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Empire State Survey Shows Contracting New Orders, Business Conditions

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The New York Federal Reserve Bank found that manufacturing new orders and business conditions were lower in May. The Empire State Manufacturing Survey’s composite index of general business activity declined from 3.1 in April to -1.4 in May. This is the first contracting level for the index’s main measure since January, ending three months of growth. Still, more than anything, this statistic mostly observed how manufacturing activity has mostly stagnated in the past month or so. Indeed, 48.5 percent of survey respondents said that conditions had not changed, with those saying that they were better or worse nearly offsetting one another at 25.0 percent and 26.5 percent, respectively.

The subcomponents of the index tend to back this view up. The pace of new orders declined modestly on net, with its index down from 2.2 to -1.2. Other contracting figures included shipments (-0.02), unfilled orders (-6.8), delivery times (-3.4), inventories (-8.0), and the average workweek (-1.1). Pricing pressures eased somewhat for the month (down from 28.4 to 20.5), but still suggest decent growth. Nearly two-thirds of survey respondents, though, suggest that raw material prices had not changed in the past month.

Even as the average workweek was lower, it appears that manufacturers continue to hire, with its index down just modestly from 6.8 to 5.7. While 71.6 percent of respondents said that their employment levels had not changed in the past month, 17.1 percent noted increases, and 11.4 percent reported declines. Still, the net growth in hiring is perhaps surprising given the sluggishness of employment growth nationally and the other weaknesses in the Empire State survey.

Continued hiring could perhaps be explained by cautious optimism in the forward-looking measures. Those manufacturers in the New York Fed’s survey who complete this survey remain positive – albeit less so than last month – about increases in new orders, shipments, employment, and capital spending plans. One-quarter of respondents plan to hire more workers, over one-third expect to increase their capital investments, and nearly 40 percent anticipate higher sales.

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

Monday Economic Report – January 28, 2013

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Here is a summary of this week’s Monday Economic Report:

Several economic variables pertaining to manufacturing continue to show weaknesses in the marketplace, despite the fiscal cliff compromise reached earlier this month. In December, our NAM/IndustryWeek survey showed that uncertainty due to the fiscal cliff had forced firms on average to pull back on hiring and capital spending, and this trend appears to be continuing—at least for now. Over the course of the past two weeks, there have been four regional Federal Reserve Bank manufacturing surveys (Kansas City, New York, Philadelphia and Richmond), each showing contraction in their January reports. The nation’s fiscal challenges—and the concern over how Washington will deal with them—remain on business leaders’ minds.

However, manufacturers continue to be mostly positive about improved activity in 2013, even if their optimism has diminished somewhat over the past few months. For instance, the four regional Fed surveys anticipate higher sales and production over the next six months, with employment and investment also increasing, albeit more slowly. Other data points also indicate possible gains in the months ahead. Markit’s Flash Manufacturing Purchasing Managers’ Index (PMI) bucked the other surveys by rising from 54.2 in December to 56.1 in January. Strong gains in new orders and output fueled the increase. Meanwhile, the Conference Board’s Leading Economic Index rose 0.5 percent in December (although this forward-looking measure’s gains benefitted mostly from non-manufacturing variables).

Increased building permits contributed positively to the Leading Economic Index. Housing, in general, continues to be a bright spot, despite some of December’s numbers being weaker than November’s. Both existing and new home sales data declined in December. In each case, however, the longer-term trend reflects a significant turnaround in the sector. Existing home sales rose 12.8 percent in 2012, and new single-family home sales were up 8.8 percent for the year.

This week, we will be closely following a number of economic releases. On the employment front, I anticipate non-farm payrolls will rise at roughly the same rate as last month, up around 150,000 or so, with manufacturing hiring increasing more modestly. We will also get our first glimpse of real GDP growth for the last quarter of 2012, with my estimate being around 1.8 percent. The other big news of the week will be the Federal Open Market Committee (FOMC) meeting. While it will have new voting members this year, it is widely expected to continue its accommodative policies in an attempt to stimulate growth. Other data highlights for the week include regional manufacturing surveys from the Chicago and Dallas Federal Reserve Banks and new data on durable goods orders, consumer confidence, personal spending and construction activity.

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

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.

Taxes, Small Business and Uncertainty

By | Economy, General, Taxation | One Comment

Two excellent commentaries on taxes, business and the economy…

Kevin A. Hassett and Alan d. Viard of the American Enterprise Institute wrote Friday in The Wall Street Journal, “The Small Business Tax Hike and the 97 Percent Fallacy,” demonstrating that the expiration of the 2001 and 2003 federal tax cuts on individual income would indeed hit small business. The “97 percent fallacy” is a reference to Vice President Biden and House Speaker Pelosi’s argument that the higher tax rates will only affect 3 percent of small business, so what’s the big deal?

The numbers are clear. According to IRS data, fully 48% of the net income of sole proprietorships, partnerships, and S corporations reported on tax returns went to households with incomes above $200,000 in 2007. That’s the number to look at, not the 3%. Would Mrs. Pelosi and Mr. Biden deny that the more successful firms owned by individuals in the top income-tax bracket are disproportionately responsible for investment and job creation?

At National Review’s The Corner, Veronique de Rugy, an economist and researcher at the Mercatus Center, makes the case that the temporary tax credits and rebates that the Administration favors to spur job creation are ineffective. For example, the $1,000 tax credit for hiring — which the President wants to boost to $5,000 — is useful only if a small business has a tax liability, much less likely given the current economic climate. In her post, “More on Small Business and the Administration,” de Rugy writes:

If the administration were so eager to help businesses, large or small, it would end the constant public-policy uncertainties that businesses are facing: The health-care overhaul, which will bring new but still unknown obligations to insure employees, and legislation aimed at tackling climate change, which could raise businesses’ energy costs, add to the uncertainty about the economy. The new financial regulation, which will take years to put in place, adds its share of uncertainty, as does the potential expiration of the tax cuts. Meanwhile, as government spending increases, so do the chances of more taxes in the future.

Her arguments about the deleterious effects of uncertainty dovetail well with the conclusions of the National Association of Manufacturers’ 2010 Labor Day report, “Labor Day 2010: The Impact of Anti-Labor Policies on Working Men and Women.