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.

The Bureau of Labor Statistics reported that producer prices rose 0.3 percent in November, offsetting the 0.3 percent decline from October. Higher food costs were behind this increase, rising 1 percent for the month. Energy costs were up a more modest 0.1 percent, and the core inflation rate – which excludes food and energy costs – increased 0.1 percent.  Looking at year-over-year data, producer prices for finished goods have risen 6.9 percent since November 2010, with core inflation growing 2.9 percent.  Core prices have risen ever-so-slightly during the course of 2011.

For manufacturers, the cost of manufactured goods increased 0.3 percent, reversing the previous month’s decline. Over the past 12 months, the price of finished manufactured goods was up 7 percent. This year-over-year figure has been declining in recent months, which is welcome news for manufacturers who have cited elevated costs as a major concern.

Looking at specific manufacturing sectors, the largest monthly gains were seen in petroleum and coal products (up 1.3 percent), food manufacturing (up 0.7 percent) and apparel (up 0.5 percent). Sectors with the biggest producer price declines for November included primary metals (down 1.1 percent), textile product mills (down 0.8 percent) and leather and allied products (down 0.7 percent).

Higher food and energy costs helped to push up producer prices at the intermediate and crude levels. Given the recent increases in petroleum prices per barrel, it is not surprising that crude energy costs rose 10.5 percent, with intermediate prices for energy up 1.9 percent. Still, core intermediate and crude prices at the producer level were negative, down 0.4 percent and 2.5 percent, respectively. This suggests that there were little inflationary pressures outside of food or energy.

This report suggests that producer prices are up modestly in November, with core inflation below 3 percent. There have been signs of easing in recent months, with year-over-year changes edging lower. Yet, higher food and energy costs are beginning to creep into prices at the intermediate and crude levels, suggesting the potential for higher finished goods prices in December and beyond.

The longer-term outlook for 2012 suggests continued modest growth in inflation next year, however, and the Federal Reserve appears more concerned with global economic growth than inflationary pressures.

Tomorrow, we will receive new data from BLS on consumer prices, which are expected to reflect similar trends.

Chad Moutray is chief economist, National Association of Manufacturers.

The Federal Reserve Board’s Federal Open Market Committee (FOMC) left monetary policy unchanged, as expected. In fact, the statement is nearly identical to the one released on November 2. The only differences appear in the first paragraph, which describes the current economic environment. The Fed writes:

Information received since the Federal Open Market Committee met in November suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth. While indicators point to some improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but business fixed investment appears to be increasing less rapidly and the housing sector remains depressed. Inflation has moderated since earlier in the year, and longer-term inflation expectations have remained stable.

Slowing “global growth” is clearly a reference to the sovereign debt crisis in Europe. The Federal Reserve continues to monitor the developments there with great interest, and it was just a couple weeks ago that it – acting in concert with other central banks – acted to provide more liquidity to the global financial system.

The Fed will continue its policy of keeping “exceptionally low” interest rates through mid-2013, rebalancing its portfolio toward holding more long-term securities (“Operation Twist”) and reinvesting principal payments in mortgage-backed securities.

As was the case with last month’s statement, the only dissention came from Charles L. Evans, the president of the Chicago Federal Reserve Bank. He voted against the decision to leave monetary policy unchanged based on his belief that the Fed should do another round of quantitative easing. While some Fed-watchers believe that this might be possible in early 2012, a third round of quantitative easing (or “QE3”) was not expected to come from today’s FOMC meeting. It would also come over the objections of three FOMC members who dissented in previous meetings: Richard Fisher (Dallas), Narayana Kocherlakota (Minneapolis), and Charles Plosser (Philadelphia).

Note that the FOMC membership will change in 2012, which could alter the dynamics. The current makeup of presidents from Chicago, Dallas, Minneapolis and Philadelphia will shift to their counterparts from Atlanta, Cleveland, Richmond and San Francisco. The president of the New York Federal Reserve Bank is always a member of the FOMC along with the Federal Reserve Board members themselves.

The Federal Reserve Board’s Federal Open Market Committee has decided to rebalance its portfolio, buying more long-term securities and selling short-term securities, in an effort to drive down long-term interest rates. It is hoped that this will stimulate additional investment on the part of businesses and lower borrowing costs for consumers – possibly by incentivizing more home refinancings.

This rebalancing is known in monetary circles as the “twist” as it was last attempted in 1961 when the Twist was a popular dance trend. Research from the Federal Reserve Bank of San Francisco has suggested that the early 1960s experience lowered interest rates by 15 basis points (or 0.15 percent).

“Operation Twist” – as it has been dubbed – was widely anticipated with media stories leaking out in the past couple weeks about this new initiative. Specifically, the “Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasuries with remaining maturities of 3 years or less.”

In general, the Federal Reserve reiterated its desire to keep interest rates “exceptionally low” through mid-2013. It cited weak economic growth and its dual mandate of combatting both inflation and high unemployment in making its decision. Referring to the economy, the press release states:

Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has been increasing at only a modest pace in recent months despite some recovery in sales of motor vehicles as supply-chain disruptions eased. Investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.

Once again, this decision was not unanimous. Presidents of three regional Federal Reserve Banks – Richard Fisher (Dallas), Narayana Kocherlakota (Minneapolis), and Charles Plosser (Philadelphia) – voted against the decision. Each of them continues to worry about inflationary pressures in the economy. In making this action, though, the remaining seven FOMC members felt that slow economic growth trumped concerns about pricing pressures. It is notable that the statement adds, “… the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.” This sentence was added to no-doubt placate those which worry that the Fed’s actions will spur inflationary tendencies.

In the end, though, this approach is different from the first two rounds of quantitative easing in that the Fed is purchasing securities through rebalancing instead of by printing additional money. This seems to me to be a nod towards the critics of “QE” and “QE2.” What’s more, it is an attempt by the Fed to try something different (since it was last attempted over 50 years ago).

For manufacturers, this means that interest rates will remain low, but it also suggests that the Federal Reserve remains quite worried about economic growth moving forward. Yet to be seen is how effective it will be. Interest rates are already low, so pushing them lower might have a limited impact, particularly if businesses and consumers remain anxious about the economy and continue to curtail their spending.

Chad Moutray is chief economist, National Association of Manufacturers.

The latest Beige Book from the Federal Reserve Book shows an economy that has slowed considerably over the past couple months. Overall, the economy continues to grow, but at a much slower pace, with some regions doing better than others. In addition, many businesses have “become more cautious about their near-term outlooks” in light of recent financial market events and increasing economic uncertainty. Consumer spending was relatively flat across most districts.

In terms of manufacturing, Midwestern and Western regions are continuing to see growth, whereas Mid-Atlantic areas have witnessed contractions in production. We have already seen much of this through the various manufacturing surveys released over the past few weeks, with the steep contraction in activity in Philadelphia presenting the most notable. The Boston and Dallas Federal Reserve Banks have seen business activity to Europe decline as a result of a weakened economy there, and many banks cited lower business and consumer confidence as having an impact.

Pricing pressures have eased somewhat, but “input costs continued to rise in select industries.” Some of the districts noted stabilization in raw material prices, with some manufacturers able to pass along price increases “with little resistance.” Yet, it remains a problem for many manufacturers.  Wage pressures, however, have been minimal.

Chad Moutray is chief economist, National Association of Manufacturers.

In a widely-anticipated speech, Federal Reserve Board Chairman Ben Bernanke touched on some of the short-run and long-run challenges impacting the U.S. economy. While not laying out any new policy initiatives on the part of the Federal Reserve, he did discuss the current economic environment and reiterated the need for the Fed to keep interest rates exceptionally low through mid-2013, as announced at the Federal Open Market Committee meeting earlier this month.

His remarks were part of an economic symposium focusing on long-term growth organized by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming. Much of the focus earlier in his speech was on the causes of the Great Recession – namely, the “freezing of credit, the sharp drops in asset prices, dysfunction in financial markets, and the resulting blows in confidence that sent global production and trade into free fall in late 2008 and early 2009.”

He once again reiterated the extraordinary actions taken to avert a financial crisis at that time and noted a number of improvements, especially in terms of the health of the banking system, since then.

Manufacturers, of course, have been instrumental in the economic recovery since the recession officially ended, and he noted their contribution:

“In the broader economy, manufacturing production in the United States has risen nearly 15 percent since its trough, driven substantially by growth in exports. Indeed, the U.S. trade deficit has been notably lower recently than it was before the crisis, reflecting in part the improved competitiveness of U.S. goods and services. Business investment in equipment and software has continued to expand, and productivity gains in some industries have been impressive….” (continue reading…)

The Federal Reserve Board’s Federal Open Market Committee has decided to keep interest rates exceptionally low, with the target federal funds rate at between 0 and 1/4 percentage points.

In its statement, the Fed writes:

“The Committee currently anticipates that economic conditions – including low rates of resource utilization and a subdued outlook for inflation over the medium run – are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”

It is notable that this decision was not unanimous. Presidents of the three regional Federal Reserve Banks: Richard Fisher (Dallas), Narayana Kocherlakota (Minneapolis), and Charles Plosser (Philadelphia) all voted against the decision. The other notable feature of this statement is that interest rates are expected to stay in place for the next two years. Many economists – including myself – had predicted that rates would go up later this year, and so, this decision reflects the general weaknesses in the economy and need to keep rates lower for longer to stimulate growth.

Reflecting this weakness, the Fed wrote about it in very stark terms:

“Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up.  Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed.  However, business investment in equipment and software continues to expand.  Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity.  Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions.  More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks.  Longer-term inflation expectations have remained stable.”

For manufacturers, this means that interest rates will remain low, but it also suggests that the Federal Reserve remains worried about economic growth moving forward. As such, it will keep its policy in place of maintaining a low federal funds rate, which it has had in place since October 2008.

Chad Moutray is chief economist, National Association of Manufacturers.

In concluding its Federal Open Market Committee Meeting, the Federal Reserve Board released a statement suggesting that it will leave its target federal funds rate at essentially zero percent, where it has been since October 2008. The Fed noted that “the economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had anticipated” at its April meeting. It feels that much of the recent softness in the economy is due to temporary factors, such as higher food and energy prices and supply chain disruptions stemming from Japan. Housing and employment will challenges, however.

As reported last week, manufacturers have seen dramatic increases in raw material prices, with the producer price index reflecting a 0.9 percent increase for manufacturing costs last month and an 8.9 percent rise over the past year. Indeed, it is one of the top concerns of manufacturers right now, according to our recent NAM/IndustryWeek survey. Moreover, core consumer inflation is beginning to creep up over the past few months.

The Federal Reserve acknowledged this saying, “Inflation has picked up in recent months, mainly reflecting higher prices for some commodities and imported goods… However, longer-term inflation expectations have remained stable.” The latter statement reflects Chairman Bernanke’s view that unique supply and demand phenomena are driving up these costs temporarily, much as he stated in his speech in Atlanta earlier this month.  When these pressures subside, energy and commodity prices will dissipate.

With that said, I would expect – as do many other economists – that the Federal Reserve will begin increasing interest rates later this year. The FOMC statement notes that the Fed will complete its purchases of $600 billion in long-term Treasury securities by June 30, thereby ending its sometimes controversial second round of quantitative easing (“QE2”). The release notes that the Fed will “pay close attention to the evolution of inflation and inflation expectations.” Yet, with the economy expected to improve somewhat in the second half of 2011, the Fed will be free to put a lid on inflation if it senses that core inflation is becoming a problem.

Chad Moutray is chief economist, National Association of Manufacturers.

The banner, front-page story in today’s Wall Street Journal is “Risk Rule Riles Main Street“:

U.S. manufacturers, energy producers and other corporations are balking at a proposed rule they fear would drive up the cost of hedging against price swings in the commodities they depend upon, renewing a high-stakes debate over whether the regulation of derivatives should extend beyond the financial industry.

Caterpillar Inc., MillerCoors, Ford Motor Co. and other companies outside finance fought hard last year to avoid being regulated under a framework created by Congress to oversee the $583 trillion derivatives market, part of the Dodd-Frank financial overhaul. At the time, lawmakers said nonfinancial companies wouldn’t have to meet the potentially costly requirement to back up their derivatives trades with cash or other assets as collateral.

But the new rule, unveiled by the Federal Reserve, Federal Deposit Insurance Corp. and other bank regulators, said banks would have to impose such requirements on their corporate clients if their exposure to these trades grew too risky.

The regulators announced the proposed rules on Tuesday with a news release, “Agencies Seek Comment on Swap Margin and Capital Requirements,” and a notice of proposed rule-making.

The National Association of Manufacturers is a member of the Coalition for Derivatives End-Users, which released a statement in reaction to the proposal. While noting the responsiveness of the Commodity Futures Trading Commission to the group’s points, the release raises further objections:

Under the rules proposed by the prudential banking regulators, margin requirements will apply to all end-user transactions that exceed a credit threshold. And under both the CFTC and the prudential regulators’ rules, regulators will impose margin on several categories of end-user trades, including transactions designed to manage risks associated with pension plans, insurance products and certain types of business financing.

Despite the clear legislative history to the contrary, the regulators continue to misinterpret the Dodd-Frank Act as giving them authority to impose margin requirements on end-users. This misinterpretation exposes end-users to margin requirements that Congress did not intend regulators to impose, and the economy to the harm associated with these new requirements.

Indeed, as Reuters reports, CFTC Commissioner Scott O’Malia dissented in the 4-1 vote to publish the rules, arguing, “I believe commercial end-users and many of the financial end-users will be dissatisfied with the lack of harmonization among the different regulatory bodies.”

• Reuters, “Swap market crackdown seeks to spare businesses“
• Bloomberg, “End-Users May Face Swap Margin Requirements as CFTC, FDIC Split‎”
• CNBC.com, “Swap market crackdown seeks to spare businesses“
• Investor’s Business Daily, “Swap rules exempt end users“

The Federal Reserve’s report on August industrial production released earlier today shows that the economic recovery is slowing. Overall industrial production rose just 0.2 percent last month, the second instance of sub-par growth in the past three months. While it is somewhat encouraging that only six of the 19 major manufacturing industries posted declines in production last month, the fact remains that during the three months ending in August, manufacturing output increased at an annual rate of just 2 percent, the slowest rise in 14 months. So after falling 17.5 percent during the 18 months ending in June 2009, manufacturing production still remains 9 percent below the peak attained in December 2007. 

While some of the deceleration in growth that has taken place in recent months is due to the fact that temporary supports for growth, such as fiscal stimulus and inventory restocking, are now largely in the past, increased uncertainty with respect to federal tax and regulatory issues, documented in this year’s NAM Labor Day Report,  is acting as a burden to the recovery.