Here is the summary for this week’s Monday Economic Report:
In the most recent NAM/IndustryWeek Survey of Manufacturers, 78.1 percent of respondents were either somewhat or very positive about their own company’s outlook. This figure has edged higher each quarter in 2013—a feat made easier by the fact that we were grappling with the prospect of the fiscal cliff at this point last year. As we move into 2014, manufacturing leaders anticipate mostly modest growth in a number of indicators, with an average sales increase of 3.0 percent expected over the next 12 months. While this estimate remains well below the 4.7 percent annual increase predicted in the first quarter of 2012, the good news is that the underlying data are consistent with a pickup in activity in the first half of next year.
However, manufacturers continue to worry about the effects of rising health insurance costs, a perceived unfavorable business climate and persistent uncertainties stemming from the government. On the topic of the Affordable Care Act (ACA), more than three-quarters of manufacturers have had their insurance costs increase by at least 5 percent for 2014, with an average increase of 8.76 percent. This was true even after many firms took steps to lower premium increases by raising employee copays (58.6 percent), reducing coverage (27.7 percent) and/or changing insurance providers (17.6 percent). Moreover, rising health insurance costs and uncertainties surrounding the ACA have forced one-third of manufacturers to reduce their outlook for next year, and a sizable percentage had reduced employment or stopped hiring (23.1 percent) and/or reduced or slowed down their business investment (20.2 percent). Beyond this, the NAM estimates the ACA will cost manufacturers at least $22.2 billion over the next three years to cover new fees, taxes, surcharges and administrative compliance costs required by the law.
Unfortunately, the NAM/IndustryWeek survey also suggested that many manufacturers remain hesitant about adding new workers. Over the next 12 months, employment is expected to grow by just 0.9 percent, with more than half of respondents saying they do not plan to change their employee levels in the next year. Despite this finding, there is some evidence that manufacturing employment has begun to improve, mirroring the recent uptick in new orders and output. The most recent jobs numbers suggest that the sector added an average of 16,500 workers from August to November, which would be progress from employment losses from March to July. Likewise, we learned last week that manufacturing job openings rose to their highest level in 16 months. While the pace of job postings and overall hiring remain lower than we might prefer, these numbers provide some encouragement—at least for now.
Other economic indicators released last week were also somewhat reassuring. Retail sales were up 0.7 percent in November, or 4.7 percent year-over-year. In addition, a survey of business economists found that they expect real GDP to accelerate to 2.8 percent in 2014, up from the 2.1 percent anticipated in 2013. For manufacturers, they predict that industrial production will expand from 2.4 percent in 2013 to 3.1 percent in 2014. Meanwhile, the National Federation of Independent Business (NFIB) reported that small business optimism edged higher in November, rebounding slightly after drops in September and October due to the government shutdown. While sales and earnings figures remained weak, the NFIB data did provide some signs of progress, including more small business owners saying it was a good time to expand.
Much of the focus this week will be on the Federal Reserve, which will have its final monetary policy meeting of the year. There is some speculation that the Federal Open Market Committee (FOMC) will announce its long-awaited plans to start tapering its purchases of long-term and mortgage-backed securities. I suspect that the FOMC will instead push this decision back to either the January 28–29 or March 18–19 meeting. Improvements in the macroeconomy should serve as an incentive to begin to scale back its asset purchases, but very low current inflationary pressures give the FOMC the leeway to stand pat if it wants to wait and see more evidence of growth before acting. Either way, financial markets have once again begun pricing in a possible taper, with the average yield on 10-year Treasury notes rising from a recent low of 2.51 percent on October 23 to a close of 2.87 percent on Friday.
This morning, we will get the latest data on industrial production for November, and Markit will announce Flash PMI data for the United States, China and the Eurozone. The expectation is these reports will reflect a decent increase in output, mirroring the acceleration in other data. We will also get new surveys from the Kansas City, New York and Philadelphia Federal Reserve Banks this week, providing further evidence about the current state of the manufacturing sector regionally. On Friday, the Bureau of Economic Analysis will give us another revision to third-quarter real GDP, which was estimated to have grown by 3.6 percent in its most recent release. In addition, other highlights this week include new data on consumer prices, housing starts, leading indicators, productivity and state employment.
Chad Moutray is the chief economist, National Association of Manufacturers.