NAM’s Chad Moutray: Lack of global growth drives down American stock market
The Dow Jones Industrial Average reached an all-time high at 18312.39 on May 19. Since peaking three months ago, the stock market has fallen nearly 10 percent, closing at 16549.75 on August 21, and is poised for more losses today. Much of the decline stemmed from worries about global growth, particularly in China. Indeed, the Caixin Flash China General Manufacturing PMIdeclined from 47.8 in July to 47.1 in August, its lowest level since March 2009. The Chinese manufacturing sector continues to struggle, with its PMI data contracting for the sixth consecutive month and activity down across the board. This mirrors deceleration in other Chinese economic statistics. With that in mind, the Bank of China has devalued the yuan, down 3.1 percent so far this month, and the Shanghai Composite Stock Market Index has plummeted nearly 38 percent since June 12. Financial markets around the world have responded in kind, worried that slowing growth in China will spill over into other markets.
Closer to home, manufacturers in the United States continue to expand, but with slower growth than desired. Reports released last week showed mixed messages on the sector’s overall health. The Markit Flash U.S. Manufacturing PMI decreased from 53.8 to 52.9, the slowest pace of growth since October 2013. New orders and output continued to expand modestly, but export sales contracted for the fourth time this year on the stronger U.S. dollar and weaknesses abroad. The Philadelphia Federal Reserve Bank’s survey of manufacturers also noted export softness. In a special question, 23.0 percent of respondents said that exports had fallen either modestly or substantially over the past year, up from 7.0 percent who said the same thing last year. In contrast, the percent noting higher exports dropped from 38.6 percent to 18.8 percent. The New York Federal Reserve Bank’s Empire State Manufacturing Surveywas even more troubling, with activity contracting at its quickest pace since April 2009, largely on economic anxieties.
On the positive side, the manufacturing leaders who completed the Philadelphia and New York Federal Reserve Bank surveys continued to be cautiously upbeat about the upcoming months, brushing off challenges in the current environment. Signs of growth elsewhere are also encouraging. For instance, many of the indicators coming out of Europe have been promising, particularly in light of worldwide and Greek headwinds. TheMarkit Flash Eurozone Manufacturing PMIremained unchanged in August, but it has trended generally higher since being essentially stagnant in November. Production expanded at its fastest rate since May 2014, with strong growth in Germany boosting the report. Still, even as Europe continues to make slow-but-steady progress, there are indications that the Eurozone has not fully emerged from its problems.Real GDP growth remains far from robust, up 0.3 percent in the second quarter and 1.2 percent higher year-over-year, andindustrial productiondeclined by 0.4 percent in June.
Returning to the U.S. economy, the housing market has been one of the brighter spots of late. Newhousing starts exceeded 1.2 million in July, reaching their fastest pace since October 2007. This suggests that residential construction has gained some steam, improving from softness earlier in the year. The higher figure last month stemmed largely from the 12.8 percent jump in single-family starts activity, reaching the highest level of single-family activity since December 2007. Multifamily starts and new housing permits data, however, both fell sharply, but this was likely temporary. Despite the decline for the month, for instance, housing permits remain 7.5 percent higher than in July 2014. Moreover, the Housing Market Index from the National Association of Home Builders and Wells Fargo found that home builder confidence rose to its highest level since November 2005, with builders mostly upbeat about single-family sales for the next six months. Existing home sales were also robust, increasing for the third straight month and selling at their briskest pace since before the Great Recession in February 2007.
One of the larger debates of the past week was when the Federal Reserve might begin to raise short-term rates. The minutes of the Federal Open Market Committee (FOMC) meeting from July 28–29 seem to indicate that many members were ready to start normalizing rates at theSeptember 16–17 meeting, but this view was not universally shared. Global economic developments since then might impact that decision, with some pundits suggesting that the FOMC might shift its thinking to theDecember 15–16 meeting instead, allowing enough time to assess incoming data. Either way, rates will still likely increase by year’s end, consistent with statement from Chair Janet Yellen. Core inflationremains quite minimal, of course, providing the Federal Reserve some flexibility in terms of when to act.
This week, we will get more information on the state of the manufacturing sector and the U.S. economy. Regional surveys from the Kansas City and Richmond Federal Reserve Banks will highlight manufacturing activity in their districts; whereas, the Census Bureau will release new data on durable goods orders and shipments for July. Sales of durable goods rebounded in June after declines in both April and May, and we will be looking for signs of continued improvement. Meanwhile, the Bureau of Economic Analysis will revise second quarter real GDP growth, which was originally estimated to increase by 2.3 percent. Other highlights for the week include the latest data on consumer confidence and new home sales.
Chad Moutray Chief Economist National Association of Manufacturers
P.S.: If you have not already done so, please take a moment to complete the latest Manufacturers’ Outlook Survey from the National Association of Manufacturers (NAM). This 20-question survey helps us to gauge how manufacturing sentiment has changed since June’s survey. It also includes some special questions on monetary policy, capital spending plans, and proposed overtime and ozone regulations. To complete the survey, click here. Responses are due byFriday, August 28. As always, all responses are anonymous.
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