Congress is poised to consider legislation this week in the critical areas of trade and energy, even as conflict in the Middle East adds geopolitical punctuation to the need for action.

The House is scheduled to consider the U.S.-Oman Free Trade Agreement (FTA), approved by the Senate last month by a 60-34 vote. Oman is a small country, and the economic implications of this individual FTA are modest. However, approval would represent another step toward a broader Middle Eastern Free Trade Agreement (MEFTA), which holds great promise for U.S. manufacturing exports.

The countries embraced by a future MEFTA already account for more than $24 billion of U.S. exports annually. Combined, they represent the sixth largest U.S. export market in the world (counting the European Union as one market).

Oman is also a reliable U.S. ally in the Middle East. Rejection of the FTA would tell other countries in the region that the United States is unserious and disengaged, not just economically, but politically as well. That’s a bad message to be sending given the current troubles.

Conflict in the Middle East also adds yet another powerful argument for opening up the United States’ vast domestic energy supplies. How often have you heard people talk about achieving energy independence or security? Well, you can’t be independent or secure if you block access to your own natural gas and oil.

Last month the House passed the Deep Ocean Energy Resources (DOER) Act, which authorizes safe development of the abundant energy supplies in the Outer Continental Shelf (OCS). With its opt-in/opt-out and revenue-sharing provisions, the legislation gives states a voice in how close drilling for oil and gas may occur to their shores.

The Senate now has the opportunity to take similar, much-needed action, opening up portions of the eastern Gulf of Mexico to offshore energy exploration. An agreement by Senate leaders paves the way for a vote by granting a special, 125-mile buffer area for Florida while establishing a state revenue-sharing system.

The NAM is encouraged that Senators continue to work on a package, and we are optimistic about a final compromise with the House OCS bill.

Above all, the arguments for OCS exploration and expanded trade are economic in nature, but neither can we ignore the instability and violence that now torments the Middle East. Approving the U.S.-Oman FTA would be a vote for regional stability and economic growth.

Meanwhile, America’s manufacturers and the entire U.S. economy have a pressing need for more affordable, abundant and reliable supplies of energy. Where better to turn than our own country’s peaceful, dependable territory?

Today’s USA Today article on the trade deficit picked up our point that excluding a surge in oil imports, the May trade numbers were quite encouraging…a nice change. Excluding petroleum, goods exports (adjusted for inflation) surged by $2 billion in May while imports fell by the same amount.

After looking at the data a little closer today, I discovered another encouraging nugget that I though I’d pass along. Over the past 12 months, exports have outpaced imports in every product category (capital goods, consumer goods, industrial supplies, autos, and foods feeds & beverages. Click here to see the chart!

Though not unprecedented, this is an unusual event. In fact, a clean sweep of exports out-pacing imports in every product category has happened only one other time (June 04 to June 05) in the past 11 years! Lets hope it become less or a rarity in upcoming months.

Yup, it’s true. The WaPo’s been fighting this one forever, while the Wall Street Journal has long noted its certainty. Well, yesterday an unexpected shot in the arm came from the typically pro-tax New York Times, which declared on its front page that there has been a jump in tax revenues. A number of Members of Congress noted this in last month’s blog row as well, as did the President in his weekly radio address on Saturday. There, he said:

“The tax relief we delivered has helped unleash the entrepreneurial spirit of America and kept our economy the envy of the world. So I will continue to work with Congress to make that tax relief permanent.”

We’re not surprised. In the depths of the recession we pushed for tax cuts saying that they would lead to more investment and ultimately to jobs. We weren’t guessing. We knew this was the only way we were able to grow out of prior recessions. Investment led the way every time.

So when folks like Governor Corzine of New Jersey only see one way out, i.e., raising taxes, we say try the other way. Cut taxes and it will — amazingly — lead to higher tax revenues, as people invest and spend.

What a concept.

Who would have believed that the U.S. Department of Labor would be stickin’ it to “The Man”. Well, that’s exactly what they did, today, when they issued the June Employment Report . When you think of “The Man”, do you think of Blue Collar, or White? White, right? Well, that exactly who felt the pain in today’ report: “The Man.”

Now that I’ve got you attention, let me shed some light on an interesting dichotomy that has emerged in the manufacturing sector since last September and has continued through the June report that was issued today. Over the past nine months, manufacturing production employment (workers on the factory floor) has increased every month — the longest winning streak in nine years. All told manufacturing production employment is up 168,000 since last September. Meanwhile, non-production employment in manufacturing has fallen every month, and a lost 104,000 over the same time.

Since “manufacturing” employment only includes employment at manufacturing establishments (places where things actually are getting built), its tough to figure out what is causing this. Are non-production workers being moved to other locations within companies, thus lowering the number of “white” collar workers at production facilities? Are “white collar” jobs being outsourced? Or, are they being lost to efficiency games? Any or all of these possibilities could be happening. But one thing is for sure, production jobs in manufacturing are on the rise while non-production jobs continue to drop.

The most recent report by the Commerce Department shows that U.S. goods exports outperformed imports 18.5% to 11.1% in the first quarter of this year and the balance of trade actually improved by $3 billion. Does this mean that the tide is beginning to turn and the end to the burgeoning trade deficit is finally at hand? Well, while one quarter does not make a trend, there is mounting evidence that suggests that the trade picture is beginning to brighten for U.S. manufacturers.

Over the past 4 quarters (1st quarter 2005 to 1st quarter 2006), U.S. goods exports have risen by 11.3%, the fastest pace in more than half a decade. At the same time, imports of goods have risen by a slower 6.6%. In fact, the 4-quarter change in goods exports has outpaced import growth every quarter since the 1st quarter of 2005, resulting in the longest sustained period of exports besting imports in a decade. (Click here to see chart).

Capital goods exports, up 17% over the past year, have been the driver of U.S. export growth over the past year, alone responsible for two-thirds of the rise. By comparison, capital goods imports have rising by 13%. Similar favorable trends have emerged in industrial supplies (ex-petroleum), where the 5% rise in exports has outpaced a 2% gain in imports and consumer goods, where exports have outpaced imports 10% to 4% over the past year. (Click here to see chart)

There are likely several factors behind this trend. Growth abroad, particularly in Asia, remains very solid. At the same time, the U.S. dollar has fallen by 14% since it peaked in February 2002. And since it takes arguably several years for a change in the dollar to have an impact on trade flows, it appears that the benefits of a lower dollar are finally starting to show up in the trade figures.

There is almost nothing better than to start out the day with a box of just-opened corn flakes with milk. There is a freshness there that other cereals can barely match. If you are a corn flakes fan, too, you may be interested to know that Kellogg’s corn flakes were invented exactly a hundred years ago in Battle Creek, MI by W.K. Kellogg.

As you probably know, his invention was a pure accident. He was trying to making something else and someone left the drier or oven on too long and suddenly there was this new thing that turned into corn flakes (or petals de Mais in French). A whole industry was spawned and the way Americans ate breakfast was changed forever. There has always been a rooster affiliated with those Kellogg’s corn flakes for as long as I can remember and so this year we can also celebrate that corn flakes mascot, Cornelius!

By the way, it has struck me how innovations sometimes seem to come in batches. In a truly serendipitous moment, G.W. Maxwell invented the paper milk carton out in San Francisco in 1906 too. I blogged earlier about Mr. Peanut turning 100 this year. Back in 2003, we celebrated the 100th anniversary of some incredible manufacturing innovations: the first commercial air conditioning installed by Willis Carrier, the founding of Ford Motor Company, the first manned flight by the Wright Brothers and the first Harley Davidson motorcycle. Imagine that, all in one year.

Earlier today, Blogger in Chief, Patrick Cleary, blogged about today’s article on this topic by Robert Samuelson, a journalist who knows a thing or two about the workings of the economy. I’d recommend you read it, like Pat, did. His final analysis is that if we want to address rising temperatures, that only technology offers us an out. And technology is dependent on engineers who can redesign products and processes, sometimes with substantial reductions in the use of energy.

So if engineering offers us the best chance to change the future, then manufacturing is the place to be in if you are an environmentalist! Sure, you can become a lawyer and sue everyone into the Stone Age. But then what have you accomplished? Too many American parents today don’t encourage their boys and girls to become engineers and it shows up when we get down the road to college and post-graduate work. Why are over half the engineers graduated here every year foreign-born? Why aren’t more Americans going into this?

A former Chairman of The Manufacturing Institute said a few years ago that young people who want to change the environmental world should work in manufacturing. It was incredibly insightful and it is really what Samuelson meant in his article, although he didn’t say it that way. Using engineering talents in university and government research labs is another way to harness this power for a better future.

It’s in all the papers today: New Jersey, collapsing under the weight of its budget, has shut down. Governor Corzine — Jonny One-Note, you might say — who ran on a platform of tax cuts now sees only one solution: higher taxes. However, his fellow Democrats who control both state houses don’t care to drink that electoral hemlock. They remember what happened to former — emphasize “former” — Governor Florio, who raised taxes and then disappeared — politically, of course. In other words, Florio sleeps with the political fishes today because he did exactly what Corzine is poised to do. The same political cement shoes may await Corzine.

During last week’s Congressional blog row, Rep. Doolittle (R-CA) noted that 48 of 50 states were running a surplus. The Garden State would be one of the two running a deficit, considered hard to do in these salad days, where federal and state tax revenues are soaring. Rep. Scott Garrett (R-NJ) at the same blog row, when asked what he hears from his constituents back home said that although he is a federal official, he hears mostly about property taxes at his town hall meetings. People complain left and right about their enormous tax burden, the one Gov. Corzine wants now to increase.

New Jersey is a major manufacturing state, but it is getting less so as Gov. Corzine seems intent on running all businesses out of the sate. Reported the Wall Street Journal in yesterday’s editorial entitled, “Jon Corzine Florio”, in 2004 alone, 60,000 more people left NJ than moved in, equaling a loss of $1 billion in the state’s personal income. The statistics are staggering: According to our Competitiveness Redbook, NJ ranks 46th (that would be of 50) in net migration; ranks 3d in per capita taxes, 7th in the cost of doing business — a cost that will only increase under Gov. Corzine. Filed under the category of “the cure is worse than the disease” — literally — in May Corzine proposed a “sick tax” — a tax on every hospital bed of almost $1500 per month in the hopes of raising some $430 million in additional revenue. No wonder his fellow Democrats are distancing themselves from him, as his approval rating dips into the 30′s.

And so, because they can’t make ends meet, reports Bloomberg, about 45,000 state employees in 31 departments, agencies and authorities will be furloughed as non-essential functions begin to shut down. Corzine, for his part, foresees a potential state deficit of $4.5 billion.

It’s worth remembering that before entering political life — and spending $60 million of his own money to buy, er, win his Senate seat — Corzine was Chairman of Goldman-Sachs. You’d think he would have learned a thing or two about money and taxes and the spending habits of people who have their taxes increased — and decreased. Federal tax revenues have soared after the last round of tax cuts, yet Corzine can only see tax increases as the solution. No wonder people are leaving in droves. When your biggest export is people, you’re in deep, uh, Turnpike.

For our part, we just hope someone in New Jersey comes to their senses before there are no businesses — or people — left to provide the prosperity Corzine needs to truly rescue a state in serious trouble.

The Federal Reserve reported on Thursday that overall industrial production declined by 0.1 percent in May and that the manufacturing sector, which makes up about 80 percent of the index, dropped for the second time in the last four months. The fall off in manufacturing production was lead by significant declines in machinery and auto production on the durable goods side and as well widespread declines in nondurable industries.

Thursday’s report shows that the economic growth is likely decelerating below potential. I expect that GDP growth will come in below 3 percent in the sencond quarter. While last month’s decline in overall industrial production followed 3 months of growth, the diffusion of the decline is noteworthy. For the first time in more than three years, production of consumer goods, business equipment, construction supplies and business supplies all fell in May. This shows that a broad-based slowdown in the economy is in the making.

The message to the Federal Reserve policy-making committee is as clear as a lighthouse beacon on a cloudless night. With the economy already slowing down, further interest rate increases, which would not impact the economy until 2007, are not needed at this point.

For a quick overview on the economy and manufacturing, check this out!

Following an 0.4% rise in March and 0.6% up tick in April, the Labor Department reported yesterday that the Consumer Price Index (CPI) rose strongly again by 0.4% in May. While the recent increase in the CPI has been fueled by surging energy prices, even the “core” CPI, which excludes food and energy products, has accelerated recently. Specifically the “core” has risen by 0.3% in each of the past 3 months (the first time this has happened in over a decade.)

Since February, the core CPI has risen at an annual rate of 3.8 percent. Again, this is the fastest pace in a decade. However, this rise in the core CPI is more a function of a slowing housing market than anything else.

The main driver of the acceleration in the core CPI has been housing, specifically an increase in owners’ equivalent rent (OER), which accounts for more than a quarter of the weight of the core CPI and is designed to measure changes in the cost of housing through the rental market. As the housing market has slowed, demand for rental units has increased, and so have rental prices, which have, in turn, pushed up OER prices. Over the past 3 months, the OER prices have risen at an annual rate of 5.6%, the fastest pace since the early 1990s.

However, excluding housing, the core CPI remains relatively well contained, growing at a 2.8 percent pace during the 3 months ending in May, with core goods prices up by less than 2 percent.

All told, the May report on the CPI shows that while energy and housing prices have risen significantly in recent months, pass through to other segments of the economy remains modest. With the economy showing significant signs of slowing, the Federal Reserve would be well advised move into a holding pattern and leave interest rates alone at its meeting at the end of the month.

To check out an overview of the U.S. economy and manufacturing click here!