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

The Bureau of Economic Analysis announced that real gross domestic product (GDP) rose 2.8 percent in the fourth quarter. This was mostly in line with forecasts of 3 percent for the quarter. For 2011, real GDP increased 1.7 percent, down from the 3 percent growth rate of 2010.

This quarter’s growth was led by strong increases in fixed investment (including residential), with healthy gains in consumption, inventories and exports. Specifically, consumers contributed 1.45 percentage points (or roughly half) to GDP, with 1.07 percent from durable goods consumption and another 0.27 percent from nondurables. Gross private domestic investment contributed 2.35 percentage points to growth, with the bulk of that coming from the replenishment of inventories. Both residential and nonresidential spending made positive contributions, as well.

Contributions from net exports were slightly negative, with higher imports offsetting the rise in exports. The largest drag on growth, though, came from government contributions. With defense and state and local government spending cuts, government reduced GDP by 0.93 percentage points.

Overall, these numbers reflect the stronger rebound in economic growth at the end of 2011 that many other indicators have reported earlier. Manufacturing activity, in particular, appeared much healthier in November and December than in the mid-months. With moderate growth in consumer and business spending, the economy turned in its fastest growth pace since the second quarter of 2010.

Moving ahead, manufacturers are optimistic about production, employment and capital spending for 2012, and yet, a number of significant headwinds (particularly from Europe) persist. Moreover, the government sector – which is already providing a drag – will continue to dampen GDP, especially as more austerity measures (including defense and other nondiscretionary spending cuts) start to have real effects on the manufacturing community.

Despite the concerns, we are seeing some positive news and reports that manufacturing is strengthening as seen in this report from the Financial Times. While growth may be slow, it is on the rise and it is expected to continue.

Chad Moutray is chief economist, National Association of Manufacturers.

Mirroring other economic indicators, the Federal Reserve Board’s Beige Book highlights “modest to moderate” growth in activity in recent months. It says, “Compared with prior summaries, the reports on balance suggest ongoing improvement in economic conditions in recent months, with most Districts highlighting more favorable conditions than identified in reports from the late spring to early fall.”

The report says manufacturing activity has picked up in most districts. According to their analysis, “The strongest reports came from subsectors such as heavy equipment manufacturing and steel, for which demand has been boosted by robust growth in the energy, agricultural, and auto manufacturing sectors.” Another positive for manufacturers has been the increase in consumer spending, which was driven largely by holiday sales. Export growth for manufactured goods has also been largely a positive.

There were exceptions to the trend of higher manufacturing activity, though, including some districts which were “stable” (Cleveland, Richmond and Dallas) or slightly declining (Kansas City). For instance, lower demand continues to be a challenge for manufacturers tied to the housing sector, and supply issues persist for some sectors because of the recent flooding in Thailand.

Pricing pressures, which have been a major challenge for manufacturers over the past year due to elevated energy and raw material costs, have eased somewhat. Price and wage increases have been limited. With that said, higher health benefit costs were cited as one compensation cost that was squeezing many employers.

This report is largely consistent with the last Beige Book release. While economic growth remains sub-par overall, there have been a number of modest improvements lately to say that the domestic environment is getting better. Still, the Fed continues to watch the developments in Europe and domestically very closely, as there continue to be a number of potential risks out there which could derail what progress has been made.

Chad Moutray is chief economist, National Association of Manufacturers.

Less than a month after the EPA announced a stay on the excessive and burdensome Boiler MACT rule, the EPA confirmed though a spokesman that there will be another delay on a proposed rule placing restrictions on greenhouse gas (GHG) emissions from power plants.

Coverage of the delay:

• NY Times: E.P.A. Plans Delay of Rule on Emissions
• National Journal: EPA to Delay Climate Rules

Manufacturers are pleased to see that various rules containing unrealistic regulations are being delayed and that industry voices are receiving more attention. The announcement of the Boiler MACT stay and the delay of the draft power plant rules show that the EPA is listening to the concerns of job creators on the impact of the regulations they seek to implement.

Although the EPA announced that the final rule is still on schedule to be published in May of 2012, this delay signals a step in the right direction. Rushed and unattainable proposals are unacceptable to the business community and the American people. Additionally, they are counterintuitive to job creation and economic growth.

Yesterday, National Association of Manufacturers President and CEO Jay Timmons met with the editorial board of the Pittsburgh Post-Gazette to discuss the state of manufacturing in Pennsylvania and nationwide.

Timmons stressed the need for pro-growth policies which will help manufacturers create new, high-paying jobs. He also talked about how importance of lowering the corporate income tax rate, energy indedpendence and reducing the number of burdensome regulations on manufacturers.