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NAM MONDAY ECONOMIC REPORT: Inflation is top manufacturing business challenge, dampening outlook

From the National Association of Manufacturers

By Chad Moutray – June 21, 2022

The Weekly Toplines

  • In the latest NAM Manufacturers’ Outlook Survey, 82.6% of respondents felt either somewhat or very positive about their company outlook, down from 88.8% in the first quarter. It was the weakest reading since the fourth quarter of 2020 but remained solid overall. Small firms remained less upbeat in their outlook than their medium and large manufacturing counterparts.

  • Increased raw material costs topped the list of primary business challenges in the second quarter, cited by 90.1% of respondents. In addition, 59.3% of manufacturing leaders believed inflationary pressures would make a recession more likely in the next 12 months.

  • Supply chain challenges were not far behind inflation as a top concern, cited by 85.5% of respondents. Once again, those completing the survey were asked when they expect supply chain disruptions to abate. Just 14.6% anticipate these disruptions improving by the end of 2022, with 53.1% expecting some abatement in 2023. As such, more respondents expect supply chain issues to drag on longer than in the previous two surveys.

  • Producer prices for final demand goods and services rose 0.8% in May. Over the past 12 months, producer prices for final demand goods and services jumped 10.8%, pulling back for the second straight month from 11.5% year-over-year in March, which was the largest increase on record. At the same time, core producer prices increased 6.8% year-over-year for the second consecutive month, easing from the record 7.1% in March.

  • The Federal Open Market Committee increased the federal funds rate by 75 basis points at the conclusion of its June 14–15 meeting, with the current range now at 1.50% to 1.75%. The Federal Reserve has been pressured to do more to combat inflation, and there will likely be 50-basis-point rate hikes (or more) at both the July 26–27 and Sept. 20–21 FOMC meetings.

  • In the latest economic projections, the median forecast of participants for the federal funds rate is 3.4% by the end of 2022. This would suggest increases of another 175 basis points by year’s end. It also predicts that the federal funds rate would increase to 3.8% by the end of 2023.

  • Many of the economic data points released last week reflect some cooling in activity in May and June. These include the following:

  • Manufacturing production growth stalled in May, with output edging down 0.1% for the month, following three months of solid gains. The sector has been quite resilient across the past year in the face of numerous challenges, and with that in mind, manufacturing production has risen 4.8% year-over-year. In addition, manufacturing capacity utilization slipped from 79.2% in April, the highest since April 2007, to 79.1%.

  • New York and Philadelphia Federal Reserve Banks reported reduced manufacturing activity in their June surveys, with the outlook for the next six months dampening in both reports.

  • New residential construction activity dropped 14.4% from 1,810,000 units at the annual rate in April to 1,549,000 units in May, the slowest pace since November 2020. Single-family housing starts declined 9.2% from 1,157,000 units to 1,051,000 units, a 21-month low. Increased mortgage rates, which surged to the highest since November 2008 last week, have cooled the housing market dramatically, with builder sentiment dropping to a two-year low and the traffic of potential buyers turning negative for the first time post-pandemic.

  • Retail sales fell 0.3% in May, declining for the first time since December. Gasoline station spending rose 4.0%, pushed higher by increased prices, with 43.2% growth over the past 12 months. Meanwhile, sales for motor vehicles and parts dealers fell 3.5% in May. Excluding motor vehicles and parts and gasoline stations, retail sales edged up 0.1% in May. Overall, these data present a mixed picture of consumer spending in the economy, with higher prices for some items (such as food and gasoline) likely curtailing spending in other areas.

  • The National Federation of Independent Business reported that the Small Business Optimism Index inched down to 93.1 in May, the lowest level since April 2020. The net percentage of respondents saying that general business conditions would be better six months from now declined from -50% to -54%, a record low in the 48-year history of the survey.

  • The Leading Economic Index from the Conference Board decreased 0.4% in May, matching the decline in April. Over the past six months, the LEI has declined 0.4%, suggesting weaker growth over the coming months as firms grapple with supply chain, workforce and inflationary challenges and renewed economic uncertainties.

  • Texas created the most net new manufacturing jobs in May, adding 6,200 workers. Other states with notable employment growth for the month included Florida (up 4,300), California (up 3,700), North Carolina (up 3,700), Indiana (up 2,400) and South Carolina (up 2,200).

Economic Indicators

Last Week’s Indicators:

(Summaries Appear Below)


Monday, June 13

None


Tuesday, June 14

NFIB Small Business Survey

Producer Price Index


Wednesday, June 15

FOMC Monetary Policy Statement

NAHB Housing Market Index

NAM Manufacturers’ Outlook Survey

New York Fed Manufacturing Survey

Retail Sales


Thursday, June 16

Housing Starts and Permits

Philadelphia Fed Manufacturing Survey

Weekly Initial Unemployment Claims


Friday, June 17

Conference Board Leading Indicators

Industrial Production

State Employment Report


This Week’s Indicators:


Monday, June 20

JUNETEENTH HOLIDAY


Tuesday, June 21

Chicago Fed National Activity Index

Existing Home Sales


Wednesday, June 22

None


Thursday, June 23

Kansas City Fed Manufacturing Survey

S&P Global Flash U.S. Manufacturing PMI

Weekly Initial Unemployment Claims


Friday, June 24

New Home Sales

University of Michigan Consumer Sentiment (Revision)

Deeper Dive

  • Conference Board Leading Indicators: The Leading Economic Index decreased 0.4% in May, matching the decline in April. Over the past six months, the LEI has declined 0.4%, suggesting weaker growth over the coming months as firms grapple with supply chain, workforce and inflationary challenges and renewed economic uncertainties. Meanwhile, the Coincident Economic Index rose 0.2% in May, slowing from the 0.5% increase in April. The CEI has increased by a modest 1.3% over the past six months.

  • FOMC Monetary Policy Statement: The Federal Open Market Committee increased the federal funds rate by 75 basis points at the conclusion of its June 14–15 meeting, with the current range now at 1.50% to 1.75%. To put that in perspective, the range was 0% to 0.25% at the start of the year. The statement reads, “Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices and broader price pressures.” The Russian invasion of Ukraine and the COVID-19-related shutdowns in China have contributed to these pricing pressures and to slower global growth. The Federal Reserve has been pressured to do more to combat inflation, and there will likely be 50-basis-point rate hikes (or more) at both the July 26–27 and Sept. 20–21 FOMC meetings. In the latest economic projections, the median forecast of participants for the federal funds rate is 3.4% by the end of 2022. This would suggest increases of another 175 basis points by year’s end. It also predicts that the federal funds rate would increase to 3.8% by the end of 2023. Beyond these moves, the Federal Reserve will also continue to reduce the size of its balance sheet, as outlined at its May 3–4 meeting. This will also put upward pressure on interest rates. FOMC participants have reduced their outlook for real GDP growth, down from a forecast of 2.8% in March for 2022 to 1.7% in the latest projections. They see 1.7% growth for 2023 as well, down from 2.2% in the previous iteration. As a result, the unemployment rate should rise to 3.7% and 3.9% in 2022 and 2023, respectively, up from 3.5% in both years in the March projections. At the same time, core inflation should drift down from 4.3% year-over-year in 2022 to 2.7% in 2023.

  • Housing Starts and Permits: New residential construction activity dropped 14.4% from 1,810,000 units at the annual rate in April to 1,549,000 units in May, the slowest pace since November 2020. Single-family housing starts declined 9.2% from 1,157,000 units to 1,051,000 units, a 21-month low, and multifamily activity, which can be highly volatile from month to month, plunged 23.7% from 653,000 units to 498,000 units. On a year-over-year basis, new housing starts have fallen 3.5% from 1,605,000 units in May 2021, with single-family construction activity down 5.3% over the past 12 months. These figures continue to reflect significant cooling in the housing market, which has been rocked by sharply higher mortgage rates, issues surrounding affordability of housing units and renewed uncertainties in the economic outlook. On these concerns, builder sentiment in the June NAHB survey was the lowest since June 2020. (See below.) Meanwhile, new housing permits—which are a proxy for future residential construction—fell 7.0% from an annualized 1,823,000 units in April to 1,695,000 units in May, an eight-month low. Single-family permits declined 5.5% from 1,109,000 units to 1,048,000 units, the weakest reading since July 2020. At the same time, multifamily activity decreased 9.4% from 714,000 units to 647,000 units. On a year-over-year basis, housing permits have edged up just 0.2% from 1,691,000 units in May 2021, but with single-family permits dropping 7.9% over the past 12 months from 1,138,000 units one year ago.

  • Industrial Production: Manufacturing production growth stalled in May, with output edging down 0.1% for the month, following three months of solid gains. Nondurable goods production inched up 0.1% in May, but output from durable goods firms declined 0.2%. Overall, manufacturing production has risen 4.8% year-over-year, with 4.5% growth relative to February 2020’s pre-pandemic pace. The index for manufacturing production in May was just shy of April’s reading, which was the best reading since July 2008. In addition, manufacturing capacity utilization slipped from 79.2% in April, the highest since April 2007, to 79.1%. The manufacturing sector has been quite resilient across the past year in the face of numerous challenges, including supply chain bottlenecks, workforce shortages, soaring production costs and COVID-19. The year-over-year data continue to reflect that strength. Yet, there are signs of cooling in the economy, and industrial production data mirror similar weaknesses in housing and retail sales data for May (see other blurbs in this report). The underlying manufacturing data provided mixed results. The sectors with the largest production increases in May included petroleum and coal products (up 2.5%), nonmetallic mineral products (up 1.8%), furniture and related products (up 1.2%), miscellaneous durable goods (up 1.0%), apparel and leather products (up 0.9%), computer and electronic products (up 0.9%), primary metals (up 0.8%) and motor vehicles and parts (up 0.7%). In contrast, notable declines in production in May occurred for wood products (down 2.6%), machinery (down 2.1%), electrical equipment, appliances and components (down 1.8%), fabricated metal products (down 0.8%) and food, beverage and tobacco products (down 0.6%). All but four of the major manufacturing sectors have rebounded to exceed their pre-pandemic paces of production. The biggest increases in output in the sector since February 2020 were in the following sectors: aerospace and miscellaneous transportation equipment (up 19.0%), miscellaneous durable goods (up 11.4%), computer and electronic products (up 10.4%), chemicals (up 8.5%) and machinery (up 5.2%), among others. At the other end of the spectrum, other manufacturing (down 11.4%), textiles and product mills (down 3.8%), paper (down 2.3%) and printing and support (down 1.9%) remain below pre-pandemic levels. Meanwhile, total industrial production rose 0.2% in May, slowing from the 1.4% gain in April but expanding for the fifth consecutive month. The index for industrial production hit a new high. Despite reduced activity for manufacturing, production for mining and utilities increased in May, up 1.3% and 1.0%, respectively. On a year-over-year basis, industrial production has increased 5.8%, and over the past 12 months, mining and utilities output rose 9.0% and 8.4%, respectively. Total capacity utilization edged up from 78.9% to 79.0%, the best reading since December 2018.

  • NAHB Housing Market Index: The Housing Market Index declined from 69 in May to 67 in June, a two-year low, according to the National Association of Home Builders and Wells Fargo. The index for current single-family homes edged down from 78 to 77, and the index for the traffic of potential buyers dropped from 53 to 48, the first sub-50 reading since July 2019. Readings above 50 are consistent with more builders being positive than negative in their market assessments, and vice versa. At the same time, the index for expected single-family sales decreased from 63 to 61. These data suggest that the housing market is cooling notably, with higher mortgage rates and affordability being top of mind for builders and potential homebuyers. Sales growth remains positive, but as the traffic measure above suggests, buyers have been spooked by still-elevated home prices and higher borrowing costs. Beyond those challenges, builders also continue to cite worker shortages and low inventories as concerns.

  • NAM Manufacturers’ Outlook Survey: In the latest survey for the second quarter of 2022, 82.6% of respondents felt either somewhat or very positive about their company outlook, down from 88.8% in the first quarter. It was the weakest reading since the fourth quarter of 2020 but remained solid overall. Indeed, it was the sixth consecutive quarter with the business outlook exceeding 80%. Small manufacturers (those with fewer than 50 employees) remained less upbeat in their outlook, with 72.5% positive, than their medium (50 to 499 employees) and large (500 or more employees) manufacturing counterparts, which were 85.5% and 84.8% positive, respectively. In addition, 59.3% of manufacturing leaders believed inflationary pressures would make a recession more likely in the next 12 months. Respondents were asked if they believe the Federal Reserve could avert a recession in 2022 or 2023. More than 52% felt that the Fed could not prevent a recession over that time—not achieving the “soft landing” that it is seeking—but 36.3% were uncertain. Manufacturers expect full-time employment to rise 2.9% on average over the next 12 months. This was the slowest pace of growth since the first quarter of 2021, pulling back from March’s near-record pace (3.7%). Nonetheless, respondents also anticipate employee wages rising over the next year at 3.8% on average, not far from the 3.9% rate of growth in the prior survey, which was the fastest pace in the survey’s history (which dates to the fourth quarter of 1997). Meanwhile, manufacturers expect raw material costs to rise 6.9%, inching down from 7.1% in the first quarter but remaining highly elevated. This figure has decelerated from the record 7.5% reading recorded one year ago. Manufacturing companies forecast 5.9% growth in prices for their products over the next 12 months, slipping a bit from March’s record inflation rate (6.1%). Along those lines, increased raw material costs topped the list of primary business challenges in the second quarter, cited by 90.1% of respondents. Three-quarters of manufacturers felt inflationary pressures were worse today than six months ago, with 53.7% noting that higher prices were making it harder to compete and remain profitable. For firms that have had to raise prices, the top sources of inflation were increased raw material prices (97.2%), freight and transportation costs (83.9%), wages and salaries (79.5%) and energy costs (55.9%), with 49.4% also citing a shortage of available workers. On the list of primary business challenges, supply chain challenges were not far behind inflation as a top concern, cited by 85.5% of respondents. Once again, those completing the survey were asked when they expect supply chain disruptions to abate. Just 14.6% anticipate these disruptions improving by the end of 2022, with 53.1% expecting some abatement in 2023. As such, more respondents expect supply chain issues to drag on longer than in the previous two surveys. For instance, in the previous survey in March, 40.4% expected supply chain issues would improve in the second half of 2022, with 32.5% predicting some relief from these bottlenecks in the first half of 2023.

  • New York Fed Manufacturing Survey: Manufacturing activity declined for the third time in the past four months in the Empire State survey, but with the composite index improving from -11.6 in May to -1.2 in June. New orders and shipments rebounded, and delivery times narrowed. On the labor market front, hiring accelerated, but the average employee workweek softened somewhat. More importantly, input prices picked up again, remaining highly elevated despite decelerating from April’s record pace. Meanwhile, manufacturers in the region felt less positive in their outlook for the next six months, with the forward-looking composite index decreasing from 18.0 in May to 14.0 in June, the lowest reading since April 2020. Expectations for new orders and shipments slowed slightly in June, but plans for hiring and capital spending improved a bit. On the other hand, respondents predicted the average employee workweek shrinking over the coming months. Anticipated raw material prices accelerated once again, rising at a solid rate but at a pace that remains down from January’s all-time high.

  • NFIB Small Business Survey: The National Federation of Independent Business reported that the Small Business Optimism Index inched down from 93.2 in April to 93.1 in May, the lowest level since April 2020. Supply chain disruptions, workforce shortages and inflation continued to challenge small business owners. Indeed, the net percentage of respondents saying that general business conditions would be better six months from now declined from -50% to -54%, a record low in the 48-year history of the survey. Respondents cited inflation as the top “single most important problem,” followed by difficulties in obtaining enough qualified labor. In May, the net percentage of respondents reporting higher prices today than three months ago rose from 70% to 72%, matching the record in March. At the same time, the net percentage planning a price increase over the next three months inched up from 46% to 47%, remaining very elevated. The labor market remained tight. The percentage of respondents suggesting they had job openings they were unable to fill rose from 47% to 51%, matching the record pace in September. In addition, the percentage of respondents citing few or no qualified applicants for job openings increased from 55% to 61%, just shy of the record 62% in September. The net percentage of respondents planning to increase hiring over the next three months rose from 20% to 26%.

  • Philadelphia Fed Manufacturing Survey: The Philadelphia Federal Reserve Bank’s composite index of general business conditions contracted for the first time since May 2020, dropping from 2.6 in May to -3.3 in June. The headline number was pulled lower by declining new orders, with shipments and the average employee workweek slowing somewhat. At the same time, delivery times—which have been too long—eased in June and hiring strengthened slightly. Raw material costs remained elevated but decelerated for the second straight month from April’s record pace. In fact, the index for prices paid was the weakest growth rate since February 2021. In special questions, 72.1% of respondents said that production was higher in the second quarter than in the first quarter, with 9.3% citing declines. The median capacity utilization rate was 80–90% today versus 70–80% one year ago. At the same time, supply chain and labor supply issues were both constraints on capacity utilization, and higher energy costs were likely to be a constraint over the next three months. Along those lines, the forward-looking composite index dropped from 2.5 in May to -6.8 in June, the first negative reading since December 2008. New orders were seen contracting over the coming months, with weaker growth for shipments, employment and hours worked. As such, these data suggest that manufacturers in the Philly Fed’s district have become more concerned about the economic outlook compared to prior months.

  • Producer Price Index: Producer prices for final demand goods and services rose 0.8% in May, accelerating once again after increasing by 0.4% in April. At the same time, producer prices for final demand goods increased 1.4%, extending the 1.3% growth in April. For the month, energy prices jumped 5.0%, but food costs were flat. On a year-over-year basis, food and energy costs have soared 13.3% and 44.6%, respectively. Excluding food and energy, producer prices for final demand goods increased 0.7% in May, continuing to expand solidly and building on the 1.1% gains in both March and April. Meanwhile, producer prices for final demand services rose 0.4% in May, with transportation and warehousing costs up 2.9% for the month. Over the past 12 months, producer prices for final demand goods and services jumped 10.8%, pulling back for the second straight month from 11.5% year-over-year in March, which was the largest increase on record. At the same time, core producer prices increased 6.8% year-over-year for the second consecutive month, easing from the record 7.1% in March. Manufacturers cite rising raw materials costs as their top challenge, followed closely by supply chain and workforce challenges, with the rapid acceleration in prices in this data over the past year helping to explain why.

  • Retail Sales: Retail sales fell 0.3% in May, declining for the first time since December. Gasoline station spending rose 4.0%, pushed higher by increased prices, with 43.2% growth over the past 12 months. Excluding gasoline station sales, retail spending decreased 0.7%. Meanwhile, sales for motor vehicles and parts dealers fell 3.5% in May. Excluding motor vehicles and parts and gasoline stations, retail sales edged up 0.1% in May. Overall, these data present a mixed picture of consumer spending in the economy, with higher prices for some items (such as food and gasoline) likely curtailing spending in other areas. Note that these data are expressed in nominal terms, reflecting higher prices as well as increased volume. At the same time, it is important to note that retail spending has soared 8.1% year-over-year, consistent with the reopening of the economy and with pent-up demand over that time. The real issue is whether that strength will continue moving forward, or if Americans will continue to be spooked by inflation and an uncertain economic outlook. For its part, consumer sentiment fell to a record low in preliminary data, but it is not always the best predictor of actual spending patterns. Looking at the underlying data, the largest increases in retail spending in May in addition to gasoline station sales occurred for food and beverage stores (up 1.2%) and food services and drinking places (up 0.7%). At the same time, in addition to motor vehicles and parts dealers, sales fell for electronics and appliance stores (down 1.3%), miscellaneous store retailers (down 1.1%), nonstore retailers (down 1.0%), furniture and home furnishings stores (down 0.9%) and health and personal care stores (down 0.2%).

  • State Employment Report: Texas created the most net new manufacturing jobs in May, adding 6,200 workers. Other states with notable employment growth for the month included Florida (up 4,300), California (up 3,700), North Carolina (up 3,700), Indiana (up 2,400) and South Carolina (up 2,200). Twenty-three states have notched increased manufacturing employment since February 2020, up from 20 in April. States with the largest gains post-pandemic included Florida (up 21,100), Utah (up 12,100), Arizona (up 8,400), Indiana (up 8,200) and Texas (up 5,700). In May, the U.S. unemployment rate remained at 3.6%, and rates fell in 16 states. At 1.9%, Nebraska had the lowest unemployment rates nationally, followed closely by Minnesota (2.0%), Utah (2.0%), New Hampshire (2.1%) and Indiana (2.2%). At the other end of the spectrum, the District of Columbia had the highest unemployment rate in the country at 5.7%. Other states with elevated rates included New Mexico (5.1%), Nevada (4.9%), Alaska (4.7%), Pennsylvania (4.6%) and Illinois (4.6%).

  • Weekly Initial Unemployment Claims: The week ending June 11 saw 229,000 initial unemployment claims, down from 232,000 for the week ending June 4. These data have gradually trended higher since reaching 166,000 claims for the week ending March 19, which was the second-lowest reading in the history of the series and the lowest since Nov. 30, 1968. Even with initial claims accelerating somewhat over the past three months, the data continue to reflect progress over the past year. At the same time, the week ending June 4 saw 1,312,000 continuing claims, up from 1,309,000 for the week ending May 28. It was the second straight week with a slight uptick but remains near the lowest level since the week ending Dec. 27, 1969.

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