Global Manufacturing Economic Update – September 12, 2014

Here is the summary for this month’s Global Manufacturing Economic Update: 

Net exports have been a drag on the U.S. economy so far through the first half of this year, with manufacturers continuing to experience sluggish sales growth in international markets. With that said, the U.S. trade deficit narrowed a bit in July to its lowest level in six months, with growth in goods exports outpacing growth in goods imports. Petroleum trade accounted for a significant portion of the change in each, and in general, energy has helped to narrow the deficit from that of a couple years ago. Another positive note was the fact that each of the top-five trading partners for U.S.-manufactured goods experienced increases in manufactured goods exports year-to-date relative to the same time frame last year using non-seasonally adjusted data.

Along those lines, manufacturers worldwide saw modest growth, with a slight improvement from the month before. The J.P. Morgan Global Manufacturing Purchasing Managers’ Index (PMI) rose marginally, up from 52.4 in July to 52.6 in August. The good news is that this marks the 21st straight month of expanding activity globally; yet, it is also clear that the pace of growth has not changed much this year. Still, manufacturing activity in August expanded in 9 of the top 10 markets for U.S.-manufactured goods, an improvement from just five markets in May.

Nonetheless, the data also show signs of softness, most notably in Europe and in China. Real GDP in the Eurozone fell 0.2 percent in the second quarter, with recent industrial production and retail sales data trending lower, as well. The Markit Eurozone Manufacturing PMI declined from 51.8 to 50.7, its lowest level since July 2013, when Europe was just emerging from its deep recession. Still, the economic health of various European nations varies widely, ranging from deteriorating activity in France to relatively robust growth in Ireland. For its part, the European Central Bank has once again lowered interest rates in the hope of spurring more economic activity and additional lending. With these actions and slow growth in Europe, the euro has depreciated against the dollar, down from a recent high of $1.3924 for one euro on May 6 to yesterday’s close of $1.2921 on September 11.

Meanwhile, Chinese manufacturers have reported expanding levels of activity for three straight months (June to August), which by itself is progress after starting the year with five months of contraction. However, the HSBC China Manufacturing PMI declined from 51.7 to 50.2, or just barely above neutral, with decelerating levels of new orders, output and exports. Moreover, while real GDP in China picked up slightly from a year-over-year pace of 7.4 percent in the first quarter to 7.5 percent in the second quarter, we expect to continue to see an easing in growth rates moving forward. We have also seen decelerating rates of growth—albeit still healthy ones by our standards—for industrial production, fixed asset investments and retail sales. Slower growth in China has also helped to pull down overall manufacturing activity in the emerging markets.

U.S. trade talks continue this month with both Asia-Pacific nations and Europe, while the World Trade Organization seeks to move forward both trade facilitation and environmental goods discussions. Domestically, a range of trade and international financing legislation awaits action, including the reauthorization of the Export-Import Bank of the United States, whose charter expires on September 30.

Chad Moutray is the chief economist, National Association of Manufacturers. us trade deficit - sept2014


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University of Michigan: Consumer Confidence Has Risen Somewhat in September

The University of Michigan and Thomson Reuters said that preliminary data on consumer confidence reflects a slight increase in September. The Consumer Sentiment Index increased from 82.5 in August to 84.6 in September, its highest level since July 2013. These figures suggest that the lull in confidence that we have seen so far this year might finally be starting to dissipate. Prior to the September reading, for instance, the University of Michigan index has averaged just 81.9, and it was little changed since recovering from the budget showdown last fall. In contrast, the Conference Board’s confidence measure has reached pre-recessionary highs in its most recent report.

The subcomponents in the University of Michigan data continue to reflect some anxieties on the part of the consumer. For instance, the index for the current economic environment slipped a bit this month, down from 99.8 to 98.5, even as it represents an improvement from earlier in the year. Americans remain concerned about labor market and income growth, and this is likely responsible for the decline in the present figure. Geopolitical events might also play into this. Still, the future-oriented index rose strongly, up from 71.3 to 75.6, its highest level in over one year, suggesting more optimism moving forward.

We will get final data on September consumer sentiment from the University of Michigan on September 26. The Conference Board will also release its survey data on consumer confidence on September 30.

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

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After Cautiousness in July, Retail Sales Pick Up in August

The Census Bureau said that retail sales rose 0.6 percent in August, rebounding from a revised 0.3 percent increase in July. The July figure was originally reported as being unchanged. As such, this is a sign that consumer spending has picked up in August after cautiousness over much of the summer. Still, the longer-term trend for retail sales has been mostly favorable, particularly after strong growth this spring, with 3.8 percent growth since December and a 5.0 percent increase year-over-year.

Healthy gains in spending on motor vehicles helped to lift August retail sales, with auto sales up 1.5 percent. It was the second straight increase in auto purchasing levels after being stagnant in June. Year-to-date, motor vehicle sales have risen by a healthy 7.7 percent, or 8.9 percent over the past 12 months.

Beyond autos, consumer spending also increased at decent levels, up 0.3 percent in August or 4.1 percent year-to-date. Therefore, we have seen modest gains for retail sales in the broader market. Excluding autos, other segments with strong increases in retail spending in August included miscellaneous store retailers (up 2.5 percent), building materials and garden supplies (up 1.4 percent), sporting goods and hobbies (up 0.9 percent), electronics and appliances (up 0.7 percent) and furniture and home furnishings (up 0.7 percent.

In contrast, gasoline stations (down 0.8 percent) and department stores (down 0.4 percent) were two areas with softer spending levels for the month. For gasoline stations, the decline stemmed from reductions in petroleum costs, with the price of West Texas intermediate crude falling from $106.07 per barrel on the last day of July to $98.23 a barrel on the last day of August. (It has fallen further since then, closing at $92.84 on Thursday.)

Overall, retail sales figures were encouraging. With softer spending levels from May to July, there were worries that cautiousness on the part of the consumer could serve to be a downside risk to the economy moving into the second half of the year. This data suggests that Americans might be loosening up a little in terms of their willingness to spend – a good sign perhaps.

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

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House Charts Common-Sense Course for EPA and States to Work Together on Clean Water

Yesterday evening, the House passed H.R. 5078, the Waters of the United States Regulatory Overreach Protection Act, introduced by Rep. Steve Southerland (FL-2), by a bipartisan majority vote of 262-152.

The legislation would put the breaks on the Environmental Protection Agency (EPA) and the Army Corps of Engineers’ (Corps) efforts to expand jurisdiction over water traditionally regulated by states and local governments. The bill directs the agencies to work more closely in a consensus-based approach to determine what waters fall under the federal government and which waters fall under the purview of the state and local governments.

The NAM and Water Advocacy Coalition (WAC) have spent the last several years communicating our concerns EPA and Corps. Among other things, we have expressed strong concerns for how the agencies re-defined “waters of the United States” so that virtually any and all water would come under federal control. In short, if you control the water use then you control the land use, thus land use would depend on decisions made not at the local level but at the federal level.

Water is integral to manufacturing process whether it is as an input, as a part of the cooling process, or whether it is a bi-product of the manufacturing process. Manufacturers cool water, settle water, and transport water away from one process while also looking for ways to reuse water. Manufacturers deal with storm water and storm water systems. We must deal with water when we perform operations, maintenance, repair, construction, expansion and infrastructure projects. If  forced to apply for and received a Corp permit every time we clean out a cooling pond, repair a transmission line, or expand machine shop, it won’t take long before we lose the ability to do what we do best…manufacture, compete and create jobs!

If passed by the Senate and signed by the President, H.R. 5078 would be an important step towards a productive federal-state relationship that provides manufacturers with the regulatory certainty need.

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Leadership Engagement Series Continues in Houston

The NAM’s Leadership Engagement Series, a nationwide roadshow aimed at elevating top manufacturing priorities, continued today in Houston. Today’s event featured a panel discussion led by NAM President and CEO Jay Timmons, who was joined by BP America Chairman and President John Mingé. Also participating were the CEOs of Emerson, Fluor Corporation, and Marlin Steel Wire Products. Our panelists shared their insights on a wide range of topics, including national energy policy and Washington’s legislative agenda for the rest of the year.

Of particular concern to our panelists and manufacturers participating in today’s event is the reauthorization of the Export-Import Bank (Ex-Im). The Ex-Im bank remains an invaluable tool for manufacturers, especially smaller companies, who rely on the bank’s funding to help finance export projects. Yet Ex-Im is currently in danger of being shut down if not reauthorized by Congress by the end of September, an outcome that would have dire consequences for Texas’ economy.

Houston Leadership EventThat’s because exports are a big business in Texas. Manufacturing accounts for more than 93 percent of Texas’ exports, which in turn support over 26 percent of Texas manufacturing jobs. And most of those exporters are small companies, not large corporations. Without the Export-Import Bank, many of these smaller manufacturers could find themselves shut out of a critical source of capital financing for their businesses, putting jobs in jeopardy.

Ex-Im was just one of many topics discussed and debated at today’s Leadership Engagement Series. There are a multitude of challenges being faced by manufacturers in today’s economic and political climate, and in the coming weeks the NAM will use these types of forums to help engage manufacturing leaders in the political process.

Stay tuned for updates from our next Leadership Engagement Series stop, coming up on September 15th in Iowa.

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Manufacturing Job Postings Eased Slightly in July, but Remained Improved from Earlier in the Year

The Bureau of Labor Statistics said that manufacturing job openings declined slightly, down from 302,000 in June to 296,000 in July. Still, June’s figure was a two-year high, and job postings remain higher than earlier in the year. In February (six months earlier), for instance, there were 258,000 job openings in the sector.

The Job Openings and Labor Turnover Survey (JOLTS) data also show a disparity between durable and nondurable goods. Durable goods manufacturers increased the number of job openings for the second straight month, up from 194,000 in June to 201,000 in July. In contrast, nondurable goods firms reduced their postings once again, down from 108,000 to 95,000, pulling the headline figure lower. A similar trend was observed in the hiring data.

Manufacturers hired 259,000 additional employees in July, down somewhat from 268,000 in June. The decrease was the result of reduced hiring for nondurable goods manufacturers (down from 113,000 to 102,000), which was enough to offset a small increase in hiring for durable goods businesses (up from 155,000 to 157,000). At the same time, manufacturing separations – including layoffs, quits and retirements – decreased from 241,000 to 226,000. Overall, net hiring (or hires minus separations) in the manufacturing sector increased from 27,000 to 33,000, illustrating the rebound in hiring seen since the winter and spring months.

In the larger economy, the number of job postings were essentially unchanged (down slightly from 4,675,000 in June to 4,673,000 in July). This continues to reflect significant growth from January’s pace of 3,874,000. Note that the June rate was the highest since February 2007, meaning that those gains were mostly sustained. There were more job postings in July for accommodation and food services, health care, professional and business services and retail trade, in addition to durable goods manufacturers.

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

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NFIB: Small Business Optimism Ticked Higher in August

The National Federation of Independent Business (NFIB) said that small business sentiment ticked higher in August, rising to its second-highest level in seven years. The Small Business Optimism Index increased from 95.7 in July to 96.1 in August. After peaking at 96.6 in May, the index eased somewhat in June, and August’s reading suggests that confidence has once again begun to climb back. Over a longer time frame, it is clear that small business owners have become more positive over the past six months, with the index at just 91.4 in February.

With that said, the underlying data were slightly mixed. On the positive side, the percentage of small business owners with job openings right now increased from 24 percent to 26 percent, continuing an upward trend. Along those lines, the percent planning to make capital expenditures over the next 3 to 6 months rose from 23 percent to 27 percent, its fastest pace since November 2007 (the month before the official start of the recession). On the topic of inflation, pricing pressures have decelerated a bit, with the net percentage of those predicting price increases over the next 3 months declining from 22 percent to 19 percent.

Yet, the report also reflected some soft spots. For instance, sales expectations over the next 3 months dipped from a net percentage of 10 percent to 6 percent. In addition, the percentage suggesting that the next 3 months were a “good time to expand” was off slightly from 10 percent to 9 percent. Nonetheless, the outlook data do reflect an upward trend overall, rising from 6 percent in February. For those saying that it is not a good time for expansion, the top reasons cited continue to be economic conditions and the political climate. Taxes were the listed as the “single most important problem” by 24 percent of respondents, followed by government regulations (19 percent), poor sales (13 percent) and labor quality (11 percent).

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

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Keeping Our Eye on the Prize: Comprehensive Tax Reform

While many press stories today focused on what U.S. Treasury Secretary Lew said – and did not say – on business tax reform and the so-called “inversions”  this morning at the Urban institute, the media missed the boat by not focusing more attention on a panel discussion after Secretary’s Lew speech .

Indeed, John Samuels, Vice President and Senior Counsel of Tax Policy and Planning at the General Electric Company, raised perhaps the most important and most often missed point in this whole discussion when he asked why policy makers are discussing how to raise the bar and make it harder for companies to leave the United States when they should be focusing on what we need to do to make it more attractive for companies (aka employers) to be located in the United States.

This is exactly the question that manufacturers have been asking themselves for quite some time. One of the NAM’s top goals is to make the United States the best place in the world to manufacture and attract foreign direct investment—a goal on which almost everyone should be able to agree but one that policymakers have done so little to advance. We have known that our tax code was antiquated, non-competitive and perhaps worst of all, unpredictable, for decades. Our tax system is out of sync with the rest of the industrialized world and, as Mr. Samuels pointed out, other nations have been competing to attract additional business investment knowing that such investment will help improve their own economies.

Meanwhile, the United States continues to lag behind and the situation would only get worse with some of the proposals being discussed that would penalize companies looking abroad to expand their business. So to paraphrase Mr. Samuels’ question this morning, why are we focused on how to build higher walls and instead figure out better incentives to drive the investment that everyone agrees is needed to get our economy back up to speed and competitive into the future. The only sure way to do this is to undertake a serious effort to enact comprehensive tax reform. To accomplish this goal everyone is going to need to keep their eye on the prize.

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Revisionist—and Discriminatory—Tax Policy Is Not the Path to Economic Growth

Manufacturers in the United States were taken aback this weekend when word leaked out that the senior Senator from New York and long-time member of the Finance Committee –Chuck Schumer (D)—is floating a tax increase proposal that would actually reach back 20 years to discriminate against certain businesses that play a critical role in the U.S. economy. While it appears that the Senator’s goal is to discourage recent M&A activity in the international arena (aka inversions), the proposal would actually discourage important foreign direct investment in the United States and set a dangerous precedent for changing tax rules mid-stream, injecting even more uncertainly in our nation’s  shaky tax system.

Specifically, what Sen. Schumer’s proposal would do is significantly limit interest deductions for some non-U.S. domiciled companies that were headquartered in the United States at some point in the past 20 years. In laymen’s terms, this would be similar to limiting the deduction for a homeowner’s mortgage interest depending on where they were born. In both cases, it adds up to discriminatory tax policy. At the same time, adopting this revisionist approach to tax policy would open to door to similar proposals affecting other tax deductions and other groups of tax payers, and promulgating even more uncertainty in our uncertain times.

The proposal from Sen. Schumer seems to disregard the very important role that foreign direct investment plays in the U.S. economy and discriminates against non-U.S.-headquartered companies that play an important role in the U.S. economy. Indeed, U.S. subsidiaries of foreign companies employ more than 2 million U.S. workers, over 17 percent of America’s manufacturing workforce. The ability to deduct interest expense is a critical factor in a company’s decision to invest and create jobs in the United States.

As we’ve noted many times before, the NAM believes that recent M&A activity highlights the critical need for a comprehensive overhaul of the U.S. tax system to reflect the global marketplace of the 21st century.  In short, the answer is comprehensive tax reform, not punitive tax treatment of foreign-owned companies.

Dorothy Coleman is the Vice President for Tax and Domestic Economic Policy at the National Association of Manufacturers. 

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Monday Economic Report – September 8, 2014

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

The U.S. economy added 142,000 nonfarm payroll workers in August, a disappointing figure given signs of a rebound in many other indicators lately. The consensus expectation had been for nonfarm payroll growth to exceed 200,000 jobs for the seventh consecutive month, as was observed in the estimates provided by ADP the day before. Manufacturing employment was flat for the month, which was also a disappointment. It ended a 12-month streak of job gains for the sector, a period in which manufacturers added 168,000 net new workers. Hopefully, the August jobs report was just a brief pause in what otherwise had been positive news on the labor front.

The Institute for Supply Management’s (ISM) purchasing managers’ index (PMI) data provides much encouragement that manufacturing activity is moving in the right direction heading into the autumn months. The headline PMI figure rose from 57.1 in July to 59.0 in August, its highest level since March 2011, and it reflected a robust recovery from weaknesses earlier in the year. Indeed, new orders and production expanded at healthy paces. These findings mirror the latest NAM/IndustryWeek Survey of Manufacturers, which is being released this morning, showing respondents mostly upbeat about their own company’s outlook, with sales, capital spending and hiring expectations at two-year highs. Indeed, 87.3 percent of those taking the survey were either somewhat or very positive in their outlook, up from 85.9 percent three months ago. The data are largely consistent with 3.1 percent growth in manufacturing production over the next two quarters.

Manufacturers spent 4.4 percent more on construction projects in July, also providing some reassuring news. The sector has devoted 23.9 percent more to construction projects over the past 12 months, an indication that the increase in demand and output observed over that time frame has resulted in a jump in new investments. Meanwhile, new factory orders data provided mixed news. While orders increased by a whopping 10.5 percent in July, much of that stemmed from highly volatile nondefense aircraft sales. Excluding transportation orders, new factory orders declined 0.8 percent for the month, a finding that we had noted in the earlier release of preliminary durable goods data. Still, factory orders excluding transportation have risen 2.7 percent over the past six months (since weather-related declines in January), which mostly mirrors the more positive data in other releases.

Looking at exports, the U.S. trade deficit narrowed ever-so-slightly in July, with an increase in goods exports marginally offsetting an increase in goods imports. Yet, manufactured goods exports have risen only slightly year-to-date, up just 0.8 percent so far in 2014 using non-seasonally adjusted data. On the other hand, these same figures show that exports to our top five exports markets were higher through the first seven months of this year relative to last year. Regardless, manufacturers hope that the pace of export growth accelerates, with sluggish sales frustrating business leaders and net export growth providing a drag on real GDP over the past two quarters.

This week, we will get new data on consumer confidence, job openings, retail sales and small business optimism. Markets will also continue to digest Friday’s employment numbers, trying to decipher if they were an aberration or a sign of larger weaknesses. In particular, this discussion centers on how the Federal Reserve will interpret such things, with a debate already ongoing as to when the Federal Open Market Committee will begin to increase short-term interest rates. Conventional wisdom holds that short-term interest rates will rise sometime in 2015, but whether that occurs earlier or later in the year is up for debate between those who are more hawkish or dovish on inflation. In the Beige Book, which was released last Wednesday, the Fed mostly observed progress in the economy in recent months, including in manufacturing. Yet, as long as the Fed continues to see “slack” in the labor market, it might be less willing to normalize rates.

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