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MONDAY ECONOMIC REPORT
Supply Chain Disruptions and Weather Dampen February Economic Activity
By Chad Moutray – March 22, 2021
The Weekly Toplines
Manufacturing production fell 3.1% in February, the largest decline in 10 months, with supply chain disruptions and weather hampering output in the sector for the month. The latest figures represent a pause in progress seen in recent months. Nonetheless, the forecast for manufacturing production suggests solid growth over the coming months, with output in the sector returning to pre-pandemic levels by the second or third quarter.
Encouragingly, manufacturing activity expanded very strongly in March surveys from the New York and Philadelphia Federal Reserve Bank districts, with the latter’s composite index rising to the best reading since April 1974. Yet, input costs also accelerated sharply in both reports.
New residential construction pulled back for the second straight month, likely on poor weather and rising costs, declining 10.3% to 1,421,000 units in February, a six-month low. While these data are disappointing, the housing market should remain a bright spot, with construction likely rebounding with improved weather conditions. Indeed, housing permits remain 17.0% higher than one year ago, up from 1,438,000 units in February 2020.
Homebuilders complain about sharply higher construction costs, worker shortages and a lack of available lots, but they remain upbeat in their outlook for sales over the next six months. Mortgage rates have also started to drift higher, albeit at still low rates historically.
After soaring by 7.6% in January, fueled by stimulus payments enacted at the end of last year, consumer spending at retailers cooled in February, down 3.0%. This is likely a temporary phenomenon, however, as new stimulus checks are expected to sharply increase retail sales in March. Over the past 12 months, retail sales have jumped 6.3%.
As expected, the Federal Open Market Committee left short-term interest rates unchanged, with the federal funds rate range remaining at zero to 25 basis points. Economic growth continues to be well below its pre-pandemic path, and the outlook remains dependent on the pace of vaccinations and a return to normal in the economy. The Federal Reserve will also continue to purchase Treasury and mortgage-backed securities for the foreseeable future.
FOMC participants also markedly increased their economic forecasts, with real GDP rising by 6.5% in 2021 and the unemployment rate falling to 4.5% by year’s end. Despite a rosy economic outlook, the Federal Reserve does not predict robust inflationary pressures.
In terms of policy changes moving forward, most of the FOMC participants do not see interest rates changing in 2021, 2022 or 2023. However, four participants see federal funds rates starting to inch higher next year, and seven anticipate increased rates in 2023.
My view is that solid economic growth and rising costs will put pressure on the Federal Reserve, and I would not be surprised if the FOMC starts scaling back its asset purchases by year’s end. Likewise, I continue to predict federal funds edging higher beginning in the first half of 2022.
Economic Indicators
Last Week’s Indicators: (Summaries Appear Below)
Monday, March 15 New York Fed Manufacturing Survey State Employment Report (January)
Tuesday, March 16 Industrial Production NAHB Housing Market Index Retail Sales
Wednesday, March 17 FOMC Monetary Policy Statement Housing Starts and Permits
Thursday, March 18 Conference Board Leading Indicators Philadelphia Fed Manufacturing Survey Weekly Initial Unemployment Claims
Friday, March 19 None
Monday, March 22 Chicago Fed National Activity Index Existing Home Sales
Tuesday, March 23 New Home Sales Richmond Fed Manufacturing Survey
Wednesday, March 24 Durable Goods Orders and Shipments IHS Markit Flash U.S. Manufacturing PMI
Thursday, March 25 Gross Domestic Product (Second Revision) Kansas City Fed Manufacturing Survey Real GDP by Industry Weekly Initial Unemployment Claims
Friday, March 26 International Trade in Goods (Preliminary) Personal Consumption Expenditures Deflator Personal Income and Spending State Employment Report (February)
Deeper Dive
Conference Board Leading Indicators: The Leading Economic Index increased 0.2% in February, slowing from the 0.5% gain in January but rising for the 10th consecutive month. Still, the LEI remained 1.2% lower than one year ago. New manufacturing orders data contributed 0.20 to the headline index in February. Other bright spots in the February LEI included initial unemployment claims, the interest rate spread, lending conditions and the stock market. At the same time, the average workweek of production workers, building permits and consumer confidence were drags on the LEI for the month.
Meanwhile, the Coincident Economic Index edged down 0.1% in February following nine straight months of increases. Despite progress since last spring, the measure remained down 4.3% since its pre-pandemic pace in February 2020. In February, industrial production decreased 2.2%, with output in the manufacturing sector off by 3.1%, largely on supply chain disruptions and weather (see below). These challenges weighed heavily on the CEI. The other components of the index—manufacturing and trade sales, nonfarm payrolls and personal income less transfer payments—were positive contributors to the index in February
FOMC Monetary Policy Statement: As expected, the Federal Open Market Committee left short-term interest rates unchanged, with the federal funds rate range remaining at zero to 25 basis points. Despite some progress in the recovery, “the sectors most adversely affected by the pandemic remain weak,” and the “ongoing public health crisis continues to weigh on economic activity,” according to the accompanying statement. Economic growth continues to be well below its pre-pandemic path, and the outlook remains dependent on the pace of vaccinations and a return to normal in the economy.
In addition to maintaining a rate policy that is near 0%, the Federal Reserve will also continue purchasing at least $80 billion in Treasury securities each month and as much as $40 billion per month in mortgage-backed securities.
FOMC participants also markedly increased their economic forecasts, with real GDP rising by 6.5% in 2021, up from an estimate of 4.2% in December projections. The U.S. economy is seen growing by 3.3% and 2.2% in 2022 and 2023, respectively. At the same time, the unemployment rate should fall to 4.5% by year’s end, down from a 5.0% estimate three months ago, and it should decline to 3.9% and 3.4% in the next two years, respectively. Despite a rosy economic outlook, the Federal Reserve does not predict robust inflationary pressures, with the core PCE deflator just slightly above the FOMC’s stated 2% goal in 2021, at 2.2%.
In terms of policy changes moving forward, most of the FOMC participants do not see interest rates changing in 2021, 2022 or 2023. However, four participants see federal funds rates starting to inch higher next year, and seven anticipate increased rates in 2023.
My view is that solid economic growth and rising costs will put pressure on the Federal Reserve, and I would not be surprised if the FOMC starts scaling back its asset purchases by year’s end. Likewise, I continue to predict federal funds edging higher beginning in the first half of 2022.
Housing Starts and Permits: New residential construction pulled back for the second straight month, likely on poor weather and rising costs, declining 10.3% from 1,584,000 units at the annual rate in January to 1,421,000 units in February, a six-month low. Housing starts decreased in every region of the country except the West, with the largest declines in the Midwest and South. Single-family starts fell 8.5% from 1,136,000 units to 1,040,000 units nationally, and multifamily construction eased from 448,000 units to 381,000 units. On a year-over-year basis, new housing starts fell 9.3%, down from 1,567,000 units in February 2020, with single-family starts up 0.6% over the past 12 months from 1,034,000 units one year ago.
While these data are disappointing, the housing market should remain a bright spot, with construction rebounding with improved weather conditions. Builders complain about sharply higher construction costs, worker shortages and a lack of available lots, but they remain upbeat in their outlook for sales over the next six months (see the NAHB Housing Market Index blurb below). It is also true that mortgage rates are inching higher, albeit still low historically, and buyers might also be pinched by higher costs, assuming builders are able to pass them along.
In the latest data, housing permits fell from 1,886,000 units at the annual rate in January, a pace not seen since May 2006, to 1,682,000 units in February, a four-month low. It is important to note that this figure is higher than the housing starts figure, and that it also was likely negatively impacted by weather. These data are a good proxy of future activity and are largely consistent with the more optimistic assessment of the coming months. Indeed, housing permits remain 17.0% higher than one year ago, up from 1,438,000 units in February 2020. Single-family and multifamily permitting rose 15.0% and 21.4% year-over-year, respectively.
Industrial Production: Manufacturing production fell 3.1% in February, the largest decline in 10 months, with supply chain disruptions and weather hampering output in the sector for the month. Durable and nondurable goods production declined 2.6% and 3.7%, respectively. The latest figures represent a pause in progress seen in recent months, with manufacturing production plummeting from 1.1% year-over-year in January to being down 4.1% over the past 12 months in February. Likewise, capacity utilization dropped from 74.6% in January to 72.3% in February, the lowest rate since September 2020. Nonetheless, the forecast for manufacturing production suggests solid growth over the coming months, with output in the sector returning to pre-pandemic levels by the
second or third quarter.
In February, just three manufacturing sectors had increased production: aerospace and miscellaneous transportation equipment (up 0.8%), primary metals (up 0.8%) and textiles and product mills (up 0.6%). The largest declines in manufacturing production occurred in motor vehicles and parts (down 8.3%), chemicals (down 7.1%), petroleum and coal products (down 4.4%), furniture and related products (down 3.4%), fabricated metal products (down 2.9%), nonmetallic mineral products (down 2.9%) and machinery (down 2.3%).
Three of the major manufacturing sectors experienced increased production over the past 12 months: food, beverage and tobacco products (up 1.1%), aerospace and miscellaneous transportation equipment (up 0.8%) and wood products (up 0.6%). The biggest year-over-year declines occurred in printing and support (down 14.8%), petroleum and coal products (down 12.5%), furniture and related products (down 11.7%), motor vehicles and parts (down 8.6%) and fabricated metal products (down 7.1%).
Meanwhile, total industrial production decreased 2.2% in February, falling by the most since April 2020. In addition to manufacturing, mining also declined sharply, off 5.4%, but utilities rose strongly, up 7.4%. Over the past 12 months, industrial production has dropped 4.2%, with mining production down 15.3% year-over-year. However, utilities output has increased 10.1% since February 2020. Total capacity utilization fell from 75.5% in January to 73.8% in February.
NAHB Housing Market Index: The National Association of Home Builders and Wells Fargo reported that confidence declined from 84 in February to 82 in March. While the Housing Market Index remains highly elevated, with builders still very upbeat in their overall assessments despite easing from November’s all-time high (90), the data have softened in recent months. Builders continue to cite higher construction costs, supply shortages, low inventories and increased delivery times as challenges. Mortgage rates have also started to drift higher, albeit at still low rates historically.
The HMI eased in every region except for the South, where it was flat. The index for current single-family home sales declined from 90 in February to 87 in March but remained very solid. At the same time, the index for expected single-family sales rose from 80 in February to 83 in March. As such, builders expressed continued strong optimism about increased sales moving forward
New York Fed Manufacturing Survey: In March, manufacturing activity expanded in the New York Federal Reserve Bank’s district at the fastest pace since November 2018. The composite index rose from 12.1 in February to 17.4 in March, buoyed by stronger growth in shipments, inventories and the average employee workweek. At the same time, new orders and employment growth slowed somewhat for the month. More troublesome, input costs accelerated at the fastest rate since May 2011.
Meanwhile, manufacturers in the Empire State Manufacturing Survey remain upbeat about stronger activity over the next six months, with the forward-looking composite index increasing from 34.9 in February to 36.4 in March, a six-month high. At least 51% of respondents forecasted new orders and shipments expanding moving forward, with 37.1% and 34.2% anticipating more hiring and capital spending, respectively. Those completing the survey predicted that raw material prices will continue to grow strongly, with the index for expected prices paid also rising to the highest level since May 2011. The index for future inventories jumped to a pace not seen since January 2018.
Philadelphia Fed Manufacturing Survey: Manufacturing activity soared at the fastest pace since April 1974, with the composite index rising from 23.1 in February to 51.8 in March. The index for new orders jumped from 23.4 to 50.9, with the percentage of respondents citing higher new orders for the month increasing from 37.2% in February to 57.9% in March. Growth in shipments, employment and the average employee workweek also strengthened in the latest data. At the same time, the index for delivery times (29.5) remained not far from the record high set in January (30.0), reflecting supply chain disruptions, and the prices paid for input costs jumped at the fastest rate since March 1980.
In special questions, 64.3% of respondents are experiencing labor shortages, with 58.9% citing skills mismatches and 44.6% having job vacancies of at least three months. As a result, 57.1% of manufacturers in the district have stepped up recruitment efforts, and 53.6% have had to boost wages, among other actions taken to address skills shortages.
Manufacturers in the district remained very positive in their outlook, with the forward-looking composite index rising from 39.5 to 61.6, the best reading since June 2020. At least 63% of business leaders in the region expect new orders and shipments to rise over the next six months, with 50.8% and 38.7% predicting more hiring and capital spending, respectively. Survey respondents predicted raw material prices to accelerate at rates not seen since April 2018.
Retail Sales: After soaring by 7.6% in January, fueled by stimulus payments enacted at the end of last year, consumer spending at retailers cooled in February, down 3.0%. This is likely a temporary phenomenon, however, as new stimulus checks are expected to increase retail sales sharply in March. (Note that the previous estimate was for 5.3% growth in retail sales, reflecting a sizable upward revision.) Excluding gasoline and motor vehicles, retail spending declined 3.3% in February following the 8.5% gain in January.
The underlying data mostly declined across the board, with the largest decreases occurring for department stores (down 8.4%), sporting goods and hobby stores (down 7.5%), nonstore retailers (down 5.4%) and motor vehicles and parts dealers (down 4.2%), among others. On the other hand, retail sales at gasoline stations (up 3.6%) and grocery stores (up 0.1%) increased, with the former largely reflecting increased gasoline prices.
Over the past 12 months, retail sales have jumped 6.3%, or 6.0% year-over-year with motor vehicles and parts and gasoline excluded. The bright spots on a year-over-year basis included nonstore retailers (up 25.9%), sporting goods and hobby stores (up 15.4%), building material and garden supply stores (up 14.2%), food and beverage stores (up 11.7%), motor vehicles and parts dealers (up 9.2%) and furniture and home furnishings stores (up 8.9%). At the other end of the spectrum, food services and drinking places (down 17.0%), department stores (down 14.5%), clothing and accessories stores (down 11.3%) and electronics and appliance stores (down 3.1%) experienced retail sales declines over the past 12 months, largely on COVID-19-related
weaknesses
State Employment Report: Alabama created the most net new manufacturing jobs in January, adding 2,000 workers. Other states with notable employment growth for the month included Wisconsin (up 1,700), Indiana (up 1,400), Minnesota (up 1,400), Kansas (up 1,200) and Missouri (up 1,200). Nationally, manufacturing employment remained down 575,000 year-over-year in January. Only three states have had net employment gains over the past 12 months: Utah (up 2,800), Idaho (up 500) and Alaska (up 300). The largest year-over-year declines remained in big states: California (down 85,300), Texas (down 56,100), Michigan (down 48,500), Ohio (down 37,000) and New York (down 34,900).
The national unemployment rate was 6.3% in January, and the unemployment rate fell in 33 states and the District of Columbia in the latest data. Hawaii had the highest unemployment rate in the country at 10.2%, followed closely by California (9.0%), New York (8.8%), New Mexico (8.7%) and the District of Columbia (8.4%). At the other end of the spectrum, the lowest unemployment rates in the United States in January occurred in South Dakota (3.1%), Utah (3.1%), Nebraska (3.2%), Vermont (3.2%) and Idaho (3.4%).
Weekly Initial Unemployment Claims: Initial unemployment claims totaled 770,000 for the week ending March 13, up from 725,000 for the week ending March 6. Over the past four weeks, initial claims have averaged 746,250. Meanwhile, continuing claims declined from 4,142,000 for the week ending Feb. 27 to 4,124,000 for the week ending March 6. Although this figure represents the lowest level since the week ending March 21, 2020, it is still too high and consistent with 3.0% of the workforce.
At the same time, 18,216,463 Americans received some form of unemployment insurance benefit (including state and federal programs) for the week ending Feb. 27. That figure declined from 20,118,468 for the week ending Feb. 20 and reflects sizable decreases in state and pandemic assistance claims.
Take Action
The NAM will host a webinar, “Quarterly Economic Update for Manufacturers,” on Thursday, March 25, at 2:00 p.m. EDT. The first quarter NAM Manufacturers’ Outlook Survey showed a rise in optimism to the highest point in two years. Explore the other results from the survey as well as the current economic indicators and the outlook. Click here to register.
The Manufacturing Institute will host a webinar, “Connecting Manufacturers with the Future: How 5G Will Transform Your Business,” on Tuesday, April 6, at 2:00 p.m. EDT in conjunction with the release of a new study on the topic. Avrio Institute President Shawn DuBravac will walk through the results of the MI study, and Qualcomm Senior Vice President and General Manager of 5G Durga Malladi will be one of the other panelists. Click here for more information and to register.
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