Monday Economic Report: FOMC Raises Rates, Signals Six More 25-Basis-Point Increases This Year

AICC, through its membership in the Council of Manufacturing Associations, is pleased to present the "Monday Economic Report" from the NATIONAL ASSOCIATION OF MANUFACTURERS (NAM).

By Chad Moutray, Ph.D., CBE –  March 21, 2022

NAM Economic Toplines: 

• The Federal Open Market Committee increasedshort-term interest rates by 25 basis points at the conclusion of its March 15–16 meeting. The federal rate will now range between 25 and 50 basis points, the first change in interest rates since the pandemic began two years ago. The Federal Reserve is also likely to begin reducing the size of its balance sheet by the summer.

• More importantly, the FOMC is likely to continue raising interest rates over the course of this year, especially given inflationary pressures in the economy. In new economic projections, the median federal funds rate expectation would suggest seven rate hikes this year (including the one just announced), assuming each increase was 25 basis points.

• Producer prices for final demand goods and services rose 0.8% in February. At the same time, producer prices for final demand goods soared 2.4% in February, the largest monthly gain on record for a series dating to November 2009. In February, food and energy costs jumped 1.9% and 8.2%, respectively, with 13.8% and 34.6% growth year-over-year.

• Over the past 12 months, producer prices for final demand goods and services soared 10.1% (seasonally adjusted), unchanged from the prior release and remaining the largest increase on record. Core producer prices increased 6.7% year-over-year in February, pulling back for the second straight month from a record 7.1% in December.

• The February data reflect very rapid growth in producer prices. The war in Ukraine will likely make the inflation picture worse moving forward, especially in the upcoming data for March. On the other hand, the slight deceleration in the core inflation rate over the past two months does provide some comfort, even as the current pace remains just shy of all-time records.

• In the latest NAM Manufacturers’ Outlook Survey,88.8% of respondents felt either somewhat or very positive about their company outlook, up from 86.8% in the fourth quarter, though it’s important to note that the survey was conducted Feb. 11–25, which was mostly before the Russian invasion of Ukraine and the resulting crisis and disruption.

• Manufacturers expect full-time employment to rise 3.7% over the next 12 months, just shy of the record in September (3.8%). With that in mind, respondents also anticipate employee wages rising over the next year at 3.9% on average, the fastest pace in the survey’s history. Meanwhile, manufacturers expect raw material costs to rise 7.1%, not far from the 7.5% reading in June of last year. Manufacturing companies forecast 6.1% growth in prices for their products over the next 12 months, a record inflation rate for the survey.

• Supply chain challenges topped the list of primary business challenges in the first quarter, cited by 88.1% of respondents. Other top challenges in the first quarter include increased raw material costs (85.7%), the inability to attract and retain a quality workforce (79.0%), transportation and logistics costs (72.7%) and rising health care and insurance costs (48.6%).

• Just 2.6% anticipate supply chain disruptions to end in the first half of 2022, but 40.4% expect them to improve in the second half of this year. Overall, 72.8% of respondents predict that supply chain disruptions will abate by the end of the first half of 2023.

• Following weaker data in December and January,manufacturing production grew by a solid 1.2% in February, the fastest monthly gain since October. These data speak to the resilience of the sector amid still-solid demand despite numerous challenges.

• Manufacturing capacity utilization jumped to 78.0% in February, the strongest reading since September 2018. Overall, manufacturing production has risen 7.4% year-over-year, with 2.9% growth relative to February 2020’s pre-pandemic pace.

• New residential construction activity rose 6.8% to 1,769,000 units at the annual rate in February, the fastest pace since June 2006. These data are encouraging, especially given the headwinds in the housing market, which has been challenged by rising building costs, higher mortgage rates, affordability issues and difficulties in finding workers.

• Builders remained optimistic about the coming months, with solid growth in single-family activity, but inflation and affordability have pushed the NAHB Housing Market Indexlower over the past few months. Housing permits decreased 1.9% to an annualized 1,859,000 units in February, but the data were consistent with still-healthy growth in housing construction moving forward, speaking to the resilience of the market.

• Retail sales grew just 0.3% in February, slowing from a revised 4.9% increase in January. The January estimate for retail sales growth was originally 3.8%. As such, this provides mixed comfort, with the knowledge that Americans spent more in January than previously thought but with the realization that consumers pulled back on their purchases in February. Indeed, retail spending fell 0.4% in February with motor vehicle and parts and gasoline sales excluded.

• More favorably, retail spending has soared 17.6% year-over-year, or 15.8% with gasoline stations and motor vehicles and parts sales excluded.

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