Economy hitting its stride
Economics in a nutshell: With manufacturing accelerating, there is every good reason to believe that the economy is beginning to hit its stride.
Economy hitting its stride
INDICATOR: May Industrial Production and June Empire State Index
KEY DATA: IP: +0.6%; Manufacturing: +0.6%/Empire State: +0.2 point; Orders: +8 points
IN A NUTSHELL: "With manufacturing accelerating, there is every good reason to believe that the economy is beginning to hit its stride."
WHAT IT MEANS: So much for the winter. Spring is just about gone and summer holds great hope that we will see consistently solid if not strong growth. Why am I so optimistic? The nation’s manufacturing sector is accelerating. Output soared in May the third month out of the last four where production rose robustly. Indeed, so far this quarter, manufacturing production has expanded at a 4.7% annualized pace and that does not assume any increase in June. The winter collapsed activity in January and the sector has made strong progress since. Most of the rise in manufacturing output was in the durable goods segment with vehicles, furniture, aerospace, electrical equipment and appliances as well as computers and electronic products all posting robust gains. In addition, while most nondurable goods manufacturers slowed production, there were big gains in plastics, chemicals and petroleum products. In other words, only nondurable consumer good firms showed weakness. Capacity utilization hit its highest level in over six years, but in a global economy, this measure has relatively modest value.
Supporting the view that manufacturing is booming was the gain in the June Empire State Index, which is produced by the New York Fed. This measure of manufacturing activity rose modestly but there was a sharp increase in new orders. Hiring slowed a bit. While optimism faded a touch, it is still at a solid level.
MARKETS AND FED POLICY IMPLICATIONS: If the Fed is looking for signs that growth is picking up, all it has to do is look at its own data. Manufacturing production is soaring and the improvement in the June New York Fed’s report point to the gains being sustained. Production is rising for big-ticket consumer goods such as furniture and motor vehicles, business equipment and products, such as chemicals and plastics that go into the production of other goods. The likelihood that manufacturing would be growing at an accelerating pace but the economy expanding weakly, is not particularly great. It really looks like second quarter GDP could be up by more than 4%. But it would take strong third and fourth quarter growth rates to put to rest the view that we are in a new world where growth meanders along at a 2% to 2.5% pace. I expect that to happen, but I am in a minority, at least right now. Though investors should love these numbers, the chaos in Iraq and the uncertainty in the energy markets could overshadow everything else.