May from a year earlier, marking the 11th straight month of slowdowns.

• On a monthly basis, consumer prices rose 0.1% in May, following a 0.4% increase in April.
• Core consumer prices—which exclude food and energy and are considered a better predictor of future inflation—rose 5.3% year-over-year in May, owing partly to increasing rent costs.

The good: “The U.S. economy has maintained momentum this year, staving off predictions of recession. The job market remains robust, and consumers have boosted their spending, though one measure shows economic output is falling. A possible credit crunch following the March collapse of a few regional banks could crimp the economy.”

The not so good: “While inflation has cooled significantly, higher prices for many goods and services are weighing on household spending decisions.”
 
What’s coming: The Fed meets today and tomorrow to determine its next steps for interest rates, which it has raised aggressively in the past year—though it probably will not raise them again this week, according to NAM Chief Economist Chad Moutray.

• The Fed “is likely to make no changes to the federal funds rate this week, but with inflation remaining more stubborn than preferred, it could hike short-term rates by 25 basis points at either or both of its July 25–26 and Sept. 19–20 meetings before hitting the pause button on rate changes,” he said.

New orders for manufactured products rose for the second month in a row in April, according to the U.S. Census Bureau.

What’s going on: New orders inched up 0.4% in April, following a 0.6% gain in March.

• Durable goods orders increased 1.1%, owing mostly to a rise in defense aircraft and parts orders, which can be volatile from month to month.
• Excluding transportation equipment, factory orders dipped 0.2% in April, the third straight month of declines.

The big picture: Overall, orders for new manufactured goods have declined 2.6% since peaking a year ago.

• With factory orders (excluding transportation) down 4.3% over the past 10 months, manufacturing activity has contracted notably since last summer.

The good news: New orders for core capital goods (nondefense capital goods excluding aircraft) rose 1.3% in April after two straight months of declines.

• Core capital goods orders are considered a proxy for capital spending in the U.S. economy. These totaled $73.982 billion in April, just under the record $73.985 billion in December and signifying 2.5% year-over-year growth.

Factory shipments: Factory shipments decreased 0.4% in April, the third straight month of declines.

• Overall, total factory shipments have declined 2.9%—or 4.2% excluding transportation equipment—since peaking a year ago.
• However, core capital goods shipments rose 0.5% in April to $73.848 billion, just slightly under January’s record of $73.850 billion. Core capital goods shipments have risen 4.1% year-over-year.

Manufacturing shed 2,000 jobs in May, the second month of declines for the industry in the past quarter, according to the Bureau of Labor Statistics.

What’s going on: Manufacturing has added just 10,000 workers year to date, a significant slowdown from the 385,000 and 390,000 employees in 2021 and 2022, respectively.

• However … there were 12,984,000 manufacturing employees in May, just shy of the 12,988,000 in February, the highest number in more than 14 years.

Earnings are up: Average hourly wages of production and nonsupervisory employees in the sector increased 0.6%, from $26.03 in April to $26.19 in May.

• Manufacturing wages saw 4.9% growth in the past 12 months, which is an increase from the 4.7% year-over-year growth in April.

The bigger picture: Overall, U.S. employers added 339,000 new workers in May, an increase from April’s 294,000.

• While the U.S. economy has added 1,570,000 workers through the first five months of 2023—a strong pace—the U.S. unemployment rate increased to 3.7% in May from 3.4% in April.

​​​​​​​​​What’s up: The largest employment gains in manufacturing in May occurred in transportation equipment (up 10,500, including 6,800 for motor vehicles and related parts), electrical equipment, appliances and components (up 2,100), primary metals (up 2,000), chemicals (up 1,700), wood products (up 800) and miscellaneous nondurable goods (up 300).

What’s down: The biggest employment declines in the sector in May occurred in furniture and related products (down 4,000), machinery (down 2,400), fabricated metal products (down 2,300), printing and related support activities (down 2,000) and textile mills (down 2,000), among others.

The NAM says: In May “the labor market remained solid, with wages continuing to increase at healthy paces despite some deceleration from the 40-year highs seen last spring,” said NAM Chief Economist Chad Moutray.

As banks tighten their lending standards in response to turmoil in the industry, it’s small businesses that are suffering, according to The Wall Street Journal (subscription).

What’s going on: “Some entrepreneurs are finding it more difficult to get a new loan or have had existing credit lines cut. Others report stricter terms, higher borrowing costs, longer waits and tougher questions from their bankers.”

Not your imagination: Close to half of all banks reported having tightened their lending standards in the past three months, according to a Federal Reserve Board survey cited by the Journal.

• “The median interest rate for a variable-rate, small-business term loan was 7.44% in the fourth quarter, the last period for which data is available, up 3.42 percentage points from a year earlier, according to the Federal Reserve Bank of Kansas City. Banks have continued to raise rates this year in response to Federal Reserve rate increases,” one source told the newspaper.

​​​​​​​Why it’s important: More stringent loan rules are forcing smaller companies—which tend to borrow from small banks—to put off or cancel expansions and consider bringing in equity investors.

• “‘The alternative to borrowing from your local small bank is another form of financing that is going to be notably more expensive,’ said Goldman Sachs chief U.S. economist David Mericle.”
• Some banks are telling small businesses to seek Small Business Administration loans, which “carry a government guarantee” but tend to have higher interest rates than their conventional counterparts.

The last word: “Manufacturers—particularly small and medium-sized firms—are closely following developments related to access to credit, with an eye on the tightening of lending standards that were occurring even before the recent banking crisis,” said NAM Chief Economist Chad Moutray.

• “Businesses need credit to be able to expand their operations, and any pullback in that access could have consequences.” ​​​​​​​

U.S. natural gas production is likely to keep growing through 2050, while LNG exports will take off, according to new forecasts from the Energy Information Association.

The gist: Natural gas production is predicted to increase 15%, while LNG exports will skyrocket 152% between last year and 2050, according to the EIA’s “Annual Energy Outlook 2023.”

• “Production growth is largely driven by U.S. LNG exports, which we expect to rise to 10 [trillion cubic feet] by 2050,” an EIA blog post explains.

Where it’s happening: “Natural gas production growth on the Gulf Coast and in the Southwest reflects increased activity in the Haynesville Formation and Permian Basin, which are close to infrastructure connecting natural gas supply to growing LNG export facilities.”

• “New liquefaction facilities in Louisiana became fully operational in 2022, ahead of schedule. In addition, new LNG trains in Texas are scheduled to be online by 2025.”

How they figured it out: This projection comes from the “reference case” in the outlook report for 2023.

• “We use different scenarios, called cases, to understand how varying assumptions affect energy trends. The AEO2023 Reference case, which serves as a baseline, or benchmark, reflects laws and regulations adopted through mid-November 2022, including the Inflation Reduction Act,” according to the EIA blog.

Washington, D.C. – Following the Securities and Exchange Commission’s decision to finalize its costly and unnecessary stock buybacks rule, National Association of Manufacturers Managing Vice President of Tax and Domestic Economic Policy Chris Netram released the following statement:

“The NAM is disappointed that the SEC has chosen to unjustifiably punish manufacturers for returning capital to their shareholders. Manufacturers, investors, retirement plans and the entire economy benefit when companies can efficiently allocate capital via share repurchases. The NAM was successful in convincing the SEC to abandon the most damaging aspect of its initial proposal, but the commission’s attempt to discourage these commonplace, commonsense transactions via an overly complicated, expensive and unworkable disclosure mandate is nevertheless a departure from its mission to enhance capital formation and protect investors.”

-NAM-

The National Association of Manufacturers is the largest manufacturing association in the United States, representing small and large manufacturers in every industrial sector and in all 50 states. Manufacturing employs nearly 13 million men and women, contributes $2.81 trillion to the U.S. economy annually and accounts for 55% of private-sector research and development. The NAM is the powerful voice of the manufacturing community and the leading advocate for a policy agenda that helps manufacturers compete in the global economy and create jobs across the United States. For more information about the NAM or to follow us on Twitter and Facebook, please visit www.nam.org.