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Economic Watch: Manufacturing Fails to Improve, Other Indicators Look Better

April 22, 2016

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The first look at April business conditions in the nation’s sluggish manufacturing sector shows the situation is improving little. Other readings are slightly more encouraging.

The Flash U.S. Manufacturing Purchasing Manager’s Index for April dropped to a reading of 50.8 from a final reading of 51.5 in March, according to the financial information services provider Market.

While this latest reading is still above the 50 no change threshold, showing manufacturing growth, this is the weakest rate of manufacturing expansion since September 2009, including the previous post-Great Recession low recorded in October 2012 when it hit 51.

Softer rates of manufacturing output and new business growth, alongside a weaker rise in staffing numbers, were the main factors weighing on the headline index, the report said. Manufacturers cited generally subdued demand conditions, delays on spending decisions among clients and ongoing weakness in the energy sector.

April data also pointed to a renewed slowdown in new business growth, with the latest expansion the lowest so far in 2016. Some survey respondents suggested that uncertainty in relation to the economic outlook and political climate had weighed on client spending in April. Moreover, export sales continued to act as a drag on overall new business volumes.

Manufacturers indicated that tighter inventory management strategies persisted in April, led by the sharpest drop in stocks of purchases since the start of 2014.

This latest performance has likely dashed hopes that first quarter weakness in the American economy was only temporary, according to Chris Williamson, chief economist at Markit.

“The survey data are broadly consistent with manufacturing output falling at an annualized rate of over 2% at the start of the second quarter, and factory employment dropping at a rate of 10,000 jobs per month,” he said. “With prior months’ survey data pointing to annualized gross domestic product growth of just 0.7% in the first quarter, the deteriorating performance of manufacturing suggests that growth could weaken closer towards stagnation in the second quarter.”

The report comes a few days ahead of the federal government's first report on first quarter gross domestic product growth. Many analysts expect the GDP numbers will reflect little expansion in the economy – not only due to the weak manufacturing numbers, but also because of flat retail sales and high business inventories.

However, another report offers a ray of hope.

Leading Economic Indicators Improve Slightly

The private research group The Conference Board says its Leading Economic Index (LEI) for the U.S. rose 0.2% in March to 123.4, following a 0.1% decline in February and a 0.2% decline in January.

The measure is used to gauge where the economy is heading in the next three to six months.

“With the March gain, the U.S. LEI’s six-month growth rate improved slightly but still points to slow, although not slowing, growth in the coming quarters,” said Ataman Ozyildirim, director of business cycles and growth research at The Conference Board. “Rebounding stock prices were offset by a decline in housing permits, but nonetheless there were widespread gains among the leading indicators. Financial conditions, as well as expected improvements in manufacturing, should support a modest growth environment in 2016.”

The board’s Coincident Economic Index, a measure of current economic activity, was unchanged in March, following a 0.1% increase in February and a 0.3% increase in January.

The Lagging Economic Index, which measures U.S. economic activity of previous months, increased 0.4% following a 0.5% increase in February and a 0.1% increase in January.

Existing Home Sales Jump

Sales of existing homes in March offered another bit of encouragement that the economy isn’t all bad, showing a bounce-back from a year ago.

According to the National Association of Realtors, total existing-home sales jumped 5.1% to a seasonally adjusted annual rate of 5.33 million in March from a downwardly revised 5.07 million in February. Sales rose in all four major regions last month and are up 1.5% from a year earlier.

Lawrence Yun, NAR chief economist, said home sales had a nice rebound in March following February's uncharacteristically large decline. "Closings came back in force last month as a greater number of buyers, mostly in the Northeast and Midwest, overcame depressed inventory levels and steady price growth to close on a home. Buyer demand remains sturdy in most areas this spring and the mid-priced market is doing quite well. However, sales are softer both at the very low and very high ends of the market because of supply limitations and affordability pressures."

He said the choppiness in sales activity so far this year is directly related to the unevenness in the rate of new listings coming onto the market to replace what is, for the most part, being sold rather quickly. "Also, a segment of would-be buyers at the upper end of the market appear to have been spooked by January's stock market correction."

Single-family home sales increased 5.5% to a seasonally adjusted annual rate of 4.76 million in March from 4.51 million in February, and are now 2.6% higher than the pace from a year ago. Existing condominium and co-op sales rose 1.8% to a seasonally adjusted annual rate of 570,000 units in March from February, but are still 6.6% below the March 2015 level.

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