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Economic Watch: Manufacturing Declines, Leading Indicators Increase

May 21, 2015

By Evan Lockridge

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A first look at the nation’s manufacturing sector shows activity has declined for the second straight month. However, a measure of future economy activity is on the upswing.

The Flash U.S. Manufacturing Purchasing Managers’ Index from the financial information services provider Markit shows a drop from 54.1 in April to 53.8 this month, signaling the weakest improvement in overall business conditions since the start of 2014.

A measure at 50 or above indicates improving conditions.

Slower new order growth was a key factor weighing down on the headline index in May, while faster job creation was the main positive development since the previous month, according to the report.

It also showed new export sales decreased marginally in May, with a number of manufacturers noting that the strong dollar had a negative influence on competitiveness in external markets. In terms of domestic demand, survey respondents noted that energy sector investment spending remained a key area of weakness in May.

Manufacturing output growth eased further from March’s six-month high, which firms largely attributed to softer new business gains. The latest increase in output volumes was the slowest recorded so far in 2015, but still broadly in line with the post-recession average, according to Markit.

“Manufacturers reported their weakest growth since the start of 2014 in May, with the survey results adding to fears that the strong dollar is weighing on the U.S. economy and hitting corporate earnings,” said Chris Williamson, chief economist at Markit. “Although falling only modestly, export sales have now dipped for two straight months, something not seen for two years and a far cry from the solid export performance seen this time last year. Overall order books are consequently growing at the slowest rate seen since the start of last year.”

He said the weaker order book trend doesn’t appear to have affected hiring, at least not yet, with job creation picking up in May. However, unless production growth revives, there is a worry that payroll growth will slow as companies seek to boost productivity.

Leading Economic Indicators Show Best Improvement in Months

A separate report on the wider conditions of the U.S. economy shows an improvement over the next three to six months, according to the private research group The Conference Board.

Its Leading Economic Index increased 0.7% in April to 122.3, the biggest gain in nine months, with seven of the 10 indicators increasing.

This follows a 0.4% increase in March, and a 0.2% decline in February.

“April’s sharp increase in the LEI seems to have helped stabilize its slowing trend, suggesting the paltry economic growth in the first quarter may be temporary,” said Ataman Ozyildirim, economist at The Conference Board. “However, the growth of the LEI does not support a significant strengthening in the economic outlook at this time. The improvement in building permits helped to drive the index up this month, but gains in other components, in particular the financial indicators, have been somewhat more muted.”

The group’s Coincident Economic Index, which measures current economic activity for the U.S., increased 0.2% in April to 112 following a 0.1% decline in March and a 0.2% increase in February.

The Lagging Economic Index, which measures U.S. economic activity of previous months, increased 0.1% in April to 116.6 following a 0.5% increase in March, and a 0.2% increase in February.

Existing Home Sales Down

A third report shows total existing-home sales declined 3.3% to a seasonally adjusted annual rate of 5.04 million in April from an upwardly revised 5.21 million in March, according to the National Association of Realtors

Despite the monthly decline, sales have increased year–over–year for seven consecutive months and are still 6.1% above a year ago.

Lawrence Yun, NAR chief economist, said sales in April failed to keep pace with the robust gain seen in March.

"April's setback is the result of lagging supply relative to demand and the upward pressure it's putting on prices," he said. "However, the overall data and feedback we're hearing from Realtors continues to point to elevated levels of buying interest compared to a year ago. With low interest rates and job growth, more buyers will be encouraged to enter the market unless prices accelerate even higher in relation to incomes."

Single-family home sales dropped 3.7% to a seasonally adjusted annual rate of 4.43 million in April from 4.60 million in March, but are still 6.5% above the 4.16 million pace a year ago.

April existing-home sales in the Northeast fell 3.1% to an annual rate of 620,000, but are 1.6% above a year ago. In the Midwest, existing-home sales increased 1.7% to an annual rate of 1.22 million in April, and are 13% above April 2014.

Existing–home sales in the South declined 6.8% to an annual rate of 2.04 million in April, but are still 3.6% above April 2014. In the West the number dropped 1.7% to an annual rate of 1.16 million in April, but is still 6.4% above a year ago.

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