Tag: economic growth

Monday Economic Report – March 3, 2014

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

The U.S. economy grew 2.4 percent in the fourth quarter, down from the earlier estimate of 3.2 percent. Given some of the recent weaker manufacturing, retail and housing data, the downward revision was largely expected. Still, there are some positives in the report, with strength in consumer spending, business investment and net exports. Fixed investment was higher in this revision, which was welcome news. Federal government spending accounted for the biggest drag on growth during the fourth quarter, subtracting one percentage point from the total figure.

The bottom line is that real GDP increased 3.3 percent in the second half of 2013, providing some momentum for growth moving into this year. While weather and other factors have dampened the economy recently (and will also reduce real GDP in the current quarter), we still expect 3.0 percent growth for 2014. Manufacturers continue to be mostly upbeat about demand and production over the coming months.

Despite such optimism in the outlook for the year, the current environment for manufacturers clearly has its challenges. Weather has negatively impacted production and shipments in a number of regions around the country, and surveys from the Dallas, Kansas City and Richmond Federal Reserve Banks all observed some easing in activity in February. This followed similar reports from the New York and Philadelphia Federal Reserve Banks the week before. Meanwhile, the Census Bureau has reported lower new durable goods orders for two straight months, with poor weather conditions likely a factor, particularly for auto sales. At the same time, new durable goods orders excluding transportation were higher, suggesting that the broader manufacturing market was slightly better than the headline figure indicated.

Some of the other data remain mixed. New home sales were up sharply in January to their highest level since July 2008, but year-over-year growth was more modest, and inventories of new homes have fallen over the past few months. Nonetheless, the positive report on new home sales stands in contrast to much weaker residential construction figures of late, including housing starts and existing home sales, which have seen negative impacts from the weather. Similarly, the two major reports about consumer confidence moved in opposite directions, with the Conference Board’s measure lower in February and the University of Michigan’s figure edging slightly higher. Doubts about income and labor growth have possibly fed some anxieties in sentiment in both surveys, but the two reports differ in their findings about the economic outlook.

This week, the focus will be on manufacturing activity, employment growth and international trade. We will get February Purchasing Managers’ Index (PMI) data from the Institute for Supply Management (ISM) later this morning. After falling from 56.5 in December to 51.3 in January, the ISM PMI is expected to increase modestly, still indicating weaknesses in new orders and production for the month. On the trade front, we will be looking for better manufactured goods exports in 2014, improving on the modest 2.4 percent growth rate seen in 2013. Still, manufactured goods exports hit an all-time high last year, providing a positive for economic growth.

The biggest news of the week will come on Friday with the release of new jobs numbers. Nonfarm payroll growth has been soft over the past two months, with just 75,000 and 113,000 net new workers added in December and January, respectively. The consensus expectation is for roughly 165,000 nonfarm workers added in February. In contrast, manufacturing job gains have been fairly decent over the past six months, averaging 15,500 since August, and we should get modest gains again in February. One of the bigger conversation pieces will be whether the unemployment rate falls to 6.5 percent in February, which is the rate specified in the Federal Reserve Board’s forward guidance. (Either way, look for the Federal Open Market Committee to change its guidance at its next meeting.) Other highlights this week include the latest data on construction spending, factory orders, personal income and spending and productivity.

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

personal consumption - mar2014

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Fed Minutes: Highly Accommodative Policies to Continue, Tapering Could Start “In Coming Months”

The Federal Reserve released the minutes to the October 29-30 Federal Open Market Committee (FOMC) meeting, providing an inside look at the internal deliberations. As noted earlier, the FOMC made no changes to its monetary policy actions at the October meeting, continuing to purchase $85 billion in long-term and mortgage-backed securities each month. It also affirmed its goal of maintaining “highly accommodative” policies until the unemployment rate hits 6.5 percent and/or long-term inflation exceeds 2.5 percent. As such, this means that short-term interest rates will remain near zero percent throughout 2014, and perhaps into 2015.

Over the summer, the Fed had been expected to begin “tapering” (or reducing) its asset purchases by year’s end, with it widely anticipated to start at the September 17-18 meeting. Instead, the FOMC chose not to taper at that meeting, surprising the market. In making its decision, the Fed cited the political stalemate in Washington and the possibility of a government shutdown. Beyond that, it also wrote:

In judging when to moderate the pace of asset purchases, the Committee will, at its coming meetings, assess whether incoming information continues to support the Committee’s expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective. Asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s economic outlook as well as its assessment of the likely efficacy and costs of such purchases.

The Fed has since insisted that a tapering decision was not pre-ordained, with any action being data dependent. Nonetheless, the Fed was widely criticized for miscommunicating its intentions, something that Chairman Ben Bernanke addressed at last night’s National Economists Club annual meeting. The threat of reducing asset purchases had sent long-term interest rates sharply higher, which he said was “neither welcome nor warranted.” Moreover, he added, “This change in expectations did not correspond to any actual lessening in the FOMC’s commitment or intention to provide the high degree of monetary accommodation needed to meet its objectives….”

The Fed’s forward guidance was discussed in both the FOMC minutes and Bernanke’s speech. Specifically, Bernanke noted that that 6.5 percent unemployment rate target was a “threshold” and not a “trigger.” In other words, the FOMC would begin debating a wind-down to its accommodative policies once the unemployment reached 6.5 percent, but one should not assume that the fed funds rate will automatically go up just because the threshold was reached. The Fed minutes make a similar point, with a couple participants pushing for an even lower target unemployment rate.

In the end, the FOMC voted to keep its policies in place without changing its forward guidance. The issue of accommodation remains a controversial one in the public and within the FOMC, with inflation hawks worried about longer-term inflation worries from current actions. Esther L. George, the president of the Kansas City Fed, dissented from the Fed’s statement for that reason. The minutes did reiterate that tapering was to begin “in the coming months,” but that is not likely to occur until probably early next year. The next FOMC meeting is on December 15-16.

Regarding the economy, the FOMC members found that the impacts of the partial government shutdown were “temporary and limited,” with several of them worrying about “the possible economic effects of repeated fiscal impasses on business and consumer confidence.” They were also disappointed with the September jobs numbers. Yet, they were encouraged  by the recent pickup in manufacturing activity, singling out strength in auto sales. While the economic projections for the short-term were slightly lower, the outlook for 2014 and 2015 currently calls for growth to accelerate. In September, the Fed had estimated growth of 2.9 to 3.1 percent real GDP growth for next year.

Chad Moutray is the chief economist, National Association of Manufacturers. He is a former president and chairman of the National Economists Club, where Bernanke gave the Herbert Stein Memorial Lecture.

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Monday Economic Report – November 12, 2013

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

The U.S. economy has been increasing a bit faster than expected, with real GDP up a surprisingly strong 2.8 percent in the third quarter. This was higher than consensus estimates of around 2.0 percent. In general, the data observed that many of the second-quarter trends extended into the third quarter, particularly with modest growth in consumer and business spending. In fact, goods spending grew an annualized 4.3 percent in the third quarter, contributing 0.99 percentage points to overall real GDP. Fixed investment was a positive contributor overall, but the largest component was inventory replenishment. Without inventory spending, real GDP would have been closer to the forecasted 2.0 percent. Other positives included stronger growth in exports and improved local and state government performance. While the data pre-dated the government shutdown, reduced federal government spending was once again a drag on growth, something that will continue moving into the fourth quarter.

October’s jobs numbers were also surprisingly strong. It was widely expected that the employment data from the Bureau of Labor Statistics were going to be closer to what ADP had estimated the week before, with roughly 130,000 additional workers added in the month. Instead, nonfarm payrolls increased by 204,000 in October, and when combined with significant revisions to August and September data, the average over the past three months is 201,667. This suggests hiring has picked up more recently in the larger economy, mirroring improvements in other data. However, the unemployment rate edged up slightly from 7.2 percent to 7.3 percent. This corresponded with the participation rate moving up a bit from 63.2 percent to 63.8 percent, suggesting that some workers might be returning to the market.

Manufacturers hired an additional 19,000 workers on net in October, its fastest pace since February. Both durable and nondurable goods firms brought on additional employees, up 12,000 and 7,000, respectively, for the month, and the largest increase occurred in the motor vehicle sector, which added another 5,700 workers. While this was better than recent figures, hiring growth for the sector has been disappointing. On a year-over-year basis, manufacturers have added 55,000 additional workers, or 2.4 percent of the 2.3 million nonfarm payroll workers added over the past 12 months.

Other data released last week also highlighted the recent acceleration in manufacturing activity. The JPMorgan Global Manufacturing Purchasing Managers’ Index (PMI) increased from 51.8 in September to 52.1 in October, its fastest pace since May 2011. Stabilization in Asia and Europe has helped to raise the level of new orders and output in many of our key trading partners, with modest growth in October. (For more information on these trends, see the latest Global Manufacturing Economic Update, which was released on Friday.) Increases in manufacturing sales helped lift the Conference Board’s Leading Economic Index (LEI) higher as well. For instance, new manufactured goods orders jumped 1.7 percent in September. Nonetheless, aircraft orders were the main driver of new factory orders, with weaknesses in the broader market.

Meanwhile, consumer confidence continued to fall in preliminary survey data from the University of Michigan and Thomson Reuters. Since reaching a six-year high in July, the confidence measure has fallen from 85.1 to 72.0. The government shutdown dampened overall sentiment, but attitudes were already waning before that. To some extent, the diminished enthusiasm about the current and future economic environment might have impacted Americans’ purchasing decisions. The latest personal spending report suggests individuals might be more hesitant about opening their pocketbooks, with only modest growth in purchases in recent months. Consumer spending fell in the third quarter, down from a year-over-year pace of 3.3 percent in June to 2.7 percent in September. Durable goods spending declined 1.3 percent in September, bringing down the total figure. Interestingly, this slowdown in spending has corresponded with relatively strong personal income growth, up an annualized 4.45 percent in the third quarter. As a result, the savings rate increased to 4.9 percent, its highest level so far in 2013.

This week, the focus will be on price, production and trade data. Prices have been increasing minimally, with core inflation running below 2 percent. That should continue to be true with the release of October consumer and producer pricing data on Thursday and Friday. Improvements in the global economy should lead to better export figures, and manufacturing production should also be up modestly, building on recent gains. Other highlights will be the latest regional manufacturing survey from the New York Federal Reserve Board and new reports on labor productivity and small business optimism.

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

real GDP forecast - nov2013

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The U.S. Economy Grew a Stronger-than-Expected 2.8 Percent in the Third Quarter

The Bureau of Economic Analysis reported a stronger-than-expected growth rate for the U.S. economy in the third quarter, with real GDP up 2.8 percent. This was higher than the consensus estimate for real GDP growth of 2.0 percent. As such, it was the third consecutive acceleration in output, with real GDP up 0.1 percent, 1.1 percent, and 2.5 percent in the past three quarters (fourth quarter 2012 to second quarter 2013), respectively. With that said, this data pre-dates the government shutdown, which is expected to have a negative impact in the fourth quarter data of 0.25 to 0.50 percentage points.

As was noted in the second quarter, consumer and business spending were once again the strongest elements of growth in the third quarter data. The good news was that net exports and government spending also made positive contributions this time around, with the latter stemming from better numbers at the state and local level. Federal government spending subtracted 0.13 percentage points from real GDP, but this was offset by a 0.17 percentage point positive contribution from state and local government outlays.

Americans purchased more items in the third quarter than in the second, with goods spending up an annualized 4.3 percent for the quarter. Total goods spending added 0.99 percentage points to growth, with 0.57 percentage points stemming from durable goods items and another 0.42 percentage points coming from nondurable goods. Among the items that were strengths were food and beverages, furnishings and durable household equipment, motor vehicles, and recreational goods and vehicles. In contrast to goods spending, consumer spending on services was almost flat for the quarter, up 0.1 percent at the annual rate.

Increased inventory replenishment and spending on both residential and nonresidential structures helped push business investment higher. In fact, gross private domestic investment increased at an annualized 9.5 percent in the third quarter, extending the 4.7 percent and 9.2 percent gains experienced in the first and second quarters, respectively. Business investment added 1.45 percentage points to growth, making it the largest contributor to real GDP in the third quarter. Given that 0.83 percentage points of that was from inventories, you might expect the fourth quarter figure to be slightly less robust as inventory spending might not need to be as strong.

On the trade front, exports were a net positive for the first time since the fourth quarter of 2012, adding 0.31 percentage points to real GDP. This was the result of goods export growth of 6.4 percent at the annual rate, outpacing goods import growth of 1.8 percent. Given the slow growth of manufactured goods exports so far this year, news that goods exports have begun to accelerate again is definitely an encouraging sign.

Overall, this data suggests that the U.S. economy continues to grow at a modest pace, led by consumer and business spending. It also indicates that growth could pick up even more with healthier trade figures, much as we saw in the third quarter. While fourth quarter growth will be somewhat depressed by the government shutdown and continuing fiscal uncertainties, real GDP should increase just above 2 percent for 2013 as a whole.

Next year, the economy is poised for better economic growth, approaching 3 percent for the first time since 2005, assuming government stops creating economic risks and the global growth continues to improve. In general, manufacturers are cautiously optimistic about next year, but they also recognize that there continue to be downward risks to growth in the economy. As such, policymakers should look for ways to expand opportunities for manufacturers, providing them with the keys to expand and flourish and helping to alleviate barriers (e.g., tax reform, reducing regulatory burdens, expanding trade, etc.).

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


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Beige Book: Economy Growing at a Modest to Moderate Pace, Government Uncertainties Tempering Sentiment

The Federal Reserve Board said that “national economic activity continued to expand at a modest to moderate pace” in its latest Beige Book. With that said, eight Fed Districts noting “similar growth rates” while four others experienced a bit slower growth. Those four Districts were the Chicago, Kansas City, Philadelphia, and Richmond Federal Reserve Bank regions. In terms of manufacturing activity, the data reflected a sector that was expanding overall. Automotive and aerospace were bright spots, with positive stories for high-tech, energy, heavy equipment, and steel. Yet, the demand for fabricated metals and construction materials was mixed.

Government uncertainties were mentioned several times in the Beige Book. Examples included the following comments:

  • “Contacts across Districts generally remained cautiously optimistic in their outlook for future economic activity, although many also noted an increase in uncertainty due largely to the federal government shutdown and debt ceiling debate”
  • “Several Districts reported that contacts were cautious to expand payrolls, citing uncertainty surrounding the implementation of the Affordable Care Act and fiscal policy more generally.”
  • “While there was little immediate disruption from the federal government shutdown, [manufacturing] contacts were worried about the potential impact if the closing became prolonged.”

Hiring was growing modestly overall, with employment growth in the manufacturing sector somewhat spotty. Specifically, the report says the following:

In manufacturing, Boston indicated that hiring primarily was for replacement or to fill key needs, New York noted slower job growth, and Chicago reported that manufacturers were cutting back on overtime. Dallas cited scattered reports of hiring in high-tech, fabricated metals, and food manufacturing.

Overall wage and pricing pressures were somewhat minimal.  However, there were some upward wage pressures for some highly-skilled employees, including those in the manufacturing sector. Meanwhile, at least two Districts noted that manufacturing “capital outlays were primarily for productivity enhancing investments.”

In other analysis, consumer spending continued to grow modestly, with motor vehicle sales being one of the bright spots. Retails were mostly upbeat about the upcoming Christmas season. Construction spending continued to improve, but a “number of Districts reported concerns from homebuilders and realtors over rising mortgage rates.” At the same time, nonresidential construction activity was more varied, but up on balance.

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

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Improved Export Picture Lifts Second Quarter Real GDP Revision Higher

The Bureau of Economic Analysis said that the U.S. economy grew 2.5 percent in the second quarter. This was faster than the 1.7 percent reported originally, but only slightly higher than consensus estimates. Still, even with the faster growth rate, real GDP rose just 1.8 percent in the first half of the year, which remains disappointly slow. The one consolation might be the fact that growth has accelerated over the past three months, from 0.1 percent in the fourth quarter of 2012 to 1.1 percent in the first quarter to 2.5 percent in the last one.

The largest change in this revision came from a better-than-originally-predicted export picture. This was largely expected after the strong trade numbers for June. Goods exports, in particular, were up 10.1 percent in the second quarter, with goods imports rising 7.1 percent. Whereas net exports were originally subtracting 0.81 percentage points from real GDP, the newer data now suggest a neutral contribution. This alone was enough to boost output significantly from its 1.7 percent estimate to closer to the latest revision figure.

The strongest elements in the U.S. economy continue to be consumer spending and business investment. These two factors added 2.69 percentage points to real GDP, up from 2.56 percent earlier. Goods consumption alone contributed 0.73 percent, helping manufacturers. On the investment side, there were strong contributions from housing and nonresidential structures and some equipment spending. Nonfarm inventories were also higher than originally predicted.

Meanwhile, government spending provided more of a drag than previously estimated, subtracting 0.18 percentage points instead of 0.08 percent. Reduced defense spending and tighter state and local government budgets were largely to blame. While the subtraction from real GDP was less than prior quarters, government’s contribution to real GDP has been negative now for 12 of the past 15 quarters. With further budget cuts expected moving forward, that is not expected to change.

Overall, these numbers provide some comfort that growth in the U.S. economy was faster in the second quarter than originally thought, and the fact that exports led the revision is certainly good news for manufacturers, particularly heading into the third quarter. Yet, 1.8 percent growth in the first half of the year is hardly robust, and policymakers would be wise to pursue actions that would lift growth moving forward. While manufacturers are cautiously optimistic about growth in the second half of the year, there continue to be headwinds that make that less than assured.

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

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Third Quarter Real GDP Revised Up Again to 3.1 Percent

The Bureau of Economic Analysis revised its figure for third quarter real gross domestic product (GDP) to 3.1 percent, up from last month’s estimate of 2.7 percent and the original estimate of 2.0 percent. This reflects higher consumer spending on services, increased net exports, and a now-positive contribution from state and local spending.

Overall, the consumer, housing, end-of-fiscal year federal government spending, inventory replenishment, and net exports were the main contributors to the faster pace of growth in the third quarter. The primary drag was nonresidential fixed investment, with manufacturers and other businesses anxious about slowing sales and the fiscal cliff. This uncertainty led to business investment subtracting 0.23 percentage points from real GDP, with reduced spending on equipment and software the primary factor.

This sluggishness has continued in the current (or fourth) quarter, with growth expected to slow to around 2 percent or less.

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

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Beige Book Cites Modest Growth, Concerns about the Fiscal Cliff

The latest Federal Reserve Board Beige Book said that the economy “expanded at a measured pace in recent weeks.” With that said, Hurricane Sandy disrupted activity in the Mid-Atlantic regions, and many respondents throughout the country were very concerned about the implications of the fiscal cliff. This is causing many manufacturers, for instance, to worry about the 2013 outlook.

The manufacturing sector was singled out as one industry that continues to be soft. This is not a surprise to those who follow the regional manufacturing surveys from the Federal Reserve Banks, many of which continue have experienced weak or falling new orders and production. In addition to concerns about the fiscal cliff, many manufacturers have also seen their sales – particularly exports – decline. Employment growth, which has seen some modest growth overall, remains more sluggish for manufacturers.  Still, there were also some pockets of strength, namely in the heavy equipment and aerospace industries.

A couple larger strengths of note were rising consumer sales and continuing growth in the housing sector. Consumer spending has increased “at a moderate pace.” The news on the holiday season was positive, with retailers having “mostly upbeat expectations.” In addition, residential construction improved in many regions, along with commercial real estate.

Chad Moutray is chief economist, National Association of Manufacturers.

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Markit Finds Modest U.S. Manufacturing Growth in August, With Slowing Activity Globally

New data from Markit provides mixed news for manufacturers and the economy. First, the Markit Flash Manufacturing Purchasing Managers’ Index (PMI) continues to show modest growth for the United States. The “flash” PMI – which is an advance measure of the final PMI data using 85 to 90 percent of the total responses – edged slightly higher from 51.7 in July to 51.9 in August. A small increase was observed in output and new orders, which helped to push the composite figure higher. Pricing pressures also continue to ease.

Still, it is important to keep in mind that manufacturing activity remains sub-par. According to their press release, August’s PMI is the “third-lowest reading in 35 months.” This includes having employment growth at its slowest pace in a year and a half. Not only were many of the components decelerating from earlier in the year, but some of them were shrinking outright. For instance, new export orders remain virtually unchanged at 48.7 in August, with values under 50 suggesting contracting activity.

Falling export orders are the result of slowing global activity. The Markit Flash Eurozone PMI was mostly unchanged, up from 46.5 in July to 46.6 in August. This was the seventh consecutive monthly contraction, with the Flash Eurozone Manufacturing PMI at 45.3. New orders and employment continue to fall, as the continent grapples with the economic consequences of its sovereign debt crisis.

This includes even the strongest economies globally. The Flash German Manufacturing PMI is currently 45.1, up slightly from 43.0 last month. The key point is that manufacturing remains very weak, with similar findings in France (46.2) and China (47.8). The coming weeks will bring new data on other countries, as well. For China, the Flash Manufacturing PMI figure was the lowest in nine months, with falling new orders, exports, and employment. Its press release says, “… Chinese producers are still struggling with strong global headwinds.”

Indeed, these figures provide further evidence that the global economy is slowing, and while the U.S. manufacturing sector continues to have modest gains, there are significant headwinds on the horizon. The Institute for Supply Management, which also produces a PMI report, has found that the U.S. manufacturing sector has contracted for two consecutive months, led by declining new sales. As such, we will be closely looking at the latest ISM figures, which will be released on September 4th, to see how the slowing global economy and uncertainty domestically impact U.S. manufacturing activity.c

Chad Moutray is chief economist, National Association of Manufacturers.

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CBO Outlines Modest Economic Growth and Tough Budget Choices Ahead

Yesterday, the Congressional Budget Office (CBO) released its annual Budget and Economic Outlook for fiscal years 2012 to 2022. Its baseline budget for FY 2012 is for a deficit of $1.08 trillion, with smaller deficits thereafter (e.g., deficits of $585 billion in FY 2013, $345 billion in FY 2014, $269 billion in FY 2015…). Much of this assumes that current tax policies expire on December 31 of this year. Total budget deficits under this baseline are $3.07 trillion over the next 10 years.

CBO also provides an alternative fiscal scenario where current tax policies are extended, the alternative minimum tax is indexed to inflation, Medicare payments are held constant at current levels and sequestered cuts as part of the Budget Control Act of 2011 are not put into place. Under this scenario, total budget deficits are estimated to add up to $10.98 trillion between FY 2013 and FY 2022.

In making these assumptions, it is important to keep the underlying economic projections in mind. CBO has forecast real GDP growth of 2.0 percent in 2012 and 1.1 percent in 2013. It then assumes an average growth rate of 4.1 percent for the years of 2014 to 2017. Inflation is expected to be modest, at 1.2 percent in 2012 and below 2 percent in all other years. The unemployment rate is assumed to be mostly unchanged from current levels and is estimated to be 8.9 percent in the fourth quarter of 2012. We do not reach “full employment” for several years, with the forecasted unemployment rate being 5.6 percent by 2017.

Overall, CBO’s baseline analysis paints a picture where economic growth will be modest at best and where the nation’s fiscal budgetary challenges will only become more serious with time. Hard choices will need to be made to address these fiscal imbalances, with budget deficits in each of the next 10 years under both the baseline and alternate scenarios.

It is also clear that these budgetary discussions will need to focus on both discretionary and mandatory spending in the years ahead. Limiting the conversation to discretionary cuts only will not achieve the savings needed to get us ahead. For instance, defense spending is expected to fall from 4.7 percent of the GDP in FY 2011 to 3.0 percent by FY 2022. Likewise, nondefense discretionary will go from 4.3 percent to 3.3 percent over the same time period.

Meanwhile, mandatory spending – while essentially remaining around 13.5 percent of GDP over the next 10 years – will become an ever-increasing share of domestic spending. Entitlement spending (not including interest on the debt) will grow from $2 trillion today to $3.5 trillion in FY 2022, and interest payments more than double from $227 billion to $624 billion over the same time period.

Chad Moutray is chief economist, National Association of Manufacturers

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