Federal Reserve Sets Principles for its Exit Strategy

The Federal Open Market Committee (FOMC) began laying out its framework for “normalizing” monetary policy moving forward. In particular, the Federal Reserve plans to end it quantitative easing program next month, with its purchases of long-term and mortgage-backed securities coming to a conclusion after its October meeting. Because of these purchases, the Fed’s balance sheet has now soared to over $4.4 trillion. Moving forward, the Fed’s assets will be reduced “in a gradual and predictable manner.” That does not mean, however, that the balance sheet will return to pre-crisis levels, as it is likely to remain at elevated levels for the foreseeable future. Still, the FOMC added the following language to its guidance, perhaps to allay worries from those who suggest that the Fed’s actions have distorted the marketplace:

The Committee intends that the Federal Reserve will, in the longer run, hold no more securities than necessary to implement monetary policy efficiently and effectively, and that it will hold primarily Treasury securities, thereby minimizing the effect of Federal Reserve holdings on the allocation of credit across sectors of the economy.

Moreover, the Fed is expected to start raising short-term interest rates, which have effectively been zero since late 2008, beginning next year. The guessing game is when that will occur, whether in the first half or second half of 2015. The FOMC’s principles state that rates will begin to rise when “economic conditions and the economic outlook warrant” such an action. In the monetary policy statement issued at the conclusion of its September 16-17 meeting, the FOMC said that “it will take a balanced approach consistent with its longer-term goals of maximum employment and inflation of 2 percent” in deciding to normalize rates. Nonetheless, the statement continues to assert that the federal funds rate will be at its current low levels for a “considerable time after the asset purchase program ends.”

The decision to continue stimulating the economy for the foreseeable future despite progress in the economy was supported by most of the FOMC participants. Fed participants remain concerned about “slack” in the economy, particularly in labor markets. Yet, inflation hawks on the FOMC dissented with these actions. Dallas Federal Reserve Bank President Richard W. Fisher felt that the pickup in economic growth warranted less accommodative policies; whereas, Philadelphia Federal Reserve Bank President Charles I. Plosser would objected to the long time horizon for keeping short-term rates at their current levels.

Chad Moutray is the chief economist, National Association of Manufacturers. 

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EPA Comment Extension, GAO Report Underscore Threats to US Energy Costs

Amid pressure from 53 bipartisan U.S Senators and countless other stakeholders, the EPA has agreed to grant a 45-day extension to the pending 111(d) greenhouse gas regulation comment period. It’s a welcome extension and one we’ve long called for, but 45 more days hardly removes the risk inherent to the EPA’s regulatory agenda, which stands to completely redefine the manner in which energy is both generated and consumed in the United States.

Recently, we’ve highlighted  how the onslaught of regulatory hurdles coming out of the EPA, like the pending revision to the ground-level ozone standard and the greenhouse gas (GHG) rule on existing power plants, could have a negative impact for manufacturers and businesses across the country. Indeed, these rules join the ranks of countless other federal regulations which, taken in full, drain $2 trillion each year from our GDP.

News of the extension comes on the heels of a report released yesterday by the Government Accountability Office (GAO) that further underscores the difficulties surrounding the pending greenhouse gas (GHG) rule and its effect on grid reliability across the country. The GAO report states that nearly 13 percent of the coal-fired generating capacity has retired or is on track to retire by 2025 – a major dent in the U.S.’s ability to produce electricity which would be exacerbated considerably upon implementation of EPA’s pending GHG regulations. This reduced capacity will threaten the reliability of our electric grid in some parts of the country and result in higher energy prices for consumers.

EPA’s power plant regulations are far from the only new rule threatening American energy reliability and costs, though.

In late July, the NAM released a study conducted by NERA Economic Consulting that showed revision of the ground-level ozone standard from 75 parts per billion (ppb) to 60 ppb could drive electricity prices drastically upward – raising them on average 23 percent for manufacturers nationwide – and drive another 100 GWs of coal-fired retirements, or more than triple the GAOs projected number.  Coupled with the pending GHG rule, the price increases on the horizon are untenable for American business and manufacturing, and threaten to cede the competitive advantage we’ve witnessed at the hand of the domestic energy boom to overseas competitors.

Meanwhile, countries like China and India account for nearly 20% of all global GHG emissions, and continue to emit drastically more every year while U.S. emissions remain flat or decline. To take unilateral action now – while the world’s largest sources of emissions continue unabated – threatens to cripple our economy without addressing the issue at hand.

We’re glad that the EPA has listened to the NAM and others, like the Partnership for a Better Energy Future, and allowed more time to hear from stakeholders as they advance their regulation of existing power plants. We hope, though, that this extra time is well spent and enables the EPA to realize the importance of a balanced and cost-effective regulatory process.

Without a balanced approach, the EPA’s slate of milestone air regulations – from the carbon power plant rules to new ozone standards – could mean that significant economic headwinds are on the horizon.

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Consumer Prices Fell 0.2 Percent in August on Reduced Energy Costs

The Bureau of Labor Statistics said that consumer prices fell 0.2 percent in August, the first monthly decline since April 2013. The decrease stemmed largely from reduced energy costs, which were off 2.6 percent in August. Gasoline prices decreased 4.1 percent for the month. Indeed, we have seen the average price of regular gasoline decline from $3.47 a gallon during the week of July 28 to $3.40 a gallon for the week of August 25, according to the Energy Information Administration. It has fallen further since then, averaging $3.35 per gallon this week.

In contrast, food prices continued to rise, up 0.2 percent, albeit at a slower pace than earlier in the year. Food costs have risen 2.4 percent year-to-date, or 2.7 percent over the past 12 months. As with past months, the largest food price increases in August were for beef and veal, chicken, eggs, fish, ham and seafood. These gains were somewhat offset, however, by decreased monthly costs for fruits and vegetables and beverages.

Meanwhile, when you exclude food and energy items, consumer prices were unchanged, mirroring producer price index data released yesterday. There were higher prices for new motor vehicles and shelter, with reduced costs for apparel, household furnishings and used cars and trucks.

Overall, the consumer price index rose 1.7 percent from August 2013 to August 2014, down from the 2.0 percent pace observed in July. This suggests a slight easing in inflationary pressures, even as it still reflects an acceleration from the 1.1 percent year-over-year rate in February. Similarly, core inflation – which excludes food and energy items – was also up 1.7 percent year-over-year, down from 1.9 percent the month before.

The Federal Open Market Committee (FOMC), which is winding up its meeting today, no doubt welcomes news that pricing pressures have lessened somewhat in August. Core inflation remains below the Federal Reserve’s stated target of 2 percent. Still, the FOMC will closely watch to see how pricing pressures develop in the coming months, particularly as it prepares to start normalizing short-term rates in early 2015.

Chad Moutray is the chief economist, National Association of Manufacturers. 

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Ball Corporation Scores High With Dow Jones Sustainability Index

NAM member Ball Corporation has for the second year in a row been recognized as an industry leader in corporate sustainability by the Dow Jones Sustainability Index (DJSI) and Dow Jones Sustainability Index North America. Ball also took first place in the Container and Packaging Category and remains the only company in its sector to appear on both lists.

“The Dow Jones recognition is important to us and we’re thrilled to be listed again this year,” said John A. Hayes, chairman, president and CEO. He went on to say that sustainability is a “fundamental part” of the company’s vision, and that their high scores highlight their drive to make sustainability efforts an integrated part of Ball. This year marks the 15th anniversary of the DJSI, and each year the index is modified to better reflect trends in corporate sustainability management and to better gauge corporation’s sustainability practices. The index takes a variety of factors in to account, including environmental, economic and social.

Dow Jones is not the only organization to recognize Ball Corporations success in sustainability. In June, Newsweek, in partnership with Corporate Knights Capital and leading sustainability experts, ranked Ball third among the 500 largest U.S. companies on overall environmental performance. Ball also has been listed in the international FTSE4Good index for five consecutive years and is included in the MSCI Global Sustainability Indexes, the STOXX Global ESG Leader Indices and the Euronext Vigeo US 50 index.

Manufacturers are committed to sustainable practices and the NAM is happy to see that its members are being recognized for their efforts. For more information on Ball’s sustainability efforts and an overview of all external assessments, please visit www.ball.com/sustainability.

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Producer Prices Were Unchanged in August

The Bureau of Labor Statistics said that producer prices for final demand goods and services were unchanged in August, continuing the easing in inflationary pressures seen in July. More importantly, producer prices for final demand goods were down 0.3 percent in August, with costs for both food and energy lower for the month. Energy prices fell for the second straight month(down 1.5 percent), consistent with the drop in the price of West Texas intermediate (WTI) crude oil from $106.07 per barrel at the end of July to $98.23 at the end of August. (WTI closed at $92.92 per barrel yesterday, indicating that there will be a further deceleration in this measure in September.)

Meanwhile, food prices decreased 0.5 percent in August. After rising 5.4 percent from December to April, producer prices for final demand food products have eased by 0.8 percent. As such, the cost of food remained 4.5 percent higher in August than at the start of the year. This has largely stemmed from higher prices for meats, eggs, dairy and produce. The largest price declines in August were seen in eggs, fish, oilseeds, pasta products and pork.

Beyond food and energy, core prices for final demand goods were unchanged. Higher monthly costs for footwear, heavy motor trucks, mobile homes, paper industries machinery, pet food and toys were offset by lower prices in computers, household appliances, metal forming machinery, office equipment, passenger cars and women’s apparel.

On an annual basis, producer prices for final demand goods and services have increased 1.8 percent over the past 12 months. This represents a decline from the 2.0 percent observed in May but an acceleration from December’s 1.1 percent pace. Likewise, core inflation – which excludes food and energy costs – for final demand goods and services has increased 1.8 percent year-over-year in August, up from 1.6 percent in July.

Overall, this report suggests that pricing pressures have accelerated from earlier in the year, but inflationary growth has eased slightly over the past couple months. Core inflation remains below the Federal Reserve’s stated threshold of 2 percent. This indicates the inflation remains in-check, at least for now, and the recent deceleration should ease the pressure on the Federal Open Market Committee (FOMC) to expedite its plans to normalize rates. With the FOMC meeting concluding tomorrow, we will get a better sense of its intentions with its latest statement. Of course, the final decision to raise short-term rates will likely hinge on economic data in the months to come.

Chad Moutray is the chief economist, National Association of Manufacturers. 

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House Lawmakers Invest in Manufacturers’ Innovation. Will the Senate Do the Same?

Last evening, the House passed the Revitalize American Manufacturing and Innovation Act (RAMI), a bill championed by Rep. Tom Reed (R-NY) and Rep. Joe Kennedy (D-MA) that has the potential to strengthen the technology leadership position that manufacturers have worked years to establish.

Manufacturers in the United States have always been the world’s leading innovators, as demonstrated by their investments and research and development and prolific patent portfolios. RAMI marks another important investment in a public-private innovation partnership that will help drive manufacturing and facilitate the longevity of our industry’s comeback. The legislation creates a network of innovation centers that brings together business, schools and the government in a joint effort to accelerate the transfer of advanced manufacturing technology and techniques into the commercial sector.

RAMI has been a top legislative priority for the NAM. Our policy teams have tirelessly advocated for the legislation in congressional meetings with key lawmakers. The NAM also designated legislative action on RAMI as a Key Vote. Now that the House has done its part and passed the bill, it is time for the Senate to follow suit.

There is reason to be optimistic. Sen. Sherrod Brown (D-OH) and Roy Blunt (R-MO), the bipartisan sponsors of a Senate version of RAMI, sat down with the NAM’s Member Focus magazine to discuss how their bill would contribute to the manufacturing comeback. “This legislation will particularly help small and medium-sized manufacturers by helping companies gain access to cutting-edge capabilities and equipment and by educating and training students and workers in advanced manufacturing skills,” Blunt told Member Focus.

As NAM President and CEO Jay Timmons wrote to lawmakers in July, “This legislation will accelerate the development of advanced manufacturing technologies and solidify the United States as the best place in the world to innovate.” The NAM will continue its push to advance RAMI until it becomes law.

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Iowa Hosts 4th Stop on NAM’s Leadership Engagement Series

Iowa’s top manufacturing leaders joined the NAM today for a discussion on advancing federal policies that strengthen manufacturing growth and opportunity. The roundtable event in Iowa is part of NAM’s nationwide Leadership Engagement Series focused on uniting the manufacturing community and elevating top manufacturing priorities.

Panelists included CEOs from Vermeer Corporation, Vantec Inc, EFCO Corporation, Kent Corporation, Al-jon Manufactuing LLC and Pella Corporation.  Leaders agreed that manufacturing in America is making a comeback, employing over 12 million workers and contributing over $2 trillion to the U.S. economy annually. However, panelists expressed concern over Washington’s political agenda threatening to hurt manufacturers’ competitiveness—from costly energy regulations and taxes to the potential shut down the Export-Import Bank.

These unfavorable federal policies could have a huge impact on jobs and the economy in Iowa, as manufacturers account for 16.7 percent of the total output in the state, employing 14 percent of the workforce. As the midterm elections quickly approach, the manufacturing community must engage in the political process to make sure the manufacturing comeback continues in the future.

Follow NAM on Twitter (@ShopFloorNAM) for more information on NAM’s Leadership Engagement Series and visit the NAM’s Election Center for more information on how you can get involved. Next stop, New York City on September 24.

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TRIA Needs to be Reauthorized Now

As Congress negotiates the final details of a bill to fund the government ahead of the September 30 deadline, lawmakers should be mindful of another fast-approaching date: December 31, the deadline to renew the Terrorism Risk Insurance Act (TRIA).  It first passed after the 9/11 attacks, when insurers and reinsurers stopped offering coverage for terrorist events, and has played an important role in ensuring the availability and affordability of commercial terrorism insurance for manufacturers. Recently the Senate voted to reauthorize TRIA with overwhelming bipartisan support, and last week the NAM joined over 400 businesses and industry groups in asking House members to do the same.

The NAM has outlined the benefits of TRIA in the past, but it essentially provides a high-level backstop for insurers and reinsurers who offer terrorism coverage and mechanism to recoup any federal outlays stemming from a catastrophic event. In another letter sent to Congress last week, the National Association of Insurance Commissioners noted that it is especially important for workers compensation (WC) because WC statutes require nearly all US employers to cover terrorism.

It is rare to see regulators and industry send letters in support of the same legislation and it indicates the importance of renewing TRIA. The clock is ticking and Congress needs to act.

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NY Fed: Manufacturing Activity Expanded Strongly in September

The Empire State Manufacturing Survey from the New York Federal Reserve Bank reported a strong increase in activity in September, its fastest pace in nearly five years. The composite index of general business conditions rose from 14.7 in August to 27.5 in September, with almost 46 percent of those taking the survey saying that conditions had improved in the month. Other measures were mostly positive, as well, including faster paces for new orders (up from 14.1 to 16.9) and shipments (up from 24.6 to 27.1).

Yet, there were also some challenges, most notably in the labor market. Hiring eased in September, with the index for the number of employees dropping from 13.6 to 3.3. This decline stemmed from an increase in those respondents who said that their employment levels had decreased, up from 5.7 percent in August to 16.3 percent in September. Along those lines, the average employee workweek (down from 8.0 to 3.2) also narrowed.

Pricing pressures continued to be elevated, even as there was a marginal improvement for the month. The index for raw material prices declined slightly, down from 27.3 to 23.9, but that still represents a significant percentage of manufacturers in the Fed district seeing input costs rise. That is expected to continue over the next six months, with nearly 46 percent of respondents anticipating higher prices.

The other forward-looking measures continue to find a mostly optimistic outlook in the New York Fed region. There was a slight pullback in many of the measures assessing the next six months, but manufacturing leaders remain upbeat overall. In fact, 57.1 percent of those completing the survey predict sales increases, or about the same proportion as those anticipating higher shipments. Just over one-quarter expect to add more workers in the coming months, with 29.4 percent planning additional capital expenditures.

Chad Moutray is the chief economist, National Association of Manufacturers. 

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Manufacturing Production Was Softer than Expected in August on Reduced Auto Output

Manufacturing production fell 0.4 percent in August, declining unexpectedly instead of extending the strong gains of July. Much of this decline stemmed from reduced motor vehicle production (down 7.6 percent in August), but this was likely the result of auto makers’ switching over to a new model year and summertime vacations. Despite the decrease for the month, motor vehicle production has risen 8.1 percent over the past 12 months, the largest increase of any of the major sectors. As such, this month’s figure should not be misinterpreted as a weakness, but instead, it is just a pause in an otherwise upward trend for motor vehicle demand and output.  Excluding autos, manufacturing production would have increased 0.1 percent.

Manufacturing production continues to reflect an accelerated pace from the winter months, with the year-over-year pace up from 1.6 percent in January to 4.0 percent in August. Still, this pace was down from 5.2 percent in July. Durable and nondurable goods output has increased 5.6 percent and 2.2 percent year-over-year, respectively. At the same time, manufacturing capacity utilization also eased, down from 77.6 percent in July to 77.2 percent in August.

Nondurable goods production was up 0.2 percent in August, but that was offset by a decline of 0.9 percent for durable goods manufacturers. Computer and electronic products (up 1.3 percent), food, beverage and tobacco products (up 0.4 percent), nonmetallic mineral products (up 0.4 percent), machinery (up 0.3 percent) and chemicals (up 0.3 percent) were examples of sectors with increased output in August.

In contrast, sectors with declining output included apparel and leather products (down 2.3 percent), fabricated metal products (down 1.3 percent), furniture and related products (down 1.0 percent), textile and product mills (down 0.9 percent) and printing and support (down 0.6 percent).

Meanwhile, overall industrial production decreased 0.1 percent, its first decline since the weather-related slowdowns of January. Mining (up 0.5 percent) and utilities (up 1.0 percent) output were both higher. Total capacity utilization edged lower, down from 79.1 percent to 78.8 percent.

In conclusion, manufacturers continue to be upbeat about activity in the second half of this year, but much like the jobs data out a couple weeks ago, the production figures suggest that there was softness in August. Instead of modest gains in output in August as expected, production in the sector declined 0.4 percent, mainly on slower activity in the auto sector. Nonetheless, the outlook remains mostly optimistic, and there were likely retooling issues related to the declines in motor vehicle production.

Still, manufacturers would like to see stronger economic activity moving forward, and for that reason, policymakers should focus on pro-growth initiatives that will allow them to expand and flourish.

Chad Moutray is the chief economist, National Association of Manufacturers. 

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