The pace of manufacturing growth in February was slower than in the previous month and fell short of expectations according to today’s Report on Business from the Institute for Supply Management (ISM). Severe winter weather likely affected last month’s manufacturing performance. Therefore, next month’s March report will be critically important to determine if a slowdown is truly emerging for manufacturers.

On a positive note, increases in exports continue to help drive production gains, along with slower cutbacks of inventories. While the employment measure has remained above the growth threshold level of 50 for three consecutive months, it will have to remain at this level for at least several months before a widespread upturn in manufacturing employment can be expected. Looking ahead, hiring is likely to remain subdued until the second half of the year when a stronger expansion is expected as consumer and business confidence pick up.

Manufacturing output surged by 1 percent in January the Federal Reserve reported today – the fastest pace in five months — due in large part to temporary boosts from inventory rebuilding and the extension of the homebuyer’s tax credit. Of the 19 major manufacturing industries, 16 posted production gains last month, signaling that the manufacturing recovery is broadening. While recent signs are encouraging, the recovery is unlikely to be sustainable at this rapid pace as much of it was driven by short-term inventory and one-time government spending.

A more durable source for growth has been the global economic recovery which, combined with a competitive dollar, is powering export growth in manufactured products. The current export surge stands in stark contrast to the early stages of the last recovery in 2002, when sluggish growth abroad and an overvalued dollar conspired to depress export growth until the middle of 2003. With global conditions improving, the time is ripe for Congress to pass a number of free trade agreements that would break down more barriers for U.S. exports and create jobs.

Looking ahead, the strength and durability of the manufacturing recovery will depend on the global competitiveness of U.S. companies.

Manufacturing activity was flat in December as improvements are still not hitting the broad range of industrial sectors. December’s solid 0.6 rise in industrial production reported by the Federal Reserve today was driven mainly by unseasonably cold temperatures, which spurred the largest monthly gain in utility output in two decades. Still, manufacturing production in the fourth quarter rose at an annual rate of 6.1 percent due to earlier gains in November.

The past year was definitely one of transition for manufacturers. After declining at an annual rate of 15 percent in the first half of 2009, production rose at a 7.8 percent annual pace in the last six months. Overall, manufacturing production was down 4.4 percent in 2009, cutting in half the 2008 decline of 8.7 percent.

While the overall manufacturing production numbers appear promising, a closer look reveals that improvements in the second half of 2009 have not yet spread throughout America’s industrial base. Production gains in both the third and fourth quarters took place in only nine of the 19 major manufacturing industries, so the bulk of manufacturers are still struggling.

Looking ahead, results of the 4th quarter NAM/IndustryWeek Manufacturing Index — a quarterly survey of NAM member companies –signal a probable slow down in the manufacturing recovery. In fact, roughly half (52 percent) of the respondents to the fourth quarter survey expect that downturns in their company’s production will extend into the second half of 2010. The full results of the 4th Quarter NAM/IndustryWeek Manufacturing Index are posted at: http://www.industryweek.com/Econinsight/

The Federal Reserve’s report today that manufacturing production increased by a strong 1.1 percent in November is a welcomed turnaround and signals that positive momentum is building in the industrial sector. With 15 of the 19 major manufacturing industries expanding last month, the November rise in factory output was the most widespread gain in three months. Still, the fact that upturns in manufacturing production have failed to reach a majority of manufacturing industries in three of the past six months shows that a broad-based economic recovery has yet to materialize for American industry. At this point, the emerging recovery is best described as fragile.

On a separate note, the Labor Department reported that finished producer prices rose by 1.8 percent in November, mainly due to a 6.9 percent rise in the price of energy goods. Outside of energy, prices rose a more modest 0.5 percent, the first increase in three months. An emerging global economic recovery is starting to put upward pressure on energy prices. Since the major economies of the world began to recover earlier this year in March, domestic energy prices at the producer level have increased at an annual rate of 34 percent. With a slack labor market suppressing wages, rising energy prices could again emerge as a significant problem for the U.S. economy just as a recovery is trying to take hold.

Today’s Organization for Economic Cooperation and Development’s Composite Leading Indicators signal demand abroad is on a path of improvement for 2010, but the American economy is not keeping up. Broad based growth sent the OECD higher in October for the eighth consecutive month, and above its long-term average of 100 to 101.4 in October from 100.4 in September. The October rise was driven by solid gains in Europe as well as milder increases in Asian economies. Economic conditions in the United States also are improving but at a slower pace than most of the other OECD nations. Stronger growth abroad along with a more competitive value of the dollar will continue to propel the recovery in U.S. exports that began in May.

Separately, the Commerce Department reported today that retail sales rose by 1.3 percent in November,  slight acceleration from the increase in October. However, 42 percent of last month’s rise was due to increased sales at gasoline stations, which were mainly driven by higher gasoline prices. Outside of purchases at gasoline stations, retail sales rose by only 0.8 percent in November, which was a deceleration from October.

Today’s reports show that while economic momentum is building abroad, the U.S. economy is not keeping pace. The American consumer is reluctant to spend, at least in part because of fears about job security.

While job creation remains a focal point in Washington these days, one of the most effective ways we can do that is to increase exports by approving pending free trade agreements. We know that 95 percent of the world’s consumers are overseas and they have money to spend. In both the near term and long term, an aggressive export campaign is going to be key to job creation.

Today’s report by the Labor Department that payroll employment declined only 11,000 last month, while the unemployment edged down to 10 percent from 10.2 percent in October, is a sign that the labor market is gradually stabilizing. The modest overall employment decline in November was mainly due to a rather large increase in temporary employment. At the same time, there was a noticeable increase in weekly hours worked to 33.2 in November from an historic low of 33 in October. Both of these measures have traditionally been precursors to overall employment growth.

It is important to note that one month does not make a trend, and this initial estimate of the employment situation in November will be revised. Manufacturing continues to be hit hard, losing 41,000 more jobs and widespread employment losses continued across most sectors of the economy in November — including construction, retail, finance, and leisure and hospitality.

Employers remain cautious and still lack the confidence to make permanent hires as several risk factors loom over their heads with policy discussions in Washington that could send the economy in the wrong direction.

(David Huether is chief economist of the National Association of Manufacturers)

Today’s report by the Labor Department that unemployment jumped from 9.8 percent in September to 10.2 percent in October suggests we have a long way to go to get to to full recovery. Despite some positive reports earlier this week, today’s data suggest that the economy will decelerate from the 3.5 percent rise in the third quarter.

While the 190,000 jobs lost last month were less than the downwardly revised 219,000 drop in September, the difference was not significant. However, the 61,000 decline in manufacturing employment, led by a 10.4 thousand decline in machinery employment, was the largest drop in four months. Because the manufacturing sector is driven broadly by consumer spending, investment spending and exports, the fact that the decline in manufacturing employment occurred across most industries shows that economic conditions are not improving significantly, and strongly suggests that much of the growth in the third quarter was due to temporary government programs.

Also, the rise of the unemployment rate to 10.2 percent will likely have a negative impact on consumer confidence, which could curtail spending in the fourth quarter.

Finally, the average weekly private-sector hours worked remained at an historic low 33 in October; that’s a harbinger of continuing weak economic conditions in the fourth quarter. Historically, the average weekly hours worked for existing employees begins to improve before new workers are added to employment rolls. Today’s report of stagnant hours worked signals slow improvement in the labor market in future months.

The Bureau of Labor Statistics reports that unemployment hit 10.2 percent in October and manufacturing lost another 61,000 jobs. More on that in a bit, but for now we’re reminded of these comments made at a White House economics advisory group meeting Monday.

We are not going to be able, through government spending, [to] replace business investment. The most important thing we can do is create an environment in which business investment is triggered and they are leading us on this path of economic growth.

Agreed, Mr. President.

The House of Representatives today continues floor debate on H.R. 2868, the Chemical Facility Anti-Terrorism Act, which makes sweeping changes to the Department of Homeland Security’s regulations over management of U.S. chemical manufacturing facilities.

The National Association of Manufacturers sent a letter to House members earlier this week opposing the legislation if it includes provisions mandating “inherently safer technologies,” or IST. This euphonious requirement imposes huge costs and reorganizing of manufacturing processes with no clear benefit in safety or security.

It’s also a disruptive reworking of safety measures already begun under the Chemical Facility Anti-Terrorism Standards being implemented by the Department of Homeland Security.

From the letter:

While H.R. 2868 reflects some of the important security measures that will continue to be implemented under CFATS, manufacturers oppose the approval of any IST language that would give the Department of Homeland Security authority to mandate manufacturing processes or substance changes without any regard for security improvements, practicality, availability or cost. The numerous improvements that manufacturers have made render this language unnecessary. Such changes would be devastating to the chemical industry, the impact of which would be felt by their customers, including thousands of small and medium manufacturers that use chemicals in their production processes or those that rely on goods manufactured with chemicals.

The paper industry estimates that converting a single facility to a new bleaching process to comply with IST could cost up to $200 million and increase energy demand by 32,000MWh/year. Additionally, the refining industry has determined that a mandate to switch from hydrofluoric acid to sulfuric acid, which can be just as dangerous in a terrorist scenario and requires roughly 250 times more acid to achieve the same results, would cost between $45 and $150 million per refinery with an increase in operating costs between 200 and 400 percent. This devastating impact could also be felt by families, as their energy costs will inevitably rise.

Rep. John Culberson (R-TX) cited the NAM’s objections in his floor remarks Thursday, and we thank him.

The NAM also joined many other trade associations in a letter in October detailing the many problems with the bill.

Today’s debate will include action on a number of amendments that could improve the bill. (See Majority Leader’s floor schedule.) The overriding question that House members should be asking themselves on all today’s votes is why they would support legislation that will add costs, drive industry overseas, and destroy jobs.

The unemployment rate was announced today at 10.2 percent.

The Commerce Department report on second quarter Gross Domestic Product (GDP) was better than expected, showing the economy fell only 1 percent – less than the 1.5 percent drop that was expected – and significantly less than the revised 6 percent decline for the first quarter. (Commerce news release.)

Exports declined only 7 percent in the second quarter after falling 30 percent the quarter before, and business investment fell 8.9 percent after declining 39 percent the quarter before. Coupled with the increase in durable goods orders reported earlier this week, these are positive signs that suggest the economic decline is leveling off.

On the other hand, the private sector is still struggling. If you factor out government spending, the GDP actually fell by 2 percent in the second quarter. And consumer confidence fell again, a cause for concern.

The overall trend is positive and suggests business will improve in the third quarter, but probably not enough to move the economy into positive growth.