NAM: Monday Economic Report
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.