There were two important reports on the U.S. economy released this morning. First, data from the Federal Reserve Bank of Dallas showed that business activity in the southern region of the country rebounded this month, albeit only slightly. Specifically, the general activity index lifted from -20.8 to -18.3 in June, a welcome improvement but still the 18th negative (contractionary) print in a row. The production index, a key measure of state manufacturing conditions, also firmed in June with a rise from -13.1 to -7.0 but this is still the second consecutive sub-zero reading. Under the hood, capacity utilization, new orders, shipments, and capital expenditures all improved this month but measures of new business growth, wages, hours worked, and total employment deteriorated. One noteworthy comment from a surveyed business manager in Texas this month is that “We are experiencing major demand instability in the United States. Continued management focus on upcoming regulatory changes is keeping us from pursuing new markets (especially internationally) and delaying making long-term investments.” Another manager added that “The Affordable Care Act (ACA) continues a downward push on productivity as it limits our hiring because we can't afford the estimated 60 percent increase in health care premiums that an ACA-compliant policy would cost.” Texas managers were also asked a series of special questions in this month’s survey and the key findings are that 41.2 percent of respondents feel that lower energy prices have decreased customer demand, and that the top three problems believed to be affecting company outlooks at the moment are government regulation, the overall U.S. economy, and energy prices.
Elsewhere, the mid-month (flash) reading on the services sector purchasing managers’ index (PMI) from Markit Economics was 51.3 in June, basically unchanged from May and therefore still near the low-end of the range seen during the current economic recovery. Under the hood, the rate of job creation slowed for the third consecutive month and surveyed service providers reported lower overall confidence in the year-ahead business outlook. When asked why, many respondents cited relatively subdued demand from customers and heightened economic uncertainty. Altogether, the recent services sector deterioration is discouraging because this area of the economy has been largely offsetting the persistent weakness seen in U.S. manufacturing over the past year. Chris Williamson, chief economist at Markit, added that “The survey data indicate that any rebound in the economy from the weak first quarter was largely confined to April, and that growth has since faded again. The June PMIs, which provide the first insight into national business activity in the second quarter, suggest the underlying rate of growth in the economy is only a meager 1 percent.”
Sources: Econoday, Bloomberg, Twitter, ZH, Markit Economics, FRBD, FRBSLPost author: Charles Couch