NAM: Monday Economic Report
As widely expected, the Federal Open Market Committee voted to reduce the federal funds rate by 25 basis points after its July 30–31 meeting, marking the first cut in interest rates since the financial crisis in 2008. The Federal Reserve said it was taking this action to help keep the economic expansion going—an “insurance policy” against slower growth. There are also expectations that the Federal Reserve might do another cut in rates at its next meeting. In addition, the Federal Reserve will stop reducing the size of its balance sheet.
Despite the FOMC’s action, participants continued to cite strength in the labor market and in consumer spending. Yet, the cut in short-term rates was spurred by softening manufacturing activity, weak business fixed investment, continuing uncertainties in the economic outlook (including from trade) and core inflation that was below the Federal Reserve’s target of 2 percent.
Financial markets were rattled at the end of last week by President Donald Trump’s announcement of new tariffs on Chinese goods on September 1. This could raise prices for more consumer goods and darken the outlook, particularly as it relates to business spending. For his part, NAM President and CEO Jay Timmons once again urged the administration and Chinese officials to reach an agreement quickly.
The ISM® Manufacturing Purchasing Managers’ Index® expanded at the slowest pace since August 2016 in July, down from 51.7 in June to 51.2 in July, largely on softer production and employment growth and declining exports. While the manufacturing sector has now expanded for 35 straight months, there has been notable slippage in activity and the outlook since then. At the same time, the Dallas Federal Reserve Bank noted declining sentiment for the third straight month despite still-expanding new orders and production and a relatively upbeat outlook.
After falling in April and May, new orders for manufactured goods rebounded in June, but continued to highlight weaknesses in the sector. New factory orders have fallen 1.2 percent since June 2018, edging down 0.1 percent with transportation equipment excluded. More positively, core capital goods spending has risen a modest 1.5 percent year-over-year.
Manufacturing employment rose by 16,000 workers in July, but job growth has slowed considerably this year. The sector has averaged nearly 8,000 new workers per month so far in 2019 relative to the more robust average of almost 22,000 per month in 2018. Nonetheless, the average hourly earnings for production and nonsupervisory workers has risen 3.3 percent over the past 12 months, even as the average workweek narrowed to the lowest level since January 2014.
Overall, the U.S. economy added 164,000 workers in July, with job growth also softening so far in 2019. The unemployment rate remained at 3.7 percent, near 50-year lows, and the so-called “real unemployment” rate fell to 7.0 percent, a rate not seen since December 2000.
Encouragingly, personal income increased strongly, up 0.4 percent in June for the fourth consecutive month. Over the past 12 months, personal income has risen a healthy 4.9 percent, with manufacturing wages and salaries up a robust 5.1 percent since June 2018. Personal spending rose 0.3 percent in June, slowing from a gain of 0.5 percent in May but continuing to be a healthy figure.
Consumer confidence rebounded, up from 124.3 in June to 135.7 in July, the strongest reading since November, according to the Conference Board. Americans felt more upbeat about both current and future economic conditions, particularly regarding jobs and income. The University of Michigan and Thomson Reuters’ measure of consumer sentiment also inched higher in July, remaining rather elevated “despite ongoing trade uncertainties.”