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Economic Watch: Factory Activity Turns Around, ‘Beige Book’ Improves

March 3, 2016

By Evan Lockridge

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New factory orders and shipments  rebounded at least somewhat in January, while measures of business investment and inventories also improved, according to new Commerce Department figures.

The 1.6% increase in new orders follows a December decline of 2.9%, the biggest month-to-month gain in seven months.

This raises hopes for the nation’s manufacturing sector, which makes up a little more than a tenth of the American economy. It's been hurt by the sharp rise in the value of the U.S. dollar, which hurt exports, and by cutbacks in the nation’s energy sector following the collapse of oil prices.

Orders for manufactured durable goods, those designed to last at least three years, increased 4.7% in January, up slightly from a preliminary report. It was led by an 11.4% jump in transportation orders.

New orders for manufactured nondurable goods fell 1.4%.

The factory shipments number posted its first gain following six consecutive monthly declines, but the 0.3% increase was not enough to erase a December drop of 1.4%. This translated into a 2% gain in the shipment of durable goods, up from 1.9% in a preliminary report, and compares to a December decline of 1.8%. Shipments of nondurable goods posted the seventh monthly drop in a row.

The overall level of shipments would have been higher, as George Pearkes, analyst at Bespoke Investment pointed out in his Twitter feed, had it not been for a big decline in petroleum shipments. Excluding them, overall shipments improved 1.2% month-over month.

The report also showed new orders for nondefense capital goods minus aircraft, an indicator of business investment, improved 3.4% in January from December, down from a 3.9% increase in an earlier report. However, shipments remained down 0.4%.

Adding to the positive news is that inventories of factory-made goods fell for the seventh consecutive month, posting a 0.4% decline in January. Inventory gluts have been blamed for a slowdown in truck freight.

The overall report was greeted warmly by many analysts, but was short of expectations, according to a consensus estimate from one survey forecasting orders to improve by 2%.

Federal Reserve Report Shows Economy Still Expanding

The U.S. Federal Reserve Wednesday issued a report ahead of its Open Market Committee Meeting showing continued growth in the U.S. economy in January and February.

The so-called “Beige Book” indicates expanding activity in most Fed districts, although the pace of growth seemed to soften slightly relative to the previous report. Transportation activity varied, with demand weighed down by weakness in the energy and agriculture sectors and lower export volumes.

“The trucking industry reported plans to expand services in the St. Louis district. Several districts noted a decline in rail cargo, including Atlanta, Minneapolis, and Dallas, with Minneapolis attributing this decline to drops in oil and coal freight,” the report said. “Weakness in the energy sector had also led to reduced volumes of barges hauling liquid petroleum in the St. Louis district. Freight volumes contracted further in the Cleveland district, while contacts in the Kansas City district reported a moderate decline in transportation activity."

The report is on the Fed website.

Two of 12 districts reported “moderate” growth, unchanged from the previous report. Four saw “modest expansion,” down from the previous report’s seven; and one noted a slight increase in activity. Two districts reported conditions were “mixed” while another two were “flat,” and activity was modestly lower in one district.

“Weakness continues to be concentrated in energy- and export-exposed sectors, although conditions in other areas of the economy were reportedly less than robust," said Josh Nye, economist at RBC Economics. "While hard data for January (retail sales, durable goods orders, existing home sales, and industrial production) have thus far been encouraging, the softer tone in today’s report is likely to keep the Fed cautious regarding the economic outlook."

Nye said the most encouraging aspect of the report, continued strength in the labor market, should give the Fed some comfort, particularly if it materializes in February’s payroll employment report set for release on Friday.

“Evidence that tight labor market conditions are fuelling wage growth continues to build, but the pass-through to overall price pressure has been limited,” Nye said. “We expect that the Fed will wait for further indications that domestic activity powered through the recent period of uncertainty and volatility, as well as evidence to support inflation returning to 2% during the medium term, before further hiking interest rates. Our forecast assumes the fed funds rate will be held steady in March 2016.”

Service Sector Throttles Back to Lowest Level in Two Years

One area of the economy that is slowing just a bit is in the service sector, according to a survey of the nation’s purchasing managers.

The Institute for Supply Management’s Non-Manufacturing Index registered 53.4% in February, 0.1 of a percentage point lower than the January reading of 53.5%. It still shows continued growth in the arena with a reading above 50, but at a slightly slower rate and is at a two-year low.

“The majority of the respondents' comments continue to be positive about business conditions,” said Anthony Nieves, chair of ISM’s Non-Manufacturing Business Survey Committee. "The respondents are projecting a slight optimism in regards to the overall economy. There is an increase in the number of industries reflecting growth in both new orders and business activity, however, the NMI has decreased slightly due to the contraction in the employment index."

The gauge of employment growth fell into contraction for the first time since February 2014, according to RBC Economics, however, hiring during this period continued to remain robust with average monthly payroll employment gains exceeding 200,000 during the August to January period.

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