Monday Economic Report – July 21, 2014

This is the summary for this week’s Monday Economic Report: 

With more and more data starting to trickle in for June, we are seeing some definite trends taking shape. One positive is that the manufacturing sector continues to expand, suggesting that the rebound from winter-related softness earlier in the year has mostly continued. Manufacturers also tend to be mostly upbeat about the second half of this year—a sign of optimism that is encouraging. Yet, there were also indicators suggesting that the pace of activity slowed somewhat in June, most notably in the industrial production, housing starts and retail sales numbers that were released last week.

Indeed, manufacturing output in June increased at its slowest rate since January, with relatively mixed news overall. Nondurable goods production edged higher, up 0.1 percent, but output from nondurable goods manufacturers declined by 0.3 percent. Monthly declines in production in such sectors as apparel, machinery and motor vehicles nearly offset output gains for aircraft, furniture, metals and plastics, and rubber products. Longer-term trends remain reassuring, even if they still leave room for improvement. Over the past 12 months, manufacturing production has increased 3.5 percent, a decent figure overall and progress from the much slower pace of just 1.5 percent in January. Durable goods output has risen by a healthy 5.5 percent year-over-year, whereas nondurable goods activity was a less robust 1.5 percent in the past year.

Housing starts in June were also weaker than expected, down from an annualized 985,000 in May to 893,000 in June. Starts were lower for both single-family and multifamily units. There have been suggestions that rain might have attributed to the weaker construction activity, with storms preventing some units from breaking ground. Yet, single-family starts have struggled for some time, down 4.3 percent over the past 12 months. On the positive side, single-family housing permits rose for the second straight month, up from 615,000 to 631,000 at the annual rate for the month. This could suggest stronger growth in the housing market in the coming months for single-family homes. Along those lines, homebuilder confidence increased to its highest point since January, with better expectations for sales over the next six months.

Meanwhile, surveys out last week reported multiyear highs in the pace of manufacturing activity. New orders and shipments were up sharply in surveys from the New York and Philadelphia Federal Reserve Banks. Hiring also picked up in both regions, and raw material costs remained elevated relative to prior months. More importantly, manufacturers in each survey said they were optimistic that sales, output, employment and capital spending would increase over the next six months. In fact, the Philadelphia Federal Reserve report found that 56.1 percent of its respondents anticipated higher new orders, with 60.4 percent predicting increased shipment levels. In addition, the Manufacturers Alliance for Productivity and Innovation (MAPI) reported that the business outlook rose for the sixth consecutive quarter on accelerated sales domestically and abroad. Shipments and capital spending were also anticipated to grow strongly moving forward.

On the consumer front, Americans continue to be cautious in their purchase decisions. Retail spending increased 0.2 percent in June. This was the slowest pace since January, and it was below expectations. Reduced auto sales contributed to this lower figure. Despite the slower activity levels in June, the year-over-year pace continues to grow at decent levels, up 4.3 percent over the past 12 months. Preliminary consumer confidence data also indicate some nagging anxieties in the economy, according to the University of Michigan and Thomson Reuters. The Consumer Sentiment Index unexpectedly decreased from 82.5 in June to 81.3 in July, and consumer attitudes have not changed much since December. Much of July’s decrease stemmed from weaker expectations about the future economy. However, higher gasoline prices might have also been a factor. Indeed, the producer price index increased in June largely on higher energy costs.

This week, we will get additional insights on the health of manufacturing worldwide. Markit will release preliminary purchasing managers’ index reports for China, Japan, the Eurozone and the United States for July. We will be looking for continued progress in Asia and the United States and we hope a reversing of the easing in activity in Europe. The Kansas City and Richmond Federal Reserve Banks will also report on their latest manufacturing surveys. Beyond these releases, the Bureau of Economic Analysis will publish real GDP data by industry for the first quarter; given the 2.9 percent drop in real GDP during the first quarter, we would anticipate minimal contributions to growth from the manufacturing sector. Other highlights include the latest data on consumer prices, durable goods orders and existing and new home sales.

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

manufacturing production growth - jul2014

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Setting the Record Straight

There’s no doubt that the U.S. tax code— which includes the developed world’s highest corporate tax rate, outdated international tax rules and a host of temporary provisions—is a drag on economic growth and competitiveness. And while Manufacturers continue to push for comprehensive tax reform, NAM members recognize that, until that happens, we have to operate and compete under the current system. Unfortunately, that reality is being largely ignored in the current rhetoric flying around Washington about corporate inversions.

In today’s Wall Street Journal Miles White, the Chairman and CEO of Abbott Laboratories, sets the record straight on the realities of the U.S. tax system in his oped,  Ignoring the Facts on Corporate Inversions, and notes that legislation to block inversions would simply make a bad system worse. We agree strongly with Mr. White that piecemeal proposals to change the tax code will do more harm than good and the real solution is one Manufacturers have been pushing for all along, “fact-based, thoughtful, comprehensive [tax] reform.”

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Investment Is Critical to an Ambitious and Successful T-TIP

As the United States and EU meet this week in Brussels to continue the Transatlantic Trade and Partnership (T-TIP) talks, U.S. and EU officials are not engaged in any formal discussion on the biggest economic driver of the transatlantic partnership – cross-border investment. Cross-border investment tops $4 trillion between the United States and the EU, making it the largest investment partnership in the world.

The EU had asked to put T-TIP investment talks on hold while it reviews the input it had requested and received from its investment public consultation, which closed on July 13.

On July 7, the NAM submitted detailed comments regarding the investment provisions in the T-TIP, Investment emphasizing that:

  • Investment is a critical driver of economic growth and jobs in both the United States and EU, and in third countries around the world.
  • The United States and EU have an important opportunity to set high standards for the protection of property and investment through the T-TIP that reflect our own core principles and help influence investment instruments being negotiated around the world.
  •  The investment treaties and experience of EU member states and the United States has been highly positive, reinforcing basic rule of law standards with our international partners.
  • While a lot of critiques have been made, the facts are very clear. U.S. and EU investment instruments are not a threat to good  government; in fact, they promote it and promote growth and jobs as well.

The United States and EU members states have long negotiated provisions recognizing core principles of their own legal systems – the protection of private property, fairness, non-discrimination and an independent and neutral venue for the resolution of disputes. The NAM and many organizations representing businesses that create millions of jobs on both sides of the Atlantic are strongly urging the EU and the United States to include high-standard investment access and protections, backed up by investor-state dispute settlement, in the final T-TIP.

While the U.S.-EU investment relationship is vibrant, that relationship will benefit from common rules and disciplines, similar to the way that the extensive trade in goods and services will also benefit from trade-agreement provisions. Including a strong investment chapter will create greater confidence and opportunities between the United States and EU, and also set an important example of the type of standards that the EU and its stakeholders hope to achieve with major economies around the world.

As negotiators begin planning the next T-TIP round, the NAM is expecting investment to be back on the table so that the United States and EU can realize the ambitious T-TIP that they began just a year ago.

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University of Michigan: Consumer Confidence Slipped Somewhat in July

The University of Michigan and Thomson Reuters said that preliminary data on consumer confidence slipped somewhat in July. The Consumer Sentiment Index unexpectedly decreased from 82.5 in June to 81.3 in July. The consensus expectation had been for a slight gain. Over the course of the last eight months (December to July), the index has averaged 81.8. In essence, after consumer attitudes recovered from the government shutdown in December, they have not really moved that much. The April reading of 84.1 is the one outlier in that time frame.

Looking specifically at the July data, it is clear that the drop in consumer sentiment in the month stemmed from weaker expectations about the future economy. The forward-looking component has declined from 74.7 in April to 71.1 in July. In contrast, views about the current economic environment were more mixed, with an improvement in July (up from 96.6 to 97.1) but with slightly weaker perceptions than seen in April (98.7).

This nuanced perception could be influenced by the competing news about the health of the U.S. economy, with disappointing data on real GDP growth in the first quarter perhaps outweighing better labor market headlines of late. Either way, it suggests that consumers continue to remain cautious.

We will get final data on July consumer sentiment from the University of Michigan on August 1. The Conference Board will also release its June survey data on consumer confidence on July 29.

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

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Remembering David Olson

David Olson, President of the Minnesota Chamber of Commerce

David Olson, President of the Minnesota Chamber of Commerce

Manufacturers lost a great leader. Minnesota Chamber of Commerce President David Olson will be missed greatly by manufacturers, his fellow NAM Board Members and many more across the country.

David left us after a life not long enough, but long enough for joy and love and laughter and good times – and long enough to leave a lasting footprint on the business community, his state and his country.

He inspired all of us and will be remembered by the countless individuals whose lives he made better. David always had colorful stories to tell, laughs to laugh, words to write, legislators to buttonhole, lobbies to walk and battles to fight. He passionately led the business community in Minnesota for decades with great optimism and strong faith. As a champion for economic growth, he provided pragmatic solutions that transcended party politics.

What most of us remember best is not specifically what David did or said, but how he did it – as a unique, wonderful, patriotic and highly intelligent human being. He connected with each of us in some unusual way to get a job done. Through his words and actions, he made us proud and proud to know him.

He was the epitome of hardworking Minnesotan values and a leader among his peers. I was fortunate enough to count him as my friend.

In an industry that seems to grow more homogenized every day, David had very much his own voice. His lifetime of dedication serves as a monument to the exemplary man he was.  His integrity and hard work will encourage those who knew him and will continue to benefit those who make Minnesota their home for years to come.  Among the best things David has left behind is his shining example.

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NLRB Loses in the Fifth Circuit, But the Controversy Continues

For reasons not entirely clear to legal experts, the NLRB opted to not appeal a Fifth Circuit ruling in D.R. Horton, Inc. v. NLRB reversing their stance that a company cannot require its employees to consent to mandatory arbitration and class action waivers.  The Fifth Circuit is not alone; other federal and state courts have also disfavored the NLRB’s viewpoint.  Despite this trend and although the NLRB allowed the deadline to pass without requesting certiorari, attorneys involved in the controversial issue expect the that the agency will not change its position.

When the case entered federal court, the NAM filed an amicus brief. on June 6, 2012 arguing that prohibiting mandatory arbitration and class action waivers upon employment will increase costs for companies and result in unnecessary litigation.  Furthermore, the NAM challenged the NLRB’s authority to regulate individual contracts dealing with rights not covered by the National Labor Relations Act.  The court agreed and determined that the NLRB’s decision went beyond its statutory authority.

As the landscape now stands, companies will likely prevail in federal court on the issue, but will still battle the NLRB at the agency level.  It is possible that the NLRB refused to appeal the case to the high court because it feared an adverse ruling.  If this clash between agency and federal court continues, the Supreme Court will likely have to review the issue.  The NAM will continue to weigh in on this issue and take whatever steps appropriate to prohibit the NLRB from stepping outside its statutory authority.

Ryan Sims is a Law Clerk for the Manufacturing Center for Legal Action

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House Votes to Ease Regulation of Non-Banks Under Dodd-Frank

The  Dodd-Frank financial reform law enacted in 2010 in response to the crippling financial crisis imposed new regulations on financial markets and companies. Unfortunately, the law’s vast reach sweeps manufacturers into areas of new oversight and regulation, even though manufacturers had nothing to do with the financial crisis.

We have written many times before about the negative impact of Dodd-Frank derivatives requirements on manufacturers, but another provision of the law, which grants broad regulatory authority over companies involved in financial activities, threatens to designate some manufacturers as systemically important financial institutions (SIFIs).

The Dodd-Frank Act created a council of regulators made up of representatives from several different regulatory bodies called the Financial Stability Oversight Council (FSOC) that is charged with identifing existing or emerging systemic risks to the financial system. Section 113 of the Act authorizes the Council to consider whether a nonbank financial company could pose a threat to financial stability and if they determine that there is a threat, then they can subject that company to Federal Reserve supervision and “enhanced” prudential standards – aka more regulation.

The problem is the FSOC looks at a company’s size and scope as part of its determination for what is a nonbank financial SIFI, threatening some large global manufacturers that must engage in lending and financing as part of their everyday course of business. Despite the global reach of these companies, manufacturers did not contribute to the financial crisis and do not engage in the same type of financial activities that banks do, especially not ones that would threaten the financial system. A SIFI designation can bring unnecessary costs for companies that could be put to better use by investing in the business and creating jobs. The NAM wrote to FSOC previously to express concerns with their proposal.

FSOC has already begun to designate companies as nonbank SIFIs, but the House this week adopted an amendment to the financial services appropriations bill offered by Rep. Garrett (R-NJ) to the put an end to this process by ceasing funding for the FSOC designation of non-bank companies as SIFIs. Manufacturers that need to be engaged in financing large projects or machinery as a part of their regular business, should not be regulated as if they were large banks.  The NAM applauds the House action. Global manufacturing companies already face enough challenges remaining competitive internationally, and the NAM will continue to support efforts aimed at preventing unnecessary regulation of these businesses.

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Support the United States: Enact Comprehensive Tax Reform

Manufacturers in the United States have struggled to compete under our nation’s broken tax system for years so it’s natural that the NAM is a leader in calling for pro-growth, pro-competitive tax reform. Even though some say tax reform is “stalled” in Congress, NAM continues a constant drumbeat on the need to reform our nation’s tax code to bring us into the 21st century. Indeed, our voices are getting louder by the day as we see Washington policy makers drag their feet on reform or, worse yet,  suggest one-off changes to the tax code to address problems that would be eliminated entirely by overall reform.

While the NAM is a strong advocate for comprehensive reform of our current tax code, we also believe it is critically important to keep our current tax system in place until policymakers agree on a final reform plan. Piece-meal changes or repeal of long-standing rules will inject more uncertainty into business planning, making U.S companies even less competitive and threatening economic growth and U.S. jobs. A key objective for the association, as outlined in NAM’s “A Growth Agenda: Four Goals for a Manufacturing Resurgence in America,”[1]  is to create a national tax climate that promotes manufacturing in America and enhances the global competitiveness of U.S. manufacturers.  Manufacturers want the United States to be the best place in the world to manufacture and attract foreign direct investment. The way to do this is to enact a pro-growth, pro-competitive tax code

[1] Available at http://www.nam.org/

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Exporters for Ex-Im: U.S. Solar Cell Manufacturer Shines With Help of Bank

Suniva Inc., a metro-Atlanta based manufacturer of high-quality, high-efficiency crystalline silicon solar cells and modules, and the Export Import Bank (Ex-Im Bank) of the United States have been working together since 2007. Suniva has benefitted from the Ex-Im Bank’s buyer financing and working capital guarantees to support its exports to global markets.

Most recently, Suniva announced that Ex-Im Bank will guarantee a $780,000, 10-year loan to be made by UPS Capital Business Credit to finance the export of Suniva’s photovoltaic (PV) solar to a rooftop solar-power project of Grupo Metal Intra S.A.P.I. de C.V. (GMI). GMI Suniva Queretaro Airport 1MW 2014 02

“High-quality American solar products are coveted in many emerging markets. In these markets where there is an abundance of sun, and power is unreliable and/or expensive, solar power is particularly attractive,” said John Baumstark, chief executive officer of Suniva.

“It is critical for American companies to export to help strengthen our economy, and U.S. Ex-Im Bank has been instrumental in providing unique products that enhance the competitiveness of American companies around the world.  It is most fitting that the first major export and installation of our modules in Mexico is utilizing a guarantee from the U.S. Export-Import Bank with which we have a longstanding and valuable relationship,” said Baumstark.

 

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MAPI: Manufacturing Activity Continued to Improve in the Second Quarter

The Manufacturers Alliance for Productivity and Innovation (MAPI) said that its Composite Business Outlook Index rose from 69 in March to 71 in June. Indeed, this was the sixth consecutive quarterly gain in the manufacturing outlook, up from 55 in December 2012. Index readings over 50 indicate expansion, and as such, these data suggest mostly positive trends in the sector. The pace of new orders (up from 71 to 78) and export sales (up from 60 to 67) accelerated, and profit margins edged higher (up from 66 to 70).

In terms of investment, manufacturers completing the MAPI survey said that they were increasing their capital spending levels both in the U.S. (up from 59 to 67) and abroad (up from 59 to 64). At the same time, the rate of research and development spending slowed slightly in this survey (down from 69 to 67), albeit a still-healthy paces.

Yet, the forward-looking indicators provided mixed news. Prospective shipments within the U.S. eased slightly (down from 88 to 87) but are still expected to grow relatively strongly. Similarly, export shipments also decelerated somewhat (down from 81 to 76). Overall, the data indicate that there is still room for improvement. The percentage of respondent companies that were operating at above 85 percent capacity dropped from 35.7 percent to 30.0 percent.

Overall, though, these data support the notion that manufacturing activity continues to improve, mirroring similar findings from other indicators. As reported last month, MAPI has a generally upbeat outlook for this year. They predict that manufacturing production will increase by 3.2 percent and 4.0 percent in 2014 and 2015, respectively, suggesting accelerating growth from the 2.6 percent pace of 2013.

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

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