Here is the summary for this week’s Monday Economic Report:
The European Central Bank (ECB) finally announced its long-awaited quantitative easing program on Thursday. The ECB will purchase 60 million euros in bonds each month until September 2016—totaling at least 1.1 trillion euros overall—in an attempt to stimulate growth. Depending on where the Eurozone economy stands pointing September 2016, the ECB might extend its purchasing beyond that point. The impact on the euro was almost immediate, with the euro exchanging for $1.1206 at Friday’s close, down from $1.3927 on March 17, the high point of 2014. This will complicate manufacturers’ ability to sell goods into Europe, something that was mentioned in the sample comments in the latest Kansas City Federal Reserve Bank’s monthly survey (see below).
The ECB believes that it needs to act to stimulate economic growth in the Eurozone. Real GDP in the Eurozone is expected to grow about one percent in 2015, and deflation has been a top concern. Indeed, the annual inflation rate declined by 0.2 percent in December, a troublesome development. On the positive side, some signs indicate that the European manufacturing sector has started to stabilize. The Markit Flash Eurozone Manufacturing purchasing managers’ index (PMI) increased to its highest level since July. It was up from 50.6 in December to 51.0 in January on stronger new orders, output and employment growth. Investors were also more optimistic, brushing off anxieties that have plagued European financial markets of late.
The other manufacturing surveys released last week were mixed. In China, for instance, the HSBC Flash Manufacturing PMI found that new orders and output grew once again in January after contracting in December. Yet, the headline PMI figure has now contracted for two straight months, and real GDP grew 7.3 percent year-over-year in the fourth quarter, decelerating from 7.7 percent growth in the fourth quarter of 2013.
Likewise, surveys of manufacturers in the United States reflected continued expansion in the new year, but at a somewhat softer pace of growth. The Markit Flash U.S. Manufacturing PMI declined from 53.9 to 53.7, its lowest reading in 12 months. Still, these figures also show demand and production expanding at a relatively strong rate, even with some easing in this month’s responses. Similarly, manufacturers in the Kansas City Fed’s district are mostly optimistic in their outlook for the next six months for sales, production, shipments, hiring and capital spending, but they remain uncertain about exports, which are threatened by sluggish economic growth overseas and the strong dollar.
Meanwhile, housing starts rebounded in December to 1,089,000 annualized units. New residential construction units started averaged just over 1,050,000 in the second half of 2014, which was a nice improvement from the roughly 955,000 observed in the first half of the year. Single-family activity provided the encouraging news in this data, rising to 728,000 units in December, the fastest pace since 2008. As such, we have seen slow-but-steady progress in the housing market, and I continue to expect 1.1 million housing starts in the coming months. For their part, home builders remain confident about future activity. In contrast to single-family units, multi-family starts and permits—each of which were lower in December—have grown more minimally and with a lot more volatility. Existing home sales were up in December, but remain below their October peak. On the positive side, sales of existing homes were up 3.5 percent year-over-year, and median prices were at their highest level since 2007.
Two of the larger headlines this week will be the Federal Open Market Committee policy statement on Wednesday and our first read on fourth quarter real GDP on Friday. Beyond those headlines, we will also get a number of reports on the health of the manufacturing sector, such as the Dallas Federal Reserve Bank survey on Monday and the Richmond Fed survey and preliminary durable goods orders numbers on Tuesday. Other highlights include the latest figures on consumer confidence, employment costs and state employment.
Chad Moutray is the chief economist, National Association of Manufacturers.
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