Last week I had the good fortune of visiting Calgary Alberta to speak at an event hosted by the Royal Bank of Canada and the NAM’s sister organization Canadian Manufacturers & Exporters. 

During my visit, I also had the opportunity to tour two manufacturing companies in Calgary:  Plains Fabrication and Supply and Toromont Energy Systems.  Visiting manufacturing facilities is one of the great perks of my job.  Seeing first hand the skill, ingenuity and talent of manufacturers making things is always an amazing experience.  Here is what I saw:

Plains Fabrication and Supply is a steel fabricator the builds, among other things, huge steel vessels that are used by the petroleum and natural gas industries to clean water (the process of cleaning the water actually incorporates the use of walnut shells!) used in the process of energy extraction for reuse.  These vessels vary in size but some are more than 15 feet in diameter and 50 feet long.  At first glance, it appeared to me that Plains was a submarine manufacturer.  This gives you some perspective on how big these vessels are.  Plains Fabrication produces its products for customers in Canada and as far away as Pakistan!  Started more than 20 years ago by four guys, the company now employees over a hundred people and is currently building a brand new manufacturing facility.

Toromont Energy Systems designs and manufacturers modular systems in Canada and the United States that are used in the natural gas, chemical and petro-chemical industries across the globe.  Rather than manufacturing on site, Toromont builds equipment in modules in their factory.  These modules are then transported to their customers and sometimes packaged together into a final product.  Due to severe climate conditions of their final destination, some of these systems are enclosed in what appear to be little houses.

While these companies make different products, two similarities that both companies share are (1) customization: every product that is manufactured by these companies is unique.  The expertise of design and the skill of their workers make both companies world leaders in their respective products; and (2) going global: both companies sell products in markets across the globe.  Going forward, it will be more important than ever for manufacturers both in Canada and in the United States to expand their customer base outside North America. 

The Latest NAM/Industry Week Manufacturing Index shows that confidence among large manufacturers eroded for a fifth consecutive quarter in the third quarter of 2008, with just 21% saying they had a positive business outlook. This marks the lowest confidence level in the history of the survey going back to the fourth quarter of 1997.

For small manufacturers, the business outlook moderated for a third consecutive quarter to its lowest level since the fourth quarter of 2002, but it remained significantly elevated compared to large survey respondents.

Asked if the U.S. economy would go through a recession, just 14% answered “no.” 

Respondents’ comments:

• “All of 2009 and first half of 2010.”
• “Because of the downturn in auto sales and housing we’ve experienced a 25% reduction in our backlog.”
• “There is a good chance that manufacturing will be spared the worst of it.”
• “Incoming orders are way down since August.”
• “It will if the U.S. implements protectionist trade policies that other nations retaliate against.”
• “We are already in a recession and worsening.”
• “Depends on the ultimate solution to the current credit”

Asked if tightening lending standards had limiting their company’s access to capital needed to finance domestic investment expenditures, nearly a fifth (18%) of survey respondents said “yes.”

Respondents’ comments:

• “Talking to more banks and alternate financing sources.”
• “Our capital improvements are based off of profits and cash, not borrowing.”
• “My biggest concern with tightening credit is the collection of accounts receivable.”
• “Hasn’t had a negative impact yet, but we’re not counting it out.”
• “Our bank terminated all of our loans and we almost could not find another bank who was taking new customers.”
• “We just had our bank not renew our line of credit even though we had not used it in over one year.”
• “Will find out in the next six months.”
• “We have great credit and we bank with small, home town bankers who know us.”

The NAM has released its 11th annual Labor Day Report.  Facing Up To The Challenge: Trade Energy and the Economy focuses on the current state of the American worker.  Sluggish domestic demand, chiefly due to high energy prices and an ongoing housing recession, have caused employment to decline continuously throughout the first seven months of the year.  The construction sector and a number of manufacturing industries have been hit hard. 

Amid these significant challenges, the one bright spot continues to be exports, which have accounted for more than half of total  economic growth during the first half of this year.  The report calls for a comprehensive national energy strategy that both boosts domestic production and exploration of energy resources as well as increases energy efficiency.  The result will be reduced dependence on foreign sources of energy, lower energy prices and higher disposable incomes for American workers. 

The report also calls for policy makers to aid U.S. exports (which are manufacturing jobs) by passing the three Free Trade Agreements (with Colombia, Panama and South Korea) that are awaiting Congressional Approval on Capital Hill.  

According to the Commerce Department’s revised estimate released today, the economy grew at a solid 3.3 percent pace in the second quarter.  This is 74 percent faster than the advanced estimate of 1.9 percent growth released last month.  While consumer spending edged up a little faster, rising at a 1.7 percent annual rate, than initially reported, the bulk of the improvement in the health of the economy came from trade.  Export growth was revised up to 13 percent (compared to 9 percent growth in the advanced report) while imports fell by 7.6 percent (compared to -6.6 percent in the advanced report). 

As a result, net exports (exports-imports) contributed 3.1 percentage points (or 94%) of the total 3.3 percent growth in the second quarter.   This is the single largest quarterly contribution to growth from trade in 28 years (2nd quarter 1980).  Exports alone were responsible for half of GDP growth last quarter.

Thanks to a more-competitive value of the dollar and solid growth overseas, trade winds are propelling the economy forward just at the right time.  Since the housing recession started in the first quarter of 2006, trade has added more to GDP growth than housing (residential investment) has taken away. 

Today’s news should be a wake up call to members of Congress, especially those who are dubious about the benefits of trade and claim that Free Trade Agreements, which work to level the playing field and make U.S. manufacturers more competitive, hurt American workers. 

The trade deficit, which was 5 percent of GDP in the second quarter, is mainly a reflection of our country’s reliance on foreign sources of energy.  By themselves, imports of petroleum made up 69 percent of the entire trade deficit in goods and services last quarter.  A comprehensive national energy strategy focused both on increasing efficiency as well as increasing domestic production will help reduce our reliance on energy imported from abroad.

The trade deficit in manufactured goods with our FTA partners, however, has narrowed over the past few years and through the first six months of this year, has turned into a suplus!  Congress can help manufacturers further by passing the three FTAs (with Colombia, Panama, and South Korea) that are awaiting congressional approval.  Economically, its a no-brainer.  Lets hope that the politicians on Capital Hill can show the political courage, ignore the foes of free trade, support U.S. manufacturers, and pass these agreements.   

 These issues are discussed more fully in this year’s, NAM Labor Day Report, which was just released.  I’ll write more about this tomorrow.

In “Obama’s Factory Floor,” the Washington Post’s Harold Meyerson today wrongly asserts that the decline in the dollar has not aided manufacturers. The basis of Mr. Meyerson’s claim is a story that appeared in Monday’s New York Times. As Meyerson writes, “Nonetheless, as the New York Times’ Louis Uchitelle reported Monday, most of the rise in U.S. exports has come in corn, wheat and other agricultural commodities, not in aircraft or machinery”.

This is totally false. It turns out that over half of what Mr. Uchitelle claims in his story are unprocessed commodities are actually manufactured products, like steel, chemicals and processed food products. It is manufactured products, not agricultural commodities, that are the driving force behind U.S. export growth.

During the first half of this year, manufactured products accounted for 81 percent of the rise in overall goods exports compared to the first half of 2007. Agricultural exports, by comparison, accounted for just 15 percent of the increase. In fact, exports of machinery and transportation products like aircraft alone increased a third more than all agricultural exports combined!

Mr. Meyerson goes on to ask “Will America ever get its manufacturing back?” Get it back? Last year, U.S. manufacturing production reached an all-time high! The United States is the largest manufacturing economy in the world, accounting for fully a fifth of world-wide manufacturing production in 2006 (latest data available from the United Nations.) Manufacturing production has slowed in recent quarters, but this is mostly due to spillover effects from the ongoing housing recession and a downturn in purchases of motor vehicles, not a lack of export growth.

Mr. Meyerson then goes on to criticize Senator McCain’s support of free trade agreements stating that “McCain has supported every offshoring, free-trade accord, past or pending, that has decimated the Midwest;”. Again, Mr. Meyerson should check his facts. Through the first six months of 2008, U.S. manufacturers had a trade surplus with our Free Trade Partners.

The next time Mr. Meyerson writes on manufacturing and trade, he should first check out the facts. They may lead him to a different conclusion…although knowing Mr. Meyerson’s writings, probably not.

The Commerce Department reported yesterday that the gross domestic product (GDP) increased by 1.9 percent in the second quarter. While this improvement from the 0.9 percent rise in the first quarter was, in part, due to the stimulus checks that propped up consumer spending, the fact remains that even if consumer spending was flat the economy still would have grown.

How, you may ask, could the economy still have increased in Q2 if consumer spending (which accounts for 70 percent of the economy) didn’t grow, especially given the fact that gross private domestic investment (housing, capital investment and inventories) fell by 15 percent (annual rate) in the second quarter?

The one word answer to this question is: Trade.

That’s right. Trade, the proverbial whipping boy of those who believe that American manufacturers (who are the most productive workers in the world) cannot compete in the global market, is keeping the economy in the black.

By itself, trade (exports-imports) contributed 2.42 percentage points to GDP growth in the second quarter-the largest contribution to GDP growth from trade in 28 years (3rd quarter of 1980.) In fact, trade’s positive contribution to economic growth last quarter was roughly 4 times the magnitude as the negative impact from the decline in residential investment.

Over the past year, trade accounted for fully 83 percent of the increase in our nation’s economy. During the last economic downturn in 2001, an overvalued dollar and sluggish growth abroad formed a toxic combination that constrained trade’s ability to act as a counterweight to a recession in the domestic economy. The result was a very dramatic downturn for manufacturers. Thankfully, that toxic combo has turned into a cocktail for growth. Today, growth from trade is offsetting the softness in the domestic economy. The result is a slowdown, but not a recession, thanks to trade.

Hopefully, policy makers on Capital Hill will muster the political courage (economically it’s a no-brainer) to vote on the pending free trade agreements (Colombia, Panama and South Korea) awaiting congressional approval. Lowering barriers to trade increases U.S. manufacturers’ ability to sell more products to customers abroad. Yesterday’s GDP report shows how important this is, especially when the domestic economy is going through a soft patch.

In a time of economic uncertainty, driven by high energy prices, falling consumer confidence and employment losses, there actually is some good news on the economic front.  The Commerce Department reported yesterday that the trade deficit beat expectations and declined for the second time in the past four months in May, as exports grew $1.4 billion during the month, double the $0.7 billion rise in imports.

As of the first quarter of this year, exports accounted for 13 percent of the U.S. economy, more than tripple the 4 percent coming from housing (residential investment).  And though the most recent four quarters (first quarter of 2007 to first quarter of 2008) improvements in our country’s trade balance have actually added more to GDP growth than housing has taken away.  Yesterday’s report is welcomed new that the trend is likely to continue.

Though the first five months of this year, goods exports (mainly manufactured products) increased at an annual rate of 11.5 percent (in real, or inflation-adjusted terms), while imports are down 4.5 percent.  And over the 12 months ending in May, exports outpaced imports in every major category:  capital goods, consumer goods, industrial supplies, automotive products, and food, feed & beverages.      

Healthy growth overseas, a realigned dollar, and the competitivness of American manufacturers is turning trade, which too many view as a toxin to the American economy, into a major source of growth.  In fact, over the past year, trade (net exports) accounted for nearly half (44 percent) of our country’s economic growth. 

Lets hope politicians on Capital Hill start to get it and help America’s manufacturers by lowering overseas barriers.  A good start would be to pass the free trade agreements (with Columbia, Panama and Korea), that are awaiting Congressional action.    

The Commerce Department reported yesterday that the U.S. trade deficit rose over $4 billion dollars to a level of $61 billion in April, the largest single monthly increase in two and a half years.  Usually, an increase in the trade deficit means that trade (exports-imports) is a drag on the economy, but not this time. 

Over the past year (first quarter 2007 to first quarter 2008), a narrowing the trade deficit (exports-imports) more than offset the decline in residential investment (housing) in the GDP accounts.  So, is this sweet spot in the economy turning sour?  Thankfully, no.

The rise in the trade deficit in April was driven by the rising price of oil imports, which increased by 8 percent, more than anything else.  Ten years ago, petroleum was about a quarter of the overall trade deficit.  A year ago, it was roughly a third.  As of April 2008, petroleum accounted for a majority (57 percent) of the entire U.S. trade deficit!

Outside of rising oil prices, trade flows continue to improve.  Adjusted for inflation, goods exports actually outpaced imports for a fifth consecutive month in April.  And over the past year, goods exports are up over 11 percent, while imports are actually down -0.5 percent.  As a result, the non-petroleum trade deficit (as of the first quarter of 2008) was at its lowest level (as a share of GDP) since 1999.

Anti-trade politicians and pundants often cite a rising trade deficit as evidence of a failed trade policy.  In reality, it has been the lack of a comprehensive energy policy, which has curtailed domestic energy production, that is the real culprit.