The Chicago Federal Reserve Bank said that the U.S. economy weakened in January. The National Activity Index (NAI) declined from 0.25 in December to -0.32 in January. Softness in the manufacturing sector contributed to the decrease in the index, with industrial production down 0.4 percent for the month. Other figures which lowered the figure included reduced housing starts and a slightly smaller contribution from employment-related indicators.

One of the unique aspects of the NAI is that it looks at the economy relative to its long-run historical trend, with negative values suggesting that the U.S. economy is growing below its historical average. IN addition, when the 3-month moving average falls below -0.70, the risk of recession is increased.

With these latest figures, the 3-month moving average is 0.30, up from 0.23 last month. This indicates that the national economy continues to grow modestly above its historical trend, even as it is clear (particularly with the January numbers) that there are some persistent weaknesses. Ideally, we would like to see stronger growth moving forward, particularly in the manufacturing sector. But, this will require business leaders feeling more confident about the economic environment than they do right now, with much of the current weakness can be explained by uncertainties related to the political wrangling over the U.S. fiscal situation.

Chad Moutray is chief economist, National Association of Manufacturers.

Here is the summary for this week’s Monday Economic Report:

The Philadelphia Federal Reserve Bank’s Business Outlook Survey continued to show significant weaknesses in the manufacturing sector in its district. There were some areas of progress, including shipments and employment, and respondents were mostly positive about higher activity this year. Yet, the composite index was sharply lower on reduced new orders, dragging the overall sentiment lower. The New York Federal Reserve Bank’s Empire State Manufacturing Survey showed similarly worrisome figures. Meanwhile, although the Conference Board’s Leading Economic Index—which foreshadows future U.S. economic activity—was higher, sluggish hiring and sales growth continued.

Despite these troubling indicators, at least one source reports that manufacturing production is on the upswing. Although the Markit Flash Manufacturing Purchasing Managers’ Index (PMI) for the United States edged slightly lower from 55.8 in January to 55.2 in February, the output measure rose to its highest point since March 2011. Even in this survey, however, the pace of growth for new orders, employment and raw materials prices slowed down somewhat. Nonetheless, the Markit data tend to find that the U.S. economy is growing moderately, despite a number of persistent headwinds. In contrast, Flash PMI data for the Eurozone suggest that its problems are far from over. On the positive side, European exports to the United States and Asia have improved.

Other data points mainly focused on housing and inflation. The residential sector has been one of the faster-growing segments of the U.S. economy over the past year. This has been welcome news for many manufacturers that have been eager for this still-struggling sector to recover. While the headline number for housing starts was lower in January, this was mainly due to decreases of multifamily starts, which have risen significantly year-over-year even with last month’s decline. New single-family residential construction rose to its highest point since July 2008, and we have seen single-family starts rise 20 percent over the past 12 months. Permits have also been on a long-term upward trend.

Regarding prices, consumers and manufacturers have benefited from an easing in inflationary pressures over the course of the past year, mainly due to falling energy costs. Price increases have been modest overall, with core inflation at both the consumer and producer level below the Federal Reserve Board’s goal of 2 percent. In January, consumer food prices were higher, particularly for fruits and vegetables, but gasoline prices were lower. However, the recent rise in crude petroleum prices could lead to higher prices for finished energy and other goods in coming months if these are sustained. But, the forecast continues to be for moderate inflation.

This week, there will be several reports released on the current state of manufacturing. On Friday, the Institute for Supply Management will release its PMI report, and it is expected to show the sector growing slowing, with data not much different than the month before and possibly reflecting some pullbacks in activity. This would be in contrast to the Markit data, but it would be consistent with some of the regional studies. There will be regional sentiment surveys released from the Chicago, Dallas, Kansas City and Richmond Federal Reserve Banks this week. Other highlights include new releases on construction spending, consumer confidence, durable goods orders, personal income and a revision to fourth-quarter 2012 real GDP. Given recent data that have come out, look for real GDP to be revised higher, up from the earlier estimate of -0.1 percent to around 0.5 percent, according to consensus forecasts.

Chad Moutray is the chief economist, National Association of Manufacturers.

Markit said that manufacturing activity in February continued to expand, but the pace of new orders slowed somewhat from January. The Flash Manufacturing Purchasing Managers’ Index (PMI) for the United States declined from 55.8 to 55.2, suggesting a marginal change in the overall picture. The good news is that output appears to be recovering strongly, up from 56.8 to 58.1. Five months ago, the output index stood at 51.2, illustrating the improvements seen since then. Moreover, February’s output figure is the highest that it has been since March 2011.

The pace of growth for new orders, employment, and input prices eased a bit. These numbers – particularly sales – helped bring the composite index down for the month, even with higher output. The index for new orders dropped from 57.4 to 56.4. While U.S. sales continued to rise, new export orders contracted once more, reversing two months of modest gains and reflecting continuing weaknesses abroad, especially in Europe (see below). Meanwhile, hiring and raw material prices expanded in February, with each at their slowest pace of the last few months.

Markit Chief Economist Chris Williamson said, “Employment rose in February, but the rate of job creation slowed and remained weaker than policymakers would like to see.” He went on to say: “While the survey … paints an encouraging picture of the manufacturing sector, helping to drive a return to growth for the economy as a whole in the first quarter of this year, firms still need to see greater confidence in the longer-term economic outlook for employment numbers to pick up again.”

This improving – but still cautious – economic outlook in the U.S. stands in contrast to what we continue to see in Europe. The Markit Flash Eurozone Manufacturing PMI was essentially unchanged, down from 47.9 in January to 47.8 in February. While this index has improved from the 44.1 figure observed in August, it continues to reflect a challenging environment for businesses on the continent. The PMI has shown contracting levels since August 2011, or for 19 straight months.

Despite the persistent bad news, the rate of decline for new orders slowed in February in the manufacturing sector. One positive to report was an expansion in new export orders, up from 48.8 to 51.7, the first increase in export sales since June 2011. The Markit report attributed this to increased exports to Asia and the U.S., with strength particularly seen in Germany.

Along those lines, the Flash German Manufacturing PMI shifted from a slight contraction (49.8) to a slight expansion (50.1) for the month. As noted in the Eurozone release, the main driver of the higher index reading was stronger growth in sales, both domestic and foreign. The new orders index rose from 48.5 to 52.7; while the new export orders index increased from 48.2 to 54.6. The jump in sales slowed the decline in employment, at least for February, which was a good sign.

Chad Moutray is the chief economist, National Association of Manufacturers.

In contrast to the Empire State survey released last week which found a rebound in manufacturing activity, the Federal Reserve Bank of Philadelphia’s Business Outlook Survey observed contracting levels once again. In fact, the Philly Fed’s composite index of general business conditions declined from -5.8 in January to -12.5 in February, and it has been in negative territory for 7 of the past 10 months. Roughly half of the respondents to the latest survey said that the economic environment had not changed between January and February, with almost 32 percent suggesting it had decreased.

The principle driver of the lower figures in February – as it often is – was lower sales. The index of new orders dropped from -4.3 to -7.8. Nonetheless, there were some signs of modest improvements. The shipments index rose from 0.4 (essentially flat) to 2.4 (slight growth), and there was similar progress for delivery times, employment, and the average workweek. The workweek, though, continued to decline, albeit at a much slower pace. Meanwhile, inventories remain in contraction territory, and the pace of raw material price increases eased somewhat.

Even with the more-negative headline numbers, manufacturers in the Philadelphia Fed District were cautiously optimistic about future activity, even with a number of headwinds zapping current sentiment. In a series of special questions, nearly 54 percent of those surveys said that they expect production to increase in the first (and current) quarter of 2013 relative to what they were doing in the last quarter of 2012, compared to one-quarter who expect a decline. Looking forward to the next six months, the indicators for expected levels of activity remain strongly positive, with just over one half thinking that sales will improve and other measures higher across-the-board.

Chad Moutray is chief economist, National Association of Manufacturers.

The Bureau of Labor Statistics reported that producer prices rose 0.2 percent in January, the first increase since September. With that said, inflationary pressures remain modest, with core finished goods prices up just 1.8 percent over the past year. This is below the 2 percent goal stated by the Federal Reserve Board, and it reflects significant easing over the course of 2012, as described last month and as can be seen in the attached graphic.

More specifically, in January, energy costs continued to fall, down 0.4 percent for the month. Prices for finished energy goods – mostly from gasoline – have declined for four straight months, helping to lowering inflationary pressures. Food costs rose 0.7 percent in January, reversing the 0.8 percent increase in December. The largest contributor to this gain was higher vegetable prices. Outside of energy and food costs, other increases were found in the pharmaceutical sector and with some types of capital equipment.

A similar picture emerges for the manufacturing sector, which has experienced only a 0.7 percent increase in producer prices year-over-year. This is largely due to reduced energy costs, with raw materials for petroleum and coal products manufacturers down 4.4 percent since January 2012. Nonetheless, these costs were 0.9 percent higher in January on crude petroleum prices. (continue reading…)

The Census Bureau and the U.S. Department of Housing and Urban Development said that new residential construction declined from a revised 973,000 in December to 890,000 in January. It is important not to over read this 8.5 percent drop. The decrease was due to a fall in multi-family housing starts, down from 365,000 to 277,000. This highly-volatile figure still represents an upward trend for multi-family units, which have risen 32.5 percent year-over-year. Instead, it appears that December’s multi-family starts number was an outlier.

New single-family residential construction, meanwhile, reached a high not seen since July 2008. Single-family housing starts rose from 608,000 to 613,000, and they were up 20.0 percent over the past year. The monthly and annual increases were primarily in the South and the West, with softness observed in the Northeast and Midwest.

The other positive news out of this report was the housing permits data, which grew from 909,000 to 925,000 for the month. Like the single-family numbers, the housing permits figure was at its highest point since July 2008. Housing permits were up 35.2 percent year-over-year. Both single-family and multi-family unit permits increased in January, and total permits were higher in all regions of the country. Single-family permits were down in the Northeast and Midwest, mirroring the starts data.

Overall, the new residential construction data suggest that the housing market remains a strong suit in the nation’s economy, even with the lower decline in multi-family starts. The longer-term trend suggests that more Americans are building or planning to build homes. The tremendous gains in housing starts and housing permits over the past year have helped to boost real GDP and provide much-needed support to the manufacturing sector. Still, while I suspect that housing starts will surpass the 1 million mark by year’s end, there is much work to be done, as housing sector activity remains well below the levels seen before the bubble burst. (continue reading…)

Here is the summary for this week’s economic report:

After some improvements in late 2012, industrial production declined in January. Manufacturing activity fell 0.4 percent, according to the Federal Reserve Board, with reduced production in motor vehicles pushing the index lower. Year-over-year, manufacturing production was up just 1.7 percent, well below the 6.3 percent pace of January 2011 or the 5.2 percent pace of January 2012. As noted by NAM President and CEO Jay Timmons in his speech before the Detroit Economic Club, the United States can do better. One of our goals should be to strive for 4.5 percent growth in industrial production annually on average between now and 2020—part of what he calls a “20/20 vision.” With faster industrial activity, manufacturers can once again provide return to an outsized role for output and employment growth, reminiscent of what we saw coming out of the Great Recession.

Many other economic data released last week were mixed. In contrast to the industrial production figures, the Empire State Manufacturing Survey showed improvements in activity in January. This was the first non-contracting month for the New York Federal Reserve Bank’s District since July, led by improved sales and increased expectations. Even with these gains, progress in the composite index stemmed mostly from people shifting their views from negative to neutral, hinting that many respondents remain tentative. This is true even though manufacturers are more cautiously optimistic for higher levels of orders, shipments, employment and capital investment over the next six months. Meanwhile, retail sales figures, while increasing 0.1 percent in January, were at their slowest pace since October. Once again, reduced auto sales helped to drag the figure lower, with higher payroll taxes also contributing.

Consumers and small businesses were slightly more upbeat in the most recent sentiment surveys, and yet, they continue to highlight persistent concerns. The National Federation of Independent Business’s (NFIB) Small Business Optimism Index, for instance, found that owners remain worried about the economy and frustrated with the political environment. The index, while edging higher in January, has not recovered from November’s steep decline, and small business owners continue to cite sluggish levels of sales, earnings, hiring and capital investment. Consumers, meanwhile, were more confident in the latest University of Michigan survey, which has fallen of late on fiscal cliff worries and higher payroll taxes. Even with this month’s improvements, consumer sentiment remains subpar.

This week, the economic focus will turn to housing and inflation. New residential construction soared to 954,000 in December, capping a year that saw tremendous gains in housing activity and showing that the still-struggling sector has begun to move in the right direction. The January housing starts figures are expected to show a slight pullback, but the longer-term trend should be for residential starts and permits to move upward. In addition to housing, we will also get new data on consumer and producer prices, both of which have eased over the course of the past year, mainly on lower energy costs. While there has been a pickup in some prices in January, I would expect for the trend of modest inflationary pressures to continue. Core inflation was 2 percent in December, which was in-line with Federal Reserve Board targets.

Chad Moutray is the chief economist, National Association of Manufacturers.

The University of Michigan and Thomson Reuters report that consumer confidence moved higher from 73.8 in January to 76.8 in February. This was the second consecutive monthly gain, with the Consumer Sentiment Survey index plummeting post-election from 82.7 in November to 72.9 in December on fiscal cliff worries. Americans remained downbeat in January, with many of them reacting negatively to higher payroll taxes.

Perceptions about the current and future economic environment improved for the month. The index for present conditions rose from 85.0 to 88.0 for the month; whereas, the forward-looking index increased from 66.6 to 68.7. Even with February’s higher numbers, sentiment remains sub-par. Americans remain less positive than they were in November (which had been a 5-year high) and well below an ideal index value of closer to 100. The simple truth is that confidence has been more subdued because of slowly advancing economic growth, elevated unemployment rates, higher taxes, and other pocketbook issues.

Inflationary expectations in the University of Michigan survey remain modest. Consumers expect prices to rise 3.3 percent over the next 12 months, the same pace as was predicted last month but up from the 3.1 percent rate predicted in November.

The New York Federal Reserve Bank’s Empire State Manufacturing Survey observed a rebound in activity in February, ending six straight months of contraction. The composite index of general business conditions rose from -7.8 in January to 10.0 in February. The percentage of those citing reduced conditions declined from 33.7 percent to 18.7 percent, with the bulk of those responses shifting to a more neutral viewpoint. This suggests that while attitudes were definitely more positive this month, there remains some degree of caution about the larger macroeconomic picture.

Nonetheless, the larger story is the increase in manufacturing activity in February, and the principle driver of these higher figures was higher sales. The index for new orders increased from -7.2 to 13.3, a significant shift. Indeed, the percentage of businesses with higher sales this month increased from 27.9 percent in January to 35.9 percent in February. Similar responses were seen for shipments and employment. Even with the faster pace of hiring, though, it should be noted that almost 72 percent of manufacturers did not change their employment levels. As we have seen in other indicators, hiring continues to lag other measures even as other measures have started to improve.

This more-positive assessment flows into the forward-looking data, as well. The index of general business conditions based on the respondents’ future expectations rose from 22.4 to 33.1, with roughly half of those surveyed anticipating better conditions six months from now. Measures for new orders, shipments, employment, and capital spending were all higher. Inventories are not expected to change, and pricing pressures should remain elevated.

Chad Moutray is chief economist, National Association of Manufacturers.

The Bureau of Labor Statistics reported that manufacturing job openings declined from 281,000 in November to 259,000 in December. This finding was consistent with other indicators suggesting that uncertainty related to the fiscal cliff and slowing sales was causing businesses to pull back at year’s end. Indeed, total job postings fell from 3,790,000 in November to 3,617,000 in December. The declines were in most major sectors except for construction and arts, entertainment, and recreation.

With that said, the news was not all bad. Manufacturers did pick up their pace of hiring for the month, up from 241,000 to 251,000. There were signs of higher levels of activity for some manufacturers in November and December (some of it due to Hurricane Sandy), which might explain this increase. Nonetheless, it is important to keep December’s hiring rate in perspective. There were 270,000 hires in June (the high point in 2012), and we ended the year more or less where we began it (with 253,000 hires in January 2012). Essentially, manufacturing employment growth was flat in 2012.

Still, net manufacturing hiring in December was 35,000, up from 4,000 in November. This was due to a sharp decline in manufacturing separations (e.g., layoff, separations, and retirements). Separations decreased from 237,000 in November to 216,000 in December.

Chad Moutray is chief economist, National Association of Manufacturers.