Here is the summary for this week’s Monday Economic Report:
Just a few data releases came out last week, so our view of the economy changed little from the previous week. Manufacturers continue to wrap their heads around the fact that growth in the early months of 2014 has been more disappointing than originally anticipated, but at the same time, they are cautiously upbeat about the second half of the year. The sharp 2.9 percent drop in real GDP in the first quarter clearly altered perceptions about the economy, with business leaders struggling to try to figure out how that impacts their prospects for the rest of this year. For instance, was the drop in activity mostly due to severe weather, or were there larger doubts about the economy at play?
For their part, business economists have lowered their projections for real GDP growth in 2014, from 2.5 percent in June (before the GDP revision) to 1.6 percent. At the same time, real GDP is expected to bounce back in the second quarter, with a median growth estimate of 3.0 percent, according to the National Association for Business Economics (NABE). (My own projection would be somewhat higher than that, perhaps around 3.5 percent.) Moreover, almost 60 percent of economists surveyed felt that the odds of a recession in 2014 or 2015 were less than 10 percent. In addition, more than half of the NABE respondents felt that the Federal Reserve would start raising short-term interest rates in the first six months of 2015.
Along those lines, the minutes from the June 17–18 Federal Open Market Committee (FOMC) meeting suggest that the Federal Reserve Board continues to also see improvements in the U.S. economy in the months ahead, even as sufficient “slack” remains in the labor market. While the Federal Reserve projects real GDP growth of 3.0 to 3.2 percent in 2015, it also intends to maintain its highly accommodative stance to monetary policy for the foreseeable future.
The FOMC reported plans to end its purchases of long-term and mortgage-backed securities in October, which mainly confirmed existing conventional wisdom, and it devoted a lot of discussion at its meeting to its exit strategy. The timing of the Federal Reserve’s move toward “normalization” in its policies has already become a focus of debate, with the guessing game now being when the increase in federal funds rate will begin. With pricing pressures accelerating of late, some will suggest that the Federal Reserve should move faster in its efforts to raise short-term rates, especially if core inflation starts to consistently exceed the stated FOMC goal of 2 percent on an annual basis.
Meanwhile, the National Federation of Independent Business (NFIB) reported that small business confidence declined somewhat in June on a slightly weakened outlook. The underlying data paint a mixed picture of encouraging news and persistent challenges, with continuing doubts about momentum in the economy and frustration with the political climate. Nonetheless, the small business labor market appears to be improving, both in terms of current job openings and those intended for the next three months. Similarly, the latest Job Openings and Labor Turnover Survey (JOLTS) data show the fastest pace of manufacturing job postings in six months, with an increase in net hiring in May. While hiring has picked up from softness earlier in the year, it continues to remain lower than what was observed in the second half of last year.
This week we will get a better sense of whether the recent pickup in manufacturing activity can be sustained as we move into the summer months. Industrial production is expected to reflect a modest gain in June, with expansion also predicted in surveys from the New York and Philadelphia Federal Reserve Banks. With that said, the pace of sales and output growth is anticipated to ease slightly. Other highlights include the latest data on consumer sentiment, housing starts and permits, producer prices, retail sales and state employment.
Chad Moutray is the chief economist, National Association of Manufacturers.
