The Unintended Consequences of the “Truth in Settlements Act”

More transparency is usually a good thing, but you can have too much of a good thing — particularly when accompanied by costs that far outweigh the intended benefit. This is exactly the case with a bill called the “Truth in Settlements Act of 2014” (S. 1898) that was approved today by the Senate Homeland Security and Governmental Affairs Committee.

Although intended to improve transparency surrounding legal settlements, S. 1898 will add additional reporting and compliance burdens, potentially change the nature of legal proceedings, and negatively impact competitiveness. The Truth in Settlements Act requires federal agencies to explain if the settlements they announce are tax deductible and to post information about settlements over $1 million on their websites. All public companies also would have to state in their SEC filings whether they have deducted any of these settlement payments from their taxes.

It is clear the authors of the bill had financial institutions in mind when crafting this bill, as even the bill’s Fact Sheet cites mortgage settlement stemming from the financial crisis. Yet, the new disclosure and filing requirements apply to all public companies. By sweeping all companies into the new requirements, lawmakers are once again penalizing manufacturers for a financial crisis they had nothing to do with.

Additionally, the threshold of $1 million is also inconsistent and much lower in some cases than what companies currently file with the SEC. The additional disclosure requirements on settlements may cause more companies to choose litigation over settling cases, draining resources for both companies and the federal government.

Indeed a thorough analysis or costs-benefit analysis of this bill would ensure the legislation is targeted and has the results intended by its authors. Unfortunately, there have been no hearings prior to the markup where these concerns could have been raised.

The NAM opposes S. 1898 and urges Senators to oppose this bill. Instead, it would make more sense for a study to be conducted to review the settlement practices of federal agencies and companies before reforms are enacted.

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Real GDP Rebounded Strongly in the Second Quarter; Up 0.9 Percent in the First Half of 2014

The U.S. economy grew strongly in the second quarter, up 4.0 percent and recovering from a very disappointing first quarter. With that said, the first quarter data was revised again, improving slightly from a decline of 2.9 percent to a decline of 2.1 percent. The second quarter data were higher than the consensus estimates and mostly reflected an economy that has rebounded from weaknesses earlier in the year, including winter disruptions. Still, real GDP growth in the first half of 2014 was soft overall, increasing just 0.9 percent.

Consumer and business spending were strengths in the second quarter. This is perhaps not a surprise given the softness seen in the first quarter and data released since then suggesting recovering levels of activity. On the consumer side, goods spending rose an annualized 6.2 percent in the second quarter, its fastest pace since the fourth quarter of 2010 but also reflecting a bounce-back from the 1.0 percent rate of the first quarter (when winter storms prevented people from going to the stores). Personal consumption added 1.69 percentage points to real GDP, with 1.38 percent stemming from goods spending.

Businesses provided the biggest boost to the economy in the second quarter, with higher levels of investment for structures, equipment and intellectual property. Housing was also a positive for the first time in three quarters. Gross private domestic investment added 2.57 percentage points to real GDP, rebounding from the 1.13 percent drag seen in the prior quarter. Inventory spending alone contributed 1.66 percentage points to the bottom line as firms restocked their shelves after letting them deplete in the previous two quarters. Indeed, inventory spending was so strong that it could slow the growth rate in the third quarter a bit.

Government spending added 0.30 percentage points to growth, but reduced defense spending was a drag at the federal level. State and local government investments returned to being a positive contributor to growth.

Export growth remained the primary weakness in the economy, subtracting from real GDP for the second straight quarter. While goods exports increased 2.3 percent at the annual rate for the quarter, this was more than outstripped by the 13.3 percent gain seen in goods imports. As a result, net exports subtracted 0.61 percentage points from real GDP in the second quarter.

Overall, the news was positive, with healthy increases in consumer and business spending helping to lift the economy in the second quarter. This suggests that we have begun to move beyond the softness seen in the disappointing first quarter. Yet, we also cannot help but note that 2014 has started off much weaker than we would have liked, with real GDP increasing by less than 1 percent in the first half of the year. While manufacturers remain mostly upbeat about the second half, it means that real GDP will once again settle in for an average of around 2 percent this year. That is not at all what we were thinking at the start of the year.

Also, the trade data suggest that we need to do more to increase manufactured goods exports. We have seen export growth continue to decelerate so far this year. This means that policymakers should consider policies that will aid manufacturers as they seek new markets. First and foremost, it means that we need to reauthorize the Export-Import Bank. (See our study released yesterday that shows the magnitude of foreign export credit activity overseas.). As a result, the United States would forfeit billions of dollars of export opportunities if we failed to reauthorize the Ex-Im Bank by September 30.  The weak U.S. export data also mean that we need the President and Congress to work together expeditiously to enact new Trade Promotion Authority legislation that is critical to enable the United States to negotiate comprehensive and high-standard agreements in Europe and the Asia Pacific and elsewhere, which will boost U.S. manufacturing exports.

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ADP: Manufacturers Added 3,000 Workers in July

Automatic Data Processing (ADP) said that manufacturers continued to add workers in July, but at a slower pace than the month before. The manufacturing sector created 3,000 net new workers in July, down from 10,000 in June. In the ADP’s analysis, the sector has hired an average of 6,000 additional workers each month since January. Note that this is lower than the roughly 9,000-worker average seen in the official year-to-date government data from the Bureau of Labor Statistics (BLS).

In the larger economy, nonfarm private businesses added 218,000 employees on net in July. This was down from 281,000 in June, but it was also the fourth straight month with employment growth exceeding 200,000. The year-to-date average is 204,000, an improvement from the 187,000 average seen for all of 2013.

In July, the largest job gains were seen in the professional and business services (up 61,000); trade, transportation and utilities (up 52,000); construction (up 12,000); and financial activities (up 9,000). Small and medium-sized businesses (e.g., those with less than 500 employees) contributed nearly 81 percent of the net new jobs.

On Friday, we will new employment figures from BLS, and I would expect roughly 225,000 nonfarm payroll workers and around additional 10,000 manufacturing workers.

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

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Forfeiting Opportunity is Not an Option

Earlier today, the NAM released a new report that documents the massive size and growth of foreign export credit activity. The findings of the report, along with those of an NAM policy brief, underscore why the reauthorization of the U.S. Export-Import (Ex-Im) Bank is critical to support exports, manufacturing and jobs.

A diverse array of manufacturers, small and large, who use the Ex-Im Bank joined NAM President and CEO Jay TimmonsExImPanel in Washington to unveil the report. Without the Ex-Im Bank, these manufacturers and thousands more would not be able to grow jobs at home and compete in the global marketplace. Even with the Ex-Im Bank’s services, manufacturers in the United States seeking to export their products, and expand their businesses to reach the 95 percent of consumers who live outside U.S. borders, are at a competitive disadvantage.

As the report found, foreign export credit agencies (ECAs) continue to grow among our largest trading partners and in emerging markets. The ECAs of nine of our top trading partners—Brazil, Canada, China, France, Germany, Japan, Mexico, South Korea and the United Kingdom—provided nearly half a trillion dollars in export credit assistance to their exporters in 2013. Collectively, that amount is more than 18 times greater than the modest $27 billion the U.S. Ex-Im Bank provided the same year. China dominates the export credit financing landscape and authorized more than $153 billion in 2013.

If Congress fails to reauthorize the Ex-Im Bank, the discrepancy in export financing between the United States and the rest of the world will only continue to grow. Other nations will jump in and fill the void. Neither our nation’s manufacturers nor the economy can afford for that to happen.

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NAM Applauds Introduction of Trade Secrets Protection Act

The NAM welcomed today’s introduction of the bipartisan Trade Secrets Protection Act of 2014 and applauded the bill’s sponsors, Representatives George Holding (R-NC), Jerrold Nadler (D-NY), Howard Coble (R-NC), Hakeem Jeffries (D-NY), Steve Chabot (R-OH) and John Conyers (D-MI) for their focus on this critical issue.

The Trade Secrets Protection Act is the House companion to legislation (S.2267) introduced in April by Senators Chris Coons (D-DE) and Orrin Hatch (R-UT). It marks a critical step toward ensuring manufacturers can effectively and efficiently enforce their trade secrets at home and abroad.

Trade secrets include everything from the special recipe for a food or beverage to research, marketing data and customer lists. They are the proprietary manufacturing processes and marketing plans that set products apart from the competition.

These vital intangible assets have never been more important to manufacturers large and small. But they increasingly are at risk in today’s mobile and interconnected global economy.

Trade secrets can comprise as much as 80 percent of the value of a company’s knowledge portfolio. But according to one estimate, theft costs businesses in this country some $250 billion a year.

The Trade Secrets Protection Act would help to address this challenge by providing access to federal civil enforcement for trade secrets theft. Right now, businesses must go state-by-state to defend their rights.

At the same time, it would provide a critical foundation for essential trade secrets commitments in U.S. trade agreements, including those under negotiation with Europe and 11 Pacific Rim nations.

The NAM was pleased to testify before the House Judiciary Subcommittee on Courts, Intellectual Property and the Internet last month on the importance of strengthening trade secret protection and enforcement in ways that advance manufacturing in the United States.

We look forward to working with Congressmen Holding, Nadler, Chabot, Conyers, Coble and Jeffries, and with many others in the House and Senate to promote swift consideration and passage of the Trade Secrets Protection Act.

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House Acts on Cyber Bills Today, Senate Needs to Follow

The U.S. House of Representatives is scheduled to vote today on four separate cybersecurity- related bills. The four pieces of legislation cover a number of issues ranging from improving the Federal cybersecurity workforce to facilitating more sharing of real-time threat information between the public and private sector. The NAM applauds the House for addressing a top priority for all manufacturers but we are still faced with a cold reality – if the Senate does not also act, none of these bills will become law.

The NAM has advocated aggressively for legislation that would increase the ability of the private sector to receive up-to-date information on the ever-present cyberthreat faced by manufacturers. Trade secrets, patents, customer data, and technological innovations are what separate manufacturers in the United States from their competitors. The NAM works on a number of different fronts to help protect this “secret sauce” but a government partner is needed. Federal Agencies have access to information that, if shared with the private sector, can do a great deal to help protect our innovation from bad actors. There has been a lot of talk from Congress about understanding this need, but little action.

Manufacturers place cybersecurity as one of their highest priorities. They are committed to keeping our assets secure and therefore keeping our nation safe. These and many other issues are at the top of the agenda of the NAM D.A.T.A. Center, a venue for NAM members to educate  policy makers and the general public to ensure they know the innovative breakthroughs in all aspects of life come from manufacturers. To get involved in the D.A.T.A. Center contact, Brian Raymond, NAM’s Director of Technology and Domestic Economic Policy.

NOTE:

The bills scheduled to be considered today by the House of Representatives are:

H.R. 2952 – The Critical Infrastructure Research and Development Act

H.R. 3107 – The Homeland Security Cybersecurity Boots-on-the-Ground Act

H.R. 3696 – The National Cybersecurity and Critical Infrastructure Protection Act

H.R. 3635 – Safe and Secure Federal Websites Act of 2013

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Manufacturers in Texas Note Accelerated Activity in July

The Federal Reserve Bank of Dallas said that manufacturing activity accelerated in July, continuing to rebound from softer levels earlier in the year. The composite index of general business activity rose from 11.4 in June to 12.7 in July. It was the 14th consecutive month of expanding levels of activity; however, manufacturers reported a near-stagnant pace in February. In July, the underlying data were mostly higher across-the-board, including the pace of growth for new orders (up from 6.5 to 13.0), production (up from 15.5 to 19.1), shipments (up from 10.3 to 22.8), capacity utilization (up from 9.2 to 18.0) and capital expenditures (up from 12.7 to 13.3).

With that said, employment growth (down from 13.1 to 11.4) eased slightly, one of the few areas that decelerated in the month. Still, hiring has generally improved from where it was two months ago, with the index up from 2.9 in May. Moreover, one-quarter of respondents to the Dallas Fed survey said that they had added workers in July, with just 13.6 percent suggesting that employment was declining for their company. In addition, the average number of hours worked (up from 4.7 to 6.3) increased somewhat.

Along those lines, a fabricated metal manufacturer noted difficulties in attracting and retaining workers in the sample comments. They wrote, “Skilled employee turnover is getting out of control. There are too many employers chasing too few skilled workers.” Other commenters spoke about the pickup in demand seen in July, with one computer and electronics product respondent adding, “The second quarter was a sold quarter from start to finish….”

Looking ahead six months, Texas manufacturers remain positive about future levels of activity. At least 45 percent of those taking the survey expect sales, production, and shipments to increase over the coming months, with just single-digit percentages anticipating declines. Beyond that, 31.5 percent plan to bring on new workers, and one-quarter are expecting to increase their capital expenditures. The one downside would be the forecast of higher raw material costs moving forward, with a pickup in pricing pressures. In all, 40.7 percent predict increased producer prices in the coming months, with just 6.5 percent expecting declines.

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

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Monday Economic Report – July 28, 2014

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

The International Monetary Fund (IMF) released its latest World Economic Outlook last week. The report reflected slower growth rates in the United States and elsewhere for 2014 mostly because of disappointing figures during the first half of the year. The IMF now predicts that U.S. real GDP will grow 1.7 percent in 2014, down from the 2.8 percent forecast in April. Much of this downgrade stemmed from the dismal 2.9 percent decline in real GDP in the first quarter, with output contracting for the first time in three years. At the same time, the manufacturing sector provided a positive contribution to growth in the first quarter, according to new data, despite bleakness in other areas. Fortunately, manufacturers are more upbeat about activity during the second half of this year and for next year. The IMF’s outlook for 2015 is for real GDP growth of 3.0 percent in the United States, which is in line with other predictions.

News regarding manufacturing activity was mostly positive last week, with surveys from the Kansas City and Richmond Federal Reserve Banks both reflecting a pickup in shipments and employment in July. New orders continued to grow at a moderate pace in each region, and respondents were mostly upbeat about sales and production over the next six months. Nonetheless, raw material costs have accelerated a bit in the Richmond district, and new export orders have contracted in eight of the past 12 months in the Kansas City district. Meanwhile, new durable goods orders rebounded in June, with year-to-date growth at a reasonably healthy rate of 4.4 percent. This indicates that the sector has recovered for the most part from winter-related softness, even if some components, such as motor vehicle sales, were lower for the month. Similarly, the Markit Flash U.S. Manufacturing Purchasing Managers’ Index (PMI) reflected relatively strong growth in sales and output for the sector despite some easing in the headline number in July.

Overseas, the data indicate that the Chinese economy has continued to stabilize from weakness in the first five months of the year. The HSBC Flash China Manufacturing PMI expanded for the second straight month in July, with the pace of activity up for new orders, exports and output. The sales pace was the fastest since January 2011, suggesting that recent measures taken by the Chinese government to stimulate growth have had a positive impact. Likewise, Japanese manufacturers also reported expanding levels of sentiment for two consecutive months, but activity decelerated overall and output stagnated. Export sales from Japan, on the other hand, grew. In other news, the European manufacturing sector made marginal progress in July, particularly for production and exports, and the Eurozone has now expanded for 13 straight months. Yet, growth varied from country to country. For instance, German manufacturing activity picked up in July, while the French economy continued to contract.

The other highlights last week centered on housing and pricing. The housing market remains weaker than we would like, as illustrated by the sharp drop in new home sales in June. Still, the June figure was consistent with the annual paces in March and April, with May’s sales numbers appearing to be an outlier. With the slower pace of sales, inventories of homes have increased. In contrast, existing home sales improved for the third straight month, with some progress in the second quarter relative to the softer first quarter. Even in the existing home sales release, however, there were some discouraging findings, including the fact that sales remain below where they were last year and that first-time homebuyers are still having difficulties making purchases. Meanwhile, on the inflation front, the consumer price index increased in June, led by higher gasoline costs. Yet, pricing pressures remain mostly in check, with core inflation up 1.9 percent over the past 12 months.

This week, the focus will be on second-quarter GDP and jobs. The expectation is that output will rebound from the drop in the first quarter, with consensus forecasts ranging from 2.5 percent to 3.5 percent growth. My view is that real GDP in the second quarter should exceed 3.0 percent. Regarding hiring, manufacturers have added, on average, more than 12,500 each month since August, and I would anticipate seeing a comparable figure for July. Nonfarm payrolls should increase by at least the roughly 230,000 average so far in 2014. Other items to look for this week include manufacturing survey results from the Dallas Federal Reserve Bank and the latest numbers for construction spending, consumer sentiment, employment costs and personal income and spending.

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

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Timmons in Pittsburgh to Talk Energy and Manufacturing Comeback

NAM President and CEO Jay Timmons addressed some of the country’s leading manufacturing executives today in Pittsburgh at an energy panel hosted by Jones Day.  The discussion centered on the critical need for an affordable and abundant energy supply to fuel the manufacturing comeback.

Jones DayTimmons kicked off the event by noting that, “major events like the shale revolution don’t happen often. Manufacturers can’t let this opportunity pass us by, so we welcome any chance to talk about the transformation in our sector.”

Despite recent manufacturing success, there are significant obstacles facing the economy.  Timmons told executives that “if policymakers make the wrong choices, those decisions could bring the energy revolution to a halt and do irreparable harm to manufacturing and the overall economy.”

Timmons also urged energy and manufacturing executives alike not to settle with their current success but to continue to lead the push for comprehensive policy reform.  He presented manufacturers with a new goal, suggesting that “our challenge in the months ahead is to run up the score on energy—and fix the broken policies that are holding manufacturers back.”

To learn more about the importance of energy to manufacturers, click here.

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Four Years Later and Still Unclear

This week, at a House Financial Services hearing entitled  “Assessing the Impact of the Dodd-Frank Act Four Years Later,” manufacturers called on Congress to provide clarity for derivatives end-users and to enact legislation that ensures companies are not faced with undue regulatory burdens.

Four years into the rule-making process, regulatory uncertainty continues to harm manufacturers. Despite Congress’ intention to exempt derivatives end-users from costly margin requirements and clearing requirements, subsequent rules implementing Dodd-Frank are unclear and capture manufacturers trying to hedge risk. Tom Deas, Vice President and Treasurer of FMC Corporation, testified that even the rules that supposedly provide end-user exemptions do not provide relief.

When author of the 2010 law and former House Financial Services Committee Chairman Barney Frank was asked about potential updates to his legislation, he responded, “I agree with much of what [Deas] said about the end-user.”  House Agriculture Committee Chairman Frank Lucas mentioned several legislative fixes that the NAM supports saying, “End-users did not create the financial crisis of 2008 and should not be regulated like they did.” We couldn’t agree more. After four years of uncertainty, manufacturers welcomed this bipartisan support and urge lawmakers to act – better late than never.

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