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A quarterly economic outlook prepared by Steve Crane of C3 Statistical Solutions and provided by the National Fluid Power Association

as a service to its
membership. The content should not be viewed as representing an official position of the Association.
Fourth Quarter 2014

Quarterly Economic Conditions Report


General Commentary
The big picture story for the US economy has been very positive As it turns out, now would be an opportune time for a modest
of late. Perhaps the strongest evidence comes from two tradition- spurt in compensation. Bigger paychecks, coupled with the sav-
ally important economic indicators. These are real GDP growth ings from tumbling energy prices, will provide consumers with the
and the standard labor market data. Both have turned in very wherewithal to boost spending. More drive from consumption is
strong performances. going to be important because investment spending will be tem-
pered by several factors. These include those same plunging
GDP growth has been in excess of 4.0 percent in three of the last energy prices which dampen exploration/drilling efforts and the
five quarters, and in excess of 3 percent for four of five quarters. problems present in selected important industrial sectors.
The most recent reading of 5.0 percent for the third quarter of 2014
was a real attention getter. Making this all the more impressive was All in all, 2015 should be a good year for the economy. Conditions
the fact that inventory adjustment was only a modest factor. It was finally seem to be evolving toward what might be considered nor-
legitimate domestic final demand that was driving GDP growth. mal for the current stage of the business cycle. Of course, the ele-
phant in the room as far as this scenario goes is the Federal
Meanwhile, the labor market has shown dramatic improvement. Reserve. Sometime around mid-year the Fed will begin active
During December 2014, a total of 252 thousand new jobs were steps toward draining liquidity from the financial sector. This will
created. For all of 2014 the monthly average was 246 thousand net be a delicate operation. Done right, Fed policy will help nurture
new jobsquite a change from the 194 thousand monthly aver- this evolving expansion. Mistakes regarding timing and magni-
age for 2013. In addition, by December the unemployment rate tude of monetary policy, however, could derail the expansion.
had fallen to 5.6 percent, a level some might have called full
employment back in 2007. All of this sets the stage for a long
needed improvement in labor compensation.

U.S. Leading Indicator*


110
Actual Index Values (2004 = 100)
104.9 105.5
105 103.6 103.6 104.3
102.5
100.9 101.2 101.8
99.2 99.2 99.6 100.0
100 98.2 98.3
96.0 96.5 97.2
96.1
95

90

85

80

75
May 13 Jun 13 Jul 13 Aug 13 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14
(*See page 2 for commentary.)

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U.S. Leading Indicator: (cover graph)
What it is: This is an index combining 10 series chosen to anticipate the future direction of the economy. It provides a better signal than
each separate series. Rising trends indicate growth e next 6-9 months; falling trends suggest stagnation or possible recession.
l After pausing in August the Leading Indicator recorded three consecutive strong gains.
l November's advance completed a string of three straight moves of 0.5 percent or more.
l Further, the strength has been widespread throughout; the majority of components signaled positive during all three months.
l All of this clearly supports a scenario of improving economic performance.

Gross Domestic Product (GDP)


What it is: The dollar value of all final goods and services produced
5
4.5 4.6 5.0
4
3.5
in the economy. It is measured in real terms, using year 2000 chain-
3.0 2.9 2.9
weighted dollars, so the data have been adjusted to remove the
3 2.7 2.7 2.8 2.8
effects of inflation. GDP is the broadest summary measure of eco-
2 1.8 nomic activity.
l The final estimate of third quarter 2014 real GDP growth came in
1
at a blistering 5.0 percent.
0 l This eye-opening figure seems legitimate; real final sales of
domestic product grew at the same rate.
-1 Annualized Growth Rate = Percent l Much of the acceleration came from stronger personal consump-
change that would occur if the
-2 change from the previous quarter
tion spending and federal government spending.
-2.1 was sustained for a full year. l Many of the investment-related components turned in weaker
-3 performances.
Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16

80 Current Index Number. Above 50 implies Manufacturing is expanding.


Purchasing Managers Index (PMI)
What it is: This is an index compiled by the Institute for Supply
Below 50 implies manufacturing is contracting.
70
Management from the responses to a monthly survey of its mem-
60 56.3 56.0 56.6 57.0 56.5 57.1 59.0 56.6 59.0 58.7 55.5 bers. Participants are asked to indicate whether certain industry
53.2 53.7 54.9 55.4 55.3
51.3
50 characteristics are getting better, staying the same, or getting worse.
The index is a composite of the responses regarding New Orders,
40 Production, Supplier Deliveries, Inventories, and Employment. It is
designed to reflect conditions in Manufacturing.
30
l The PMI declined during both October and November.
20 l Despite this, the PMI continues to signal expansion in the manu-
facturing sector.
l November marked the 19th consecutive month with a reading
10

0 above the neutral benchmark level of 50.0.


Aug 13 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov 14 Dec 14 l Both the new orders and the production components declined
during November, while the employment component rose.

6
Prime Rate
Average Values for the Quarter

5 What it is: At one time, it was the rate banks charged their best cus-
4.21 tomers on short-term loans. Now, it is a short-term rate set by indi-
4 3.92 vidual banks for use as a benchmark when making business and
3.46
3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 personal loans. It tends to reflect monetary policy moves by the
3 Federal Reserve Bank.
l The timing of the Fed's short-term interest rate policy change is
2 very much in play.
l The Fed says it will be patient, so an increase is not imminent.
1 l Fairly regular quarter point increases can be expected once the
first move is made.
0 l That move most likely comes at the June policy meeting.
Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16

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2
6 Average Values for the Quarter Long Term Interest Rates
What it is: This is the constant maturity rate for 10-year U.S. gov-
5 ernment bonds. It is interpolated by the U.S. Treasury from the daily
yield curve using composites of quotes obtained by the Federal
4 Reserve Bank of New York.
l There was only modest volatility in the monthly average figures
3 2.8
2.7 2.7 2.6 2.5 2.5 2.6 reported during the fourth quarter.
l On a higher frequency basis this benchmark was fairly stable during
2.3 2.2 2.3
2.0 2.1
1.9
2 1.7 November, and then showed a bit more volatility during most of
December.
l A notable decline began around Christmas and continued into the
1

new year.
l The interest rate fell from about 2.3 percent in early December to just
0
Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16
below 1.8 percent by mid-January.

U.S. Total Industrial Production


10
The value is the actual index value (2007=100).
Growth from Year-Ago = Percent Change from Year-Ago Values.

What it is: This is an index of total goods production by the nation's


9
The quarterly figures are averages of the three monthly values for
8 each quarter.

7 factories, mines and utilities. Because it is reported monthly, it is often


6 used as an alternative to GDP, to provide an early indication of the
5 4.7 4.8
5.1
4.6 direction of the overall economy.
4.4
l A strong November was sandwiched between essentially stable
4.2
3.9
4 3.4 3.5
3.2 3.0 3.3
3 2.5 2.7 readings for October and December.
2 l There is little reason to be concerned over the 0.1 decline in
1 December's overall production activity.
0 l Most of it traced to warm weather-related declines in utility output.
-1 l Excluding utilities, overall production was up 0.7 percent; more nar-
-2 rowly manufacturing rose 0.3 percent.
Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16

Industrial Production: Germany


What it is: This is an index of total goods production. It includes
5
Based on the index,
whose value has a base
2010 =100. Data are 4.2
4 Growth from Year-Ago = goods produced in establishments engaged in mining (including oil
3.5
Percent Change from 3.2
3 Year-Ago Values. The 2.8 extraction), manufacturing, and the production of electricity, gas, and
quarterly figures are
averages of the three
2.4 water. Because it is reported monthly, it is often used as an alterna-
2 monthly values for each 1.8
tive to GDP to provide an early indication of the direction of the over-
quarter. 1.4
1
1.0 all economy. Data are from OECD. They are seasonally adjusted.
0.4 l There were modest gains in German industrial production during
0
September and October.
l This was followed by a minimal 0.1 percent slip in November.
-0.2 -0.2 -0.2
-1
l Almost all of November's weakness was concentrated in the energy
-2
-2.0 sector.
-3
-2.4 l Manufacturing production was up 0.3 percent.
Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16

Industrial Production: Japan


What it is: This is an index of total goods production. It includes goods
8
7
Based on the index, whose 7.8
value has a base 2010=100.
6 Data are Growth from Year-Ago produced in establishments engaged in mining (including oil extraction),
5.4
5
= Percent Change from
Year-Ago Values. The manufacturing, and the production of electricity, gas, and water.
4
quarterly figures are averages
of the three
Because it is reported monthly, it is often used as an alternative to GDP
3 monthly values for each
2.6 to provide an early indication of the direction of the overall economy.
quarter. 2.4
2 1.9 1.6 1.8 Data are from OECD. They are seasonally adjusted.
1
0.3 l Japanese production picked up a bit this fall; there were several
0
consecutive months of modest gains.
-1 l But then output slipped 0.5 percent during November.
l That sales tax increase last April continues to cast a pall on the
-2 -1.2 -1.4
-3 -2.9 Japanese economy.
l Japan's economic outlook depends considerably on what policy
-4 -3.8
-5
-6
decisions are made regarding the planned next installment of the
-7
-6.0 -6.3 sales tax increase.
Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16

3
1.0 Housing Starts
What it is: This is the total number of single-dwelling structures (includ-
Seasonally Adjusted Annualized Rate. The quarterly figures are averages
of the three monthly values for each quarter. (Millions of units) .87
.85
.83
0.8 .78 ing condos and town houses) that were started. It is an estimate of the
.73
.69
annual total derived from the seasonally adjusted number of actual
.66
.63 .63
.65 starts reported for a particular month.
.60 .60 .60 .60
0.6
l The housing sector just can't seem to get rolling.
l After a nice 8.0 percent gain in October single-family starts fell
0.4 back 5.4 percent in November.
l New permits also slipped after two consecutive months of
0.2 advance.
l Much of November's weakness was found in the south region.

0.0
Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16

Construction Machinery Manufacturing, New Orders


What it is: This is the percentage change from year-ago values for the
40
Values are Millions of 1982 dollars. Percent Change
from Year-Ago in 12-month moving total for
NAICS Industry 33C. The quarterly figures are annual moving total of the volume of new orders for goods from NAICS
30 averages of the three monthly values for each
quarter. Industry 33C.
21.8 l The construction machinery market began weakening during the
20 17.4 17.9 second quarter of 2014.
l This continued and intensified during the third quarter.
11.6
l Orders declined a bit over 21 percent between March and
10.7
10 7.7 6.9
October.
l November's modest 1.9 percent gain paled by comparison.
2.1 2.0 1.2
0 -0.1
-2.4
-4.5
-5.8
-10 Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16

15 Metal Working Machinery New Orders


What it is: This is the percentage change from year-ago values for
Values are Millions of 2003 dollars.
14.5 Percent Change from Year-Ago in
13.1 12-month moving total for NIACS

12
Industry 33I. The quarterly figures
are averages of the three monthly
the annual moving total of the volume of new orders for goods
11.4
11.0 values for each quarter. from NAICS Industry 33I.
l Metal working orders finished the third quarter with an 8.5 percent
10.0

9 8.7 drop; this was promptly reversed in October.


7.4 7.1 6.7 l November saw another 1.0 percent advance.
6 l Volume is near record levels and there are reports of growing back-

4.0
logs.
l The effects of an improving manufacturing sector are easy to see in
3
1.7 1.9 2.0 these data.
1.5 1.4

0
Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16

20

Farm Machinery & Equipment Shipments


15 16.6

What it is: This is the percentage change from year-ago values for the
10
5.6
5 3.9 3.2
0.3 annual moving total of the volume of products shipped by NAICS
0
Industry 33A.
-5
-5.1 l The last Market Outlook described farm machinery market condi-
-10 -9.7 Values are Millions of tions as turning from bad to worse.
l Since that time the market has continued to implode.
-15 1982 dollars. Percent
Change from Year-Ago
-20 -17.3
l After a brief uptick in September, shipments dropped 7.8 percent
in 12 month moving
total for NAICS industry -20.8
-21.6 -21.4
-25 33A. The quarterly
during October and another 8.5 percent in November.
figures are averages of
-29.8 -29.4
-30 l Shipment volume has fallen to the lowest levels in nearly 20 years.
the three monthly values
for each quarter. -32.4
-35
Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16