sequestration Archives - Shopfloor

Senators Look at America’s Innovation Pipeline

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The Senate Appropriations Committee is holding a hearing today called “Driving Innovation Through Federal Investments” and what impact sequestration and other budget cuts are having on innovation in America.

Manufacturers for years have been the world’s leading innovators. We have the most patents and spend the most on research and development than any other industry. The NAM is an aggressive leader on behalf of manufacturers and ensuring their continued ability to innovate.

In many instances, manufacturers will partner with universities and the government on groundbreaking research that is much more difficult to achieve if these types of partnerships did not exist. What we have seen recently is that due to sequestration and across-the-board, indiscriminate budget cuts, the United States is facing an innovation deficit compared to other countries and their investment in innovation. The NAM warned of this potential “brain drain” – the innovation infrastructure, and the men and women behind it, must be constantly nurtured. Otherwise we will see it rust and eventually disappear.

The NAM co-chairs the Task Force on American Innovation, a group of leading corporations, universities, and professional societies supporting public-private partnerships, which weighed in with the Senate Appropriations Committee by submitting testimony for today’s hearing. The Task Force and other groups called on Congress to take a sensible approach to our nation’s fiscal challenges that allows wise investments in research and education and creates economic and job growth.

America is still the unquestionable leader in manufacturing and innovation. But we are risking that lead if we don’t close the innovation deficit.

Business Economists Expect the Economy to Accelerate in 2014

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Economists with the National Association for Business Economics (NABE) expect real GDP growth of 2.8 percent in 2014, up from the 2.1 percent rate anticipated for 2013. While this represents an acceleration in growth, it also suggests a slight downgrade from the 3.0 percent pace for 2014 predicted in the September survey. Some marginal easing in the paces of growth for consumer spending, business investment, and net exports accounted for the difference.

Still, the overriding news in this report was the pickup in activity expected next year. For manufacturers, industrial production is predicted to expand from its 2.4 percent annual pace in 2013 to 3.1 percent growth in 2014. This mirrors the increased pace of new orders and output that we have seen in the sector since the beginning of the third quarter, and it is consistent with the findings from the latest NAM/IndustryWeek survey.  In terms of auto production, light vehicle sales should rise from an average of 15.5 million annualized units this year to 16.1 million units next year, according to those completing the NABE survey.

The labor market is also expected to improve in 2014, with an average of 197,000 nonfarm payroll workers added each month next year. This would be higher than the 178,000 average stated by the survey respondents as the average for 2013. Note that we have already seen job growth that has accelerated in recent months, according to the Bureau of Labor Statistics, with an average of 204,000 nonfarm payrolls added between August and November. The unemployment rate is also predicted to move lower, with at least some of the survey respondents anticipating 6.5 percent rate by the fourth quarter of 2014.

Business economists expect inflationary pressures will remain under control, with consumer prices rising just 1.8 percent in 2014. They do, however, forecast that the average 10-year Treasury note yield will increase to 3.25 percent next year, even as the Federal Reserve keeps short-term interest rates near zero. Recently, the run-up in mortgage rates has caused some “sticker shock,” dampening the demand for new homes, but the housing market should begin to grow again. Survey respondents predict that housing starts will rise to 1.1 million in 2014.

In terms of downward risks to economic growth, 73 percent of business economists said the government shutdown would reduce fourth quarter real GDP by up to 0.5 percentage points. Only 20 percent felt that there would be another government shutdown in January. However, across-the-board cuts to the federal government would have a negative impact to real GDP in 2014, with 76 percent feeling that sequestration would reduce output by up to 0.5 percentage points.  Panelists also felt that the Affordable Care Act could reduce nonfarm payrolls by an average of 10,000 each month.

Chad Moutray is the chief economist, National Association of Manufacturers. Note that he was one of the panelists for the Deember 2013 NABE Outlook Survey.

Beige Book: Economy Growing at a Moderate Pace

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The Federal Reserve Board reported that “national economic activity continued to expand at a moderate pace” in its latest Beige Book. In general, Fed Districts have experienced modest growth in the manufacturing sector, recovering from some of the softness experienced in the spring months. There were some exceptions to this, such as the Minneapolis Fed reporting “that the pace of growth was uneven” in its region. Elsewhere, respondents found strong gains in the motor vehicles, machinery, and inputs to the housing and infrastructure sectors.

On the topic of federal budget cuts, the Fed’s report says the following:

Contacts in the Boston District reported minimal direct effects of the federal sequestration, although they were concerned about the prospect of larger effects in the fourth quarter. On the other hand, defense firms in the Kansas City and San Francisco Districts reported that the effects of the sequestration have already been passed through to actual reductions in production.

The Kansas City Fed has focused on frustrations with federal budget cuts for some time, with sample comments touching on this in its most recent survey.

Employment “held steady or increased somewhat” in the economy as a whole, but the gains in manufacturing were more modest. This finding is consistent with recent survey and jobs data, with manufacturers still somewhat hesitant to bring on new workers. Overall wage pressures remain “subdued.”

In terms of larger macroeconomic findings, the Fed noted “strong demand for automobiles and housing-related goods,” which have helped to lift consumer spending. Residential activity continued to grow moderately, with some respondents suggesting that higher mortgage rates have “spurred a pickup in recent market activity, as many `fence sitters’ were prompted to commit to purchases.” The recent existing home sales numbers made a similar observation, but other data tend to suggest that increased borrowing costs have begun to have a slowing impact on new home construction and sales.

Meanwhile, pricing pressures continue to be minimal, with core inflation below 2 percent, the desired level stated by the Federal Open Market Committee (FOMC). This has allowed the Federal Reserve to continue to pursue expansionary monetary policies, even as it contemplates an easing in asset purchases perhaps as soon as its September 17-18 FOMC meeting.

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

Manufacturing Sentiment Improves in February in Richmond

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The Richmond Federal Reserve Bank said that manufacturing activity, which had contracted sharply in January, improved in February. The composite index of general business conditions rose from -12 in January to 6 in February. Indeed, there were signals of progress – as well as some continued weaknesses – in many of the key indicators. For instance, the shipments index increased from -11 to 10, and capacity utilization jumped from -18 to 11.

At the same time, new orders were unchanged, with the index up from -17 to zero. The fact that they were not declining, though, should be taken as a good sign. On the employment front, hiring turned positive for the first time since July, but the average workweek has decreased for three straight months. This suggests that employers are starting to think about bringing on more workers, even as the workload continues to lag behind.

To the extent that hiring is taking place then, it must be based on improving expectations about the future, and the forward-looking measure for hiring rose from being unchanged last month to a decent increase this month. Other indicators also reflected cautious optimism over the next six months, including increased index values for new orders, shipments, capacity utilization, and wages. The anticipated pace of capital spending, however, eased somewhat in February, but was still positive with modest growth ahead.

In terms of pricing pressures, respondents noted a deceleration in inflation from last month, but they expect for raw material prices to pick up the pace in the months ahead. The prices paid for input increased 2.04 percent at the annual rate in February, down from 2.54 percent in January. Looking ahead six months, manufacturers in the Richmond Fed District expect for prices to rise 2.72 percent, up from 1.97 percent last month.

Overall, this study finds a more optimistic manufacturing community in the Richmond region. To be fair, though, it is important to note that these gains in February are from a sharp decline in January. It will be interesting to see how these opinions shift in the coming month, particularly if the across-the-board spending cuts go into effect on March 1 as planned. Virginia – and for that matter, the entire metropolitan DC area – will experience some of the greatest impacts, as noted in our study released last year.

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

Damage from Sequester Very Real and Approaching Fast

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Today the Task Force on American Innovation, chaired by NAM and Texas Instruments, sent a letter to the President and Congressional leaders calling for a halt to the sequester. Signed by the heads of leading business and technology associations, the letter represents thousands of businesses, educational institutions and other interested parties. The sequester is set to make across the board budget cuts to discretionary spending, with much of those cuts to the defense sector.

The NAM has led the opposition to the sequester basically since its inception. Manufacturers released a study detailing the serious damage that these cuts will have on our economy – we took that message around the country and have used every tool at our disposal to make sure that policymakers are well aware of the damage that will be inflicted.

Unfortunately, in the 18 months since the Budget Control Act was passed, Washington hasn’t found a way to avoid the sequester and the numbers haven’t changed. If the planned defense cuts go into effect we’ll see a body blow to our efforts at economic recovery.

  • Over 1 million jobs lost
  • A loss of 1% of GDP
  • An 0.7& increase in the unemployment rate

Additionally, we would see a drain on innovation and scientific advancement that manufacturers rely on to drive their business in such a competitive global economy.  Continued economic growth is the true solution to our fiscal issues and if Washington allows the sequester to become a reality, we will have eliminated one of the most critical elements for success.

The cuts undermine our economic growth in a shortsighted fashion that will hurt America for generations to come. The businesses and other organizations that signed the letter to the President and Congressional leaders are not crying wolf – it’s a very real threat to our ability to grow and lead the world economy and it’s entirely self-inflicted. It’s beyond time to solve this problem and get focused on growing the economy.

When it Comes to the Defense Sequester, the DoD Secretary Cuts to the Quick

By | Taxation | No Comments

For more than a year, manufacturers have been telling policy makers that the pending sequester, now set for March 1st, will impair our national security and cripple a vital part of the manufacturing sector. This morning at Georgetown University, Defense Secretary Leon Panetta delivered the same message, and laid out the true national security ramifications.

On the need to maintain the defense industrial base, he told the audience, “The last damn thing we need, if we face a crisis, is to have to contract out that responsibility to another country.” As the deadline fasts approaches for the across-the-board cuts to kick in, we strongly urge Congress and the Administration to work together to replace the sequester with less damaging cuts in federal spending and not job-killing tax increases.

When Did the Sequester Turn into a Tax Issue?

By | Taxation | No Comments

Manufacturers supported the Budget Control Act of 2011 that, among other things, included some $917 billion in spending cuts and set up a “Super Committee” to find an additional $1.2 trillion to $1.5 trillion of deficit reduction. If the Super Committee failed, as it did, the penalty was a “sequester,”  $1.2 trillion in across-the-board spending cuts divided between defense and nondefense spending. NAM members feel strongly that we need to get our nation’s fiscal house in order and get government spending under control but we oppose the “chain saw” approach of the sequester. Arbitrarily cutting federal programs, particularly in the defense area, threatens jobs, national security and the economy.

As a result, we’ve urged lawmakers to abandon the “across-the-board” approach and instead take a critical and deliberative look at cutting government spending with a focus on entitlement reforms and potential cuts in discretionary spending, keeping in mind the impact spending cuts will have on our economic and national security. In short, we have a spending problem and the focus should be on spending cuts. 

So we’re surprised at recent proposals from Congressional Democrats and today, President Obama, who want to replace the sequester with a mix of spending cuts and tax increases.  As the NAM and many other groups have pointed out, the sequester will cost U.S. jobs and economic growth.  And tax increases will do the same.

Replacing the sequester with tax hikes is substituting one bad idea for another.  Rather, let’s use this opportunity to begin a much needed and very important debate on actually cutting federal spending.

The Sequester Will Kill Jobs But So Will Tax Increases

By | Taxation | No Comments

The headline of the New York Times Feb. 3 editorial, “A Million Jobs at Stake,” caught the attention of Manufacturers who’ve been warning Congress and the Administration of the potential job-killing impact of the sequestration now set to kick in on March 1st. Indeed, we agree with the Times that the sequester was never supposed to happen and that allowing it to kick in will hurt our struggling economy. But we strongly disagree that the solution to avoid sequestration is tax increases, particularly those directed a specific industries or tax payers. Yes we need to cut federal spending, but imposing new tax increases or arbitrarily lopping off some spending is not the way to go.

Rather, we believe strongly that the solution is thoughtful reductions in federal spending—particularly entitlement spending. As NAM Board member Della Williams so aptly told the House Armed Services Committee last summer, “sequestration is cosmetic surgery with a chainsaw.” There’s no way to avoid it: policy makers need to take a hard look at all federal spending—including entitlement spending with an eye to avoiding unintended and damaging impacts. Clearly our nation’s fiscal challenges are of critical importance not only to the future of American manufacturers but to the future of all Americans. Any plan to address these our fiscal problems will have a long-lasting and significant impact on our economy.  We urge policy makers not to take the “easy way out” and let the sequester “happen” but to use this opportunity to tackle our real fiscal challenges.

Manufacturers: Derailing the Sequester Only Solves Part of the Problem

By | Taxation | No Comments

President Obama’s assertion last night that the sequester “will not happen,” was encouraging news to manufacturers who are extremely concerned about the impact on jobs and the economy of the $1.2 trillion in federal spending set to begin January 1st. Although the administration walked back the comments a bit following the debate, it is still an important commitment that we hope the President will uphold.

Earlier this year, we released a report showing that the defense cuts will reduce U.S. employment by more than 1 million jobs in 2014 alone. Similarly, the Information Technology and Innovation Foundation (ITIF), a non-partisan think tank, in September released a study called Eroding Our Foundation: Sequestration, R&D, Innovation and U.S. Economic Growth concluded that close to 200,000 jobs per year could be in jeopardy if across the board cuts to federal R&D investment are implemented. But avoiding the sequester addresses only part of the problem. Pending tax increases for a wide range of individual taxpayers and small businesses along with the spending cuts under sequestration will hit the U.S. economy with a $500 billion fiscal shock on January 1st, a shock that likely will send our already weakened economy into a tailspin.

So, while manufacturers appreciate the President’s commitment to avoiding the sequester, we also believe it is critically important to maintain the status quo on current tax policy for all Americans. Almost 70 percent of all manufacturers (about 200,000 nationwide) pay income taxes at the individual rate. The average taxable income for these small manufacturers is $570,000 – so unless Congress extends current tax rates, these employers will be subject to new tax rates of almost 40 percent and subject to new restrictions on itemized deductions and exemptions. Not exactly good news for job creation and investment.

Real Manufacturers Warn of Defense Cuts Economic Damage

By | Economy | No Comments

The drum beat of the massive damage that the U.S. will see should the defense cuts go into effect is picking up. This weekend the Las Vegas Review-Journal ran an editorial by Click Bond Inc. executive Karl Hutter.

The NAM released a report that paints a stark picture of job loss and economic loss – to the tune of over a million jobs lost nationwide by 2014. But you don’t have to take the word of an economic report – real manufacturers are telling the exact same story.

Mr. Hutter writes about who will bear the brunt of these proposed cuts. “In the aerospace sector, most of the pain from these cuts will not be felt by large corporations, but by the small and midsize businesses that form the extended supply chain. About two-thirds of an aircraft’s value is contributed by smaller suppliers, and three-quarters of all aerospace and defense-related manufacturing jobs are at these firms. So cuts to large programs and their big prime contractors will immediately flow down to where most of the work is done. My company, Click Bond Inc. in Carson City, is one of these firms.”

In a recent survey of manufacturers and small businesses, over two-thirds have cited uncertainty in the economic and political arena as their major road block to job creation and investment. Mr. Hutter’s comments put a face to those significant concerns.

“Sequestration stands to negatively impact our planned growth through investments in equipment and construction, in research and technology and, most importantly, in hiring and training people. While we wait for Congress to act, the mere uncertainty surrounding sequestration makes running a business difficult. It’s hard to invest in new products or hire new workers with the sequestration buzz saw hanging over aerospace and defense programs. It’s risky investing in expensive tooling or materials for work on contracts that may be sequestered, but it’s equally dangerous putting off work in the face of tight customer deadlines and long material lead times.

We must sign contracts now with our own suppliers on work for 2013, but it’s impossible to know which projects will survive sequestration’s scythe. Such judgments must be made by every firm up and down the entire supply chain, exponentially magnifying the damage that is already under way.”

This is why the President and the Congress need to act now, on behalf of companies like Click Bond, to halt these cuts, restore certainty and save the million-plus jobs that are at risk.