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Monday Economic Report – February 4, 2013

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

Manufacturing activity picked up somewhat in January, according to several reports that came out last week. The Institute for Supply Management’s (ISM) Purchasing Managers’ Index (PMI) rose from 50.2 in December to 53.1 in January. Stronger sales and production data helped to lift this index higher, with export growth still lagging (but no longer declining). The data was mirrored in the latest surveys from ISM-Chicago and the Chicago and Dallas Federal Reserve Banks. New durable goods orders were also higher in December, mainly due to increased aircraft sales.

The sentiment surveys tended to show an uptick in hiring in January, which might be a gauge of future activity. However, for now at least, the data show that employment growth in the sector has been slow at best. The ADP payroll data suggest that manufacturing employment contracted in January, while the government report showed that manufacturers added just 4,000 workers during the month. It is hard to ignore the significant slowdown in hiring that took place among manufacturers during the second half of 2012, with worries about sales and the economic outlook taking a toll on hiring and investing. While the larger economy added roughly 180,000 workers on average each month last year—a figure which is decent, but still not strong enough to bring the unemployment rate down—manufacturers only gained 11,000 additional workers in the last six months of the year.

Much of the economic uncertainty was tied to the fiscal cliff negotiations, with upcoming debates on the budget and deficit still causing uncertainty for many manufacturers. With the debt ceiling conversation postponed until mid-May, all eyes will now focus on the across-the-board federal budget cuts scheduled for March 1 and the possibility of a government shutdown on March 27. The fiscal cliff’s impact can be seen in the economic data as well, with manufacturing activity falling and consumer and business confidence indicators plunging. Dividends rose sharply at the end of the year (up 34.3 percent in December), as companies tried to accelerate these payments in anticipation of higher dividend taxes. The result was a 2.6 percent rise in personal income, pushing the savings rate up to 6.5 percent, its highest level (albeit a temporary one) in nearly four years.

The Federal Reserve Board reported that the economy “paused” at the end of 2012, referencing both Hurricane Sandy and the political wrangling over the fiscal cliff. Beyond that, however, the Federal Open Market Committee (FOMC) made little news. It continued the stimulative policies put in place in December, with new rotating members of the FOMC voting much like the old ones did. Kansas City Federal Reserve Bank President Esther L. George picked up the mantle of her fellow inflation hawks by being the lone dissenter.

This week is a much slower one on the data front. The key data to watch for will come on Thursday with new labor productivity numbers and on Friday with the latest international trade figures. The export data will be closely followed as it will be the first to show activity for all four quarters of 2012.

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

Accelerated Payouts Boost Personal Income in December

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With the threat of the fiscal cliff looming, many businesses began thinking about the tax implications of going off of the cliff, and they adjusted their payouts accordingly. As proof of this, the Bureau of Economic Analysis (BEA) said that personal income soared 2.6 percent in December, building on the 1.0 percent gain in November.

Digging deeper into the data, it is clear that many companies pushed up their dividend payouts to avoid possible higher taxes in 2013. (As part of the fiscal cliff deal enacted on January 2, 2013, dividend taxes went from 15 percent to 20 percent for those individuals earning more than $400,000, but it could have gone up to 39.6 percent had we gone over the fiscal cliff.) Personal dividend income increased 4.5 percent in November and a whopping 34.3 percent in December. There has also been evidence of bonuses being pushed into December, as well, even though BEA does not keep track of that.

Manufacturing wages and salaries rose from $751.4 billion in November to $756.2 billion in December. On average, manufacturing wages and salaries have continued to rise, up 7.2 percent over the past year. This is a reflection of the increased production in the sector overall. In contrast, wage and salary disbursements in all private sectors rose 4.4 percent over the past year.

While income was increasing significantly in December on end-of-year moves, personal consumption was growing more slowly, up 0.2 percent. The largest spending gains were in durable goods, up 1.0 percent (and extending the 2.7 percent increase of November). Based on the GDP data released yesterday, we know that much of this increase was in the motor vehicle sector. Nondurable spending declined 0.2 percent. For the year, though, personal spending numbers have been decent, up 3.6 percent, helping to boost demand for manufactured goods.

With income increasing substantially outstripping spending growth, the savings rate jumped from 4.1 percent in November to 6.5 percent in December. It had been as low as 3.3 percent in September. The savings rate is now at its highest point since May 2009; although, I would expect for it to settle back to reality in January once these one-time-only wage increases are no longer part of the picture.

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

Monday Economic Report – January 7, 2013

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

With a last-minute deal to avert the fiscal cliff, manufacturers have fewer uncertainties to worry about at the start of the new year. The threat of an economic downturn appears to have largely dissipated, with modest growth in real GDP of 2 percent or so expected this year. However, while the agreement ensures that tax rates for most individuals will remain the same, marginal tax rates will rise for some manufacturing companies that are organized as pass-through entities.

The agreement delays budget sequestration for two months, but that only extends the uncertainty over how this matter will be resolved. In addition, policymakers did not even begin to address the long-term fiscal challenges that confront us by ensuring meaningful tax and entitlement reforms. However, because of the structure of the agreement, they will have additional opportunities to do so over the next few months when they must address the debt ceiling limit, sequestration and the soon-to-expire continuing resolution that funds the government.

The data released last week tended to reflect an economy that was strengthening, even as it continues to show signs of persistent weaknesses. On the employment front, manufacturers added 25,000 net new workers. This is a healthy figure to end the year on, with 180,000 additional jobs in 2012 and 522,000 since the end of 2009. Still, the pace during the second half of the year was much slower than the first half, and it would be encouraging to see the sector producing outsized output and employment growth again. Sentiment surveys have tended to show some manufacturers pulling back on hiring. This might change if business leaders see an economy on more solid footing.

There are some signs that the U.S. and global economic environments have stabilized. As noted in the Global Manufacturing Economic Outlook released on Friday, January 4, seven of our top 10 markets for manufactured goods are growing—an improvement from just three months ago when much of the world outside of North America was experiencing declines. Looking specifically at the U.S. market, the Institute for Supply Management’s (ISM) Purchasing Managers’ Index (PMI) shifted from contraction to a slight expansion last month, with export orders and hiring helping to lift the measure. While there is still much progress to be made on this front, the positive PMI number is good news. Similarly, the Dallas Federal Reserve Bank reported higher activity levels and increased manufacturing business confidence in its region.

This week, the key highlight will come on Friday with the release of new international trade data for November. The October data reflected reduced exports and imports as a result of slowing global growth. With improvements in some countries, we will see if manufactured goods exports begin to pick up. Other numbers to watch include data on consumer credit, job postings and small business optimism.

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

Manufacturing Construction Spending Was Lower in November

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The Census Bureau said that construction spending decreased 0.3 percent in November, its first decline since March. The decrease was largely due to lower levels of activity in the nonresidential sector, which decreased 0.7 percent and was negative four of the past six months. With businesses anxious about the impending fiscal cliff and tighter government budgets dampening public sector spending, nonresidential activity has been soft at best for much of the second half of 2012.

This has definitely been true in the manufacturing sector, which had seen its construction spending levels fall 2.0 percent since September. With at least some of the uncertainties surrounding the fiscal cliff over, I would expect for these figures to improve moving into 2013 if sales improve and the global economic environment stabilizes.  As a sign that manufacturers have been willing to invest for the future, increased construction spending earlier in the year helped to push up year-over-year activity by 5.1 percent.

Looking specifically at the November numbers, the one bright spot was the residential sector, with construction spending up 0.4 percent for the month and private sector housing activity up 19.0 percent since November 2011. On the private sector nonresidential side, construction was down across-the-board, with only transportation and communications sector activity higher.

Public sector nonresidential spending was off 0.5 percent, but it was more mixed. Sectors with increased public sector activity included commercial, power, sewage and waste disposal, highway and street, and transportation projects. The largest monthly declines were in conservation and development, amusement and recreation, office, water supply, and public safety projects.

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

ISM: Slight Manufacturing Expansion in December

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The Institute for Supply Management’s purchasing managers’ index (PMI) edged higher, from a contracting 49.5 in November to a slight expansion of 50.7 in December. While the PMI is above the threshold figure of 50 which signifies net growth, it is also not growing with any gusto. Indeed, in the buildup to the fiscal cliff negotiations that just ended, manufacturers remained quite anxious, dampening production and sales. Indeed, in the last seven months of 2012, the PMI was below 50 four times, and overall manufacturing activity was reduced from what was seen earlier in the year.

On the positive side, though, it was nice to see manufacturers end the year with a net expansion, even a more lackluster one. The index for new orders was unchanged at 50.3, growing for the fourth consecutive month (but just barely). Meanwhile, the pace of production eased somewhat, slowing from 53.7 to 52.6. There were two notable areas of strength. First, export orders – which have been a real challenge for much of the past year – shifted from contraction (47.0) to expansion (51.5). This is definitely good news for the industry. Similarly, hiring also picked up, rising from 48.4 to 52.7.

The sample comments tend to support this mixed view of the economic world, with some signs of increased demand even as manufacturers were uncertain about the future. One respondent said, “We are seeing stabilization of orders and costs as well as production capacity for the first time in months.” Yet, others tended to echo the sentiment of the fabricated metal producer who cautioned that future conditions were “foggy.”

Overall, manufacturing sales and production appear to have improved in December, which bodes well for the sector as we move into 2013. Some of this is likely the result of a pickup in activity after Hurricane Sandy; although, increased exports and imports also suggest improvements in the international economic environment.

Yet, the pace of growth is only slightly above neutral, with many business leaders pulling back on activity in December due to uncertainties surrounding the U.S. fiscal situation and slowing orders globally. With the fiscal cliff situation resolved, at least some of these uncertainties will be resolved for now. Even with this, manufacturing production is expected to grow more modestly in 2013 than in 2012. Moreover, the fiscal cliff agreement did not tackle larger structural issues, leaving larger reforms to the tax code and to entitlements for later, perhaps during the political haggling over the debt ceiling which will take place between now and the spring.

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

Third Quarter Real GDP Revised Up Again to 3.1 Percent

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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.

Medicare Part D – Don’t Fix What Ain’t Broken

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Yesterday NAM President and CEO Jay Timmons participated in a media teleconference centering around Medicare Part D and the fiscal cliff. Medicare Part D, the popular prescription drug aspect of the Medicare program, has been mentioned in talks about the fiscal cliff and as a way to reduce spending. The message of the call, hosted by the Council for Affordable Health Coverage (CAHC), was to avoid ‘fixing what ain’t broke.’

Medicare Part D is wildly popular among seniors and set to come in at 43% under budget. Additionally studies show that if Part D is altered to impose Medicaid-style rebates, it would raise costs for Medicare beneficiaries, increase costs for employers, and ultimately reduce the availability of medication to seniors. On top of that, 200,000 jobs could be lost in the process.

NAM has joined with 400 other organizations to stand up and tell Congress and the Administration that they should keep the focus on reforming the entitlement programs where it’s so badly needed and to leave programs that actually work alone.

Below you can find the remarks given by Mr. Timmons on the call.

Thanks to the CAHC for hosting this call today. I know there are people on the call who will discuss the specific policy implications of altering the Medicare Part D program, so I’d like to use my time to share some thoughts from the broader perspective of the business and manufacturing communities.

It’s really no secret, and the last campaign bears this out, that every candidate was talking about the importance of manufacturing. America is facing a severe challenge, and taxpayers, businesses and families are looking to our leaders in Washington to provide real solutions that won’t cause additional harm to our fragile economy and end up pushing us off the fiscal cliff.

In the case of Medicare Part D, the so-called solution to extend Medicaid-style rebates to the Part D program will only weaken an entire pro-growth industry, result in higher health care costs and lead to the loss of good, high-paying jobs at a time when America’s employers are already facing way too much uncertainty.

Biopharmaceutical research and manufacturers truly represent one of the most vibrant and dynamic sectors of American manufacturing. All told, they are directly responsible for employing more than 650,000 Americans. The industry also has an extremely high multiplier effect, with studies showing each biopharmaceutical job supports nearly five additional jobs outside of the industry. This is an area of our economy we need to encourage, not punish in order to fix a program that’s not broken and that has helped millions of American senior citizens live longer, healthier lives. As an example, one study estimates that the effect of imposing a rebate onto Medicare Part D, similar to recent proposals, could result in 200,000 jobs lost.

Medicare Part D is an amazing example of a federal government program that is actually working, providing a valuable service that keeps costs down for the taxpayers and for Medicare beneficiaries. The policymakers should hold up the program as an example of how government can do a better job and not use it as a bargaining chip.

Part D already provides significant discounts through competition in the marketplace, and those savings are passed directly on to consumers in the form of low premiums and drug costs. Shifting costs onto employers, Medicaid and beneficiaries will only serve to take money out of the productive private sector at a time when we can least afford it. For this reason, the National Association of Manufacturers today joins with nearly 400 business, patient, provider and veteran organizations in urging Congress not to move forward with a proposal that would damage this very successful program.

There’s no doubt our government needs to make some difficult choices in the weeks and months ahead in order to get us back on the right track.  But putting even more Americans out of work and burdening a program that is actually working shouldn’t be a part of any solution to the fiscal cliff.


University of Michigan Consumer Confidence Falls in December

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The University of Michigan and Thomson Reuters report that consumer confidence fell from 82.7 in November to 74.5 in December. After rising from July (72.3) through November, December’s reading marks a reversal on higher sentiment. This is largely due to worries about the fiscal cliff, as consumers are beginning to focus on its possibility more than in previous months.

While Americans’ perceptions about the current and future economic environment were both downgraded, it was the expectations component that declined by more. The forward-looking sub-index plunged from 77.6 to 64.6, or its lowest level since December 2011. The measure of current conditions decreased from 90.7 to 89.9, or more moderately.

This shift in sentiment is important, as consumer spending has been one of the main drivers of the economy this year. In fact, consumer spending added about one percentage point to the real GDP growth rate of 2.7  percent in the third quarter, with the bulk of that (0.82 percentage points) from the purchase of durable and nondurable goods. A worried consumer might pull back their spending, with major implications for the larger macroeconomy. Already, we have seen businesses decrease their investments and slow hiring – as noted in yesterday’s NAM/IndustryWeek survey and elsewhere. In fact, capital spending was a drag on real GDP in the third quarter, a trend that should continue into the current one.

Inflationary expectations in the University of Michigan survey remain modest, but did pick up slightly in December. Consumers expected prices to rise 3.3 percent over the next 12 months, up from 3.1 percent from November.

Chad Moutray is chief economist, National Association of Manufacturers.

Manufacturers Reduce Their Outlook Sharply, Reducing Hiring and Capital Spending Plans

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The latest NAM/IndustryWeek Survey of Manufacturers shows just how dramatically business leaders have downgraded their economic views over the course of this year. In March, almost 89 percent of manufacturers said that they were either somewhat or very positive about their own company’s outlook; that has fallen each quarter this year, and is now just 51.8 percent. Moreover, the percentage of manufacturers saying that they were “somewhat negative” has more than tripled in the past six months, from 15.8 percent in June’s survey to 38.9 percent in the fourth quarter.

There are a number of factors behind these numbers. No one should discount the effect of slowing global sales, or more recently, the reductions in activity caused by Hurricane Sandy. But, it is clear that manufacturers in this survey are responding to post-election concerns and worries about the fiscal cliff. In fact, 84.2 percent of respondents said that uncertainties related to the political climate and the fiscal cliff were their top challenge. They were also highly skeptical that Washington will be able to address the nation’s long-term fiscal challenge, with only 7.5 percent of manufacturers anticipating a “grand bargain” in the Lame Duck session of Congress. Forty-eight percent feel that the cliff will be averted by delaying the tax increases and spending cuts by a few months or a year, with roughly 28 percent feeling that we will “go over the cliff.”

This has had a real impact on how manufacturing leaders perceive economic growth and their company’s sales and activity next year. Almost 63 percent of them admit to reducing their business outlook for 2013. More worrisome, 42.6 percent say that they have reduced or slowed down business investment, and 36.2 percent have either reduced their employment or stopped hiring. These impacts were even larger for smaller firms with less than 50 employees. Given this, it should not be a surprise that manufacturers have lowered their estimates for sales, investment, and employment for the next 12 months, with capital spending plans and hiring turning negative on average for the first time since the fourth quarter of 2009.

When asked about the most-pressing priorities for the second Obama term and the 113th Congress, manufacturers say that that the top priority should be a long-term deal that tackles the deficit and debt (cited by 88.7 percent of respondents). Slowing the growth of entitlements (82.1 percent) and averting the fiscal cliff (75.5 percent) were also high on the list, as were a number of ways to make businesses more competitive globally. The latter items include reducing the overall regulatory burden (76.4 percent), passing comprehensive tax reform (68.7 percent), and controlling rising healthcare costs (67.6 percent).

In summary, these findings reflect a tremendous amount of nervousness on the part of the manufacturing community related to economic growth moving into 2013. These anxieties are dampening hiring and investment and reducing overall optimism. This is further proof that policymakers must act quickly to avert the fiscal cliff and address our long-term fiscal challenges, but all of this must also be done in such a way that would keep the U.S. economy growing and make U.S. manufacturing more competitive on a global scale.

Chad Moutray is chief economist, National Association of Manufacturers.


ADP: Manufacturing Employment Falls for the Fifth Straight Month

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Automated Data Processing (ADP) reported that nonfarm payrolls rose 118,000 in November, lower than the 157,000 observed in October. Almost all of this increase stemmed from additional service sector workers, which increased by a net 114,000. Goods- producing firms hired just 4,000 net new employees in the month.

In the manufacturing sector, employment dropped by 16,000 workers. This was the fifth straight month of losses, according to ADP, totaling 60,000. This figure is larger than the official statistics from the Bureau of Labor Statistics (BLS), which reported declines of 27,000 in August and September with a gain of 13,000 in October. Nonetheless, it is an indication that the BLS results, when they are released on Friday for November, will be weak at best, and could be negative.

ADP said that the losses in the manufacturing workforce offset a healthy 23,000-worker increase in construction employment. The trade, transportation and utilities (up 22,000), professional business services (up 16,000), and financial activities (up 13,000) sectors also saw more hires in the month.

Breaking out the analysis by company size, larger businesses – particularly those with over 1,000 employees – added the most net new jobs, hiring an additional 62,000 workers. Small and medium-sized businesses hired 19,000 and 33,000 net new workers, respectively, in the month. This is a bit of a turnaround from prior months, when medium-sized (e.g., those with between 50 and 499 workers) led the net job gains.

In summary, the weaker employment numbers in November for manufacturing stemmed from two things. First, Hurricane Sandy reduced some activity, particularly in the Mid-Atlantic regions, and we have seen this storm have an impact in a number of economic statistics. But, the larger challenge right now is the uncertainty created by the fiscal cliff, with slowing global sales also playing a role. As Moody’s Analytics Chief Economist Mark Zandi, who produces this report for ADP, put it, “Businesses appear to be holding firm on their hiring and firing decisions.”

Chad Moutray is chief economist, National Association of Manufacturers.