Somewhat Better Manufacturing Data in China and Europe for October, But Weaknesses Persist

The HSBC Flash China Purchasing Managers’ Index (PMI) rose to its highest level in three months, up from 50.2 in September to 50.4 in October. It was the fifth consecutive monthly expansion in manufacturing activity in China, an improvement from the contracting levels of activity experienced in the first five months of 2014. Yet, despite the headline better headline figure, many of the underlying data points reflect some easing in growth rates for the month. This includes new orders (down from 51.5 to 51.4), exports (down from 54.5 to 52.8) and output (down from 51.3 to 50.7). Hiring continued to decline, but at a slower rate (up from 47.5 to 48.6).

As such, Chinese manufacturers are expanding, but not by as much as we might prefer. This finding is consistent with the deceleration that we have observed in other Chinese data, including real GDP, which slowed from 7.5 percent year-over-year growth in the second quarter to 7.3 percent in the third quarter. The paces of fixed real investment (down from 16.5 percent year-over-year in August to 16.1 percent in September) and retail sales (down from11.9 percent year-over-year to 11.6 percent) also decelerated. On the positive side, industrial production picked up, increasing from the year-over-year rate of 6.9 percent in August to 8.0 percent in September; yet, that remained lower than the 9.0 percent pace of July.

Meanwhile, the Markit Flash Eurozone Manufacturing PMI increased from 50.3 to 50.7. That is good news, as the August figure had been the lowest level since July 2013, when Europe first emerged from its recession. September’s reading was higher largely due to a pickup in output (up from 51.0 to 51.9) and employment (up from 50.1 to 50.6). Still, new orders (unchanged at 49.3) contracted for the second straight month, with the growth rate of exports (down from 51.6 to 50.5) easing. Therefore, it is clear that the Eurozone’s challenges in the manufacturing sector remain a challenge, especially in terms of falling sales. The results also vary by country, with Germany (up from 49.9 to 51.8) improving somewhat while French manufacturers  (down 48.4 to 47.6) continue to report weakness.

Closer to home, the Markit Flash U.S. Manufacturing PMI dropped slightly, down from 57.5 to 56.2. The pace of activity was down across-the-board, including new orders (down from 59.8 to 57.1), output (down from 59.6 to 58.0), hiring (down from 56.4 to 56.2) and exports (down from 54.1 to 51.9). While the index for new orders was at its lowest level since January’s 53.9 reading, it is hard to get too worked up over the decline in September for these indicators. After all, demand, production and employment continue to grow at decent rates, and it is clear that manufacturers are reporting higher activity levels than earlier in the year.

Still, we would like to see better results to begin the fourth quarter, particularly for U.S. exports. Given the softness that we see in worldwide markets, however, this weakness should not be a surprise.

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

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GlobalFoundries Taking Steps to Drive Future Innovation

GlobalFoundries is bringing computer chip design in-house, opening the doors for new business and growth. Acquiring the business from IBM’s Vermont and New York locations is a boon for GlobalFoundries innovation – gaining customers and, importantly, the institutional expertise of 5,000 researchers and engineers. This partnership between IBM and GlobalFoundries will not only preserve these manufacturing jobs, but will leverage IBM’s commitment to R&D and GlobalFoundries’ ability to develop and enable technologies

Driving the next generation of innovation and game-changing products is a critical to maintaining manufacturers’ in the U.S. mantle of leadership. Manufacturing today is sleek, advanced, and technological. The ability to stay ahead of the competition and innovating at every turn will define the future of manufacturing and it’s great to see GlobalFoundries, like many others, is taking pro-active steps to ensure future growth. Manufacturing is making a comeback and we can’t wait to see what’s around the corner.

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Tax Extenders are a Must-Do Item This Year, and the Sooner the Better

NAM continues to urge Congress to act on tax extenders as soon as possible as a bridge of certainty until comprehensive tax reform can be enacted.

The NAM is leading meetings with members of the House and Senate to call on Congress to act immediately when they return for the Lame Duck session to enact a package of over 50 expired and expiring tax provisions, typically called “tax extenders”. Several expired tax provisions are integral for manufacturers to innovate, grow, and compete in the global marketplace. These provisions include the R&D tax credit, enhanced Section 179 expensing, bonus depreciation, the “look-through” rule for controlled foreign corporations (CFCs), and deferral for active financing income. In the coming weeks, the NAM will outline in a series of Shopfloor Blog posts exactly how important these provisions are to the U.S. economy.

Manufacturers are not alone in calling upon Congress to act to restore the expired tax provisions immediately. Recently, IRS Commissioner John Koskinen wrote in a letter to Senate Finance Committee Chairman Ron Wyden (D-WY) that Congress should act on tax extenders no later than November to avoid disruptions and delays to the 2015 tax filing season. In the letter, Koskinen points out that the uncertainty in whether and when Congress may reinstate the expired tax provisions could delay the 2015 filing season and “delay the processing of tax refunds for millions of taxpayers.” The Commissioner also warned that waiting until 2015 to extend the provisions would be even more problematic.

NAM members echo these concerns, and want Congress to know that a failure to enact a retroactive extension of the tax extenders by the end of the year equates to a tax increase on U.S. manufacturers.

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Monday Economic Report – October 20, 2014

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

Global financial markets were highly volatile last week, with investors concerned about slower growth in Europe and an Ebola outbreak in the United States, among other factors. Indeed, industrial production in the Eurozone fell 1.8 percent in August, and activity was down largely across-the-board, most notably in Germany (down 4.3 percent), the Eurozone’s largest economy. Sluggish income and labor market growth in Europe has also pushed inflationary pressures lower, with year-over-year pricing changes of just 0.3 percent in September. Despite such worries, equity markets began to rebound on Friday, with the Dow Jones Industrial Average (DJIA) closing at 16380.41. Nonetheless, the DJIA remains 5.2 percent below its all-time high of 17279.74 on September 19.

Still, the U.S. economy has shown signs of resilience. Despite a softer August, manufacturing production increased 0.5 percent in September. Over the past 12 months, output in the sector has risen 3.7 percent. While this was slower than its July year-over-year pace, it reflects a nice improvement from the more sluggish 1.5 percent rate in January.

Moreover, surveys from the Manufacturers Alliance for Productivity and Innovation (MAPI) and the New York and Philadelphia Federal Reserve Banks observed expanding activity levels in their latest reports. Each measure eased somewhat in October, but they were expansionary nonetheless. The weakest of these reports was the Empire State Manufacturing Survey, which observed a slight contraction in new orders. Yet, even there, respondents remained mostly optimistic about demand and output over the next six months. Along those lines, MAPI has a generally upbeat outlook, predicting that manufacturing production will increase by 3.4 percent in 2014 and 4.0 percent in 2015.

Housing starts exceeded 1 million again, increasing from an annualized 957,000 units in August to 1,017,000 in September. This continues a slow-but-steady trend upward, with an average of 978,111 so far in 2014 relative to an average of 930,000 for all of 2013. Still, there was relatively weak housing activity throughout much of the second half of last year and the first half of this year, and the latest data suggest that the sector has begun to stabilize somewhat. I continue to predict housing starts solidly in the 1.1 million unit range by the beginning of 2015. Homebuilder confidence has also reflected a positive outlook despite slipping a bit in October. Lower mortgage rates might spur more residential construction activity. According to Freddie Mac, average 30-year fixed mortgage rates fell to 3.97 percent this past week, their lowest level since June 2013.

Meanwhile, there was mixed news on the consumer front. On the positive side, consumer confidence reached a pre-recessionary high, according to the University of Michigan and Thomson Reuters. This is a sign that improvements in the economy and lower gasoline prices have helped to lift Americans’ spirits. Yet, there are also lingering worries about income and labor market growth, and consumers remain somewhat cautious overall. Retail spending declined 0.3 percent in September, suggesting softness as we begin autumn. At the same time, year-over-year growth in retail sales was up 4.3 percent, a fairly decent rate, and the holiday season retail outlook looks pretty strong. We hope we will see better consumer spending data in the coming months.

This week, we will get additional insights regarding the health of the global economy. Markit will release Flash Purchasing Managers’ Index (PMI) data for China, Japan, the Eurozone and the United States. The European data are expected to show continued weakness, but we will be watching for signs of progress in the Chinese manufacturing sector, which has decelerated in recent months. The Kansas City Federal Reserve Bank will also unveil its latest manufacturing survey, and it is expected to show continued expansion in its district. Beyond these surveys, we will learn about growth in consumer prices, and if they are similar to the producer price index data released last week, they will reflect easing in both food and energy costs. Other highlights this week include reports on existing and new home sales, leading indicators and state employment.

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

DJIA - oct2014

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NAM Leadership Road Show Heads to the Steel City

With Election Day now less than three weeks away, the NAM continued its Leadership Engagement Series today with a stop in Pittsburgh, Pennsylvania. Numerous manufacturing leaders including Gerald MacCleary, President of Bayer MaterialScience; Marc Skalla, President of SASCO Chemical Group, Inc.; Richard Harshman, Chairman, President and CEO of Allegheny Technologies Incorporated; and Nicholas Pinchuk, Chairman and CEO of Snap-on Inc. met with NAM President and CEO Jay Timmons to discuss the future of the manufacturing sector and both the opportunities and the obstacles that lie on the horizon.

What better place, after all, to talk about the vital role of manufacturers and the policies that impact them than the Steel City?

Pittsburgh has long been at the forefront of the manufacturing sector. Today, while heavy manufacturing and industry remains a mainstay of Pittsburgh’s economy, the city is also helping to drive the development of advanced manufacturing techniques and technologies that will help the United States to remain a world leader in manufacturing. In Pittsburgh’s back yard, the Marcellus Shale is providing the ample, affordable energy needed to sustain the current manufacturing renaissance, and continue to lure producers back to the United States.

The conditions in Pittsburgh – strong R&D, affordable energy, and a legacy built on manufacturing – are emblematic of what’s helped the American manufacturing sector to grow in recent years. We can sustain these conditions nationwide against the right policy backdrop. Unfortunately, Washington seems bent on policies that would work contrary to these goals. The Environmental Protection Agency continues to advance air regulations that would cripple our energy sector and devastate our economy. Congress remains idle on reauthorization of the Export-Import Bank. Our tax code remains a burdensome relic.

The NAM’s Leadership Roadshow is focused on helping manufacturers to present a unified voice in the face of such threats. With just a few short days until the votes are tallied, doing so has rarely been more important. To get involved in the upcoming election, visit the NAM’s Election Center.

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University of Michigan: Consumer Confidence Rose to a Pre-Recessionary High in October

The University of Michigan and Thomson Reuters said that preliminary data on consumer confidence reflects a pre-recessionary high in October. The Consumer Sentiment Index increased from 84.6 in September to 86.4 in October, its highest level since July 2007. This mirrors similar data from the Conference Board, which has also reached pre-recessionary levels of late (although that measure unexpectedly declined in September, reflecting a public that remains on edge).

Even with the increase in October, the University of Michigan report also shows these anxieties. The index for the current economic environment was unchanged at 98.9, and it remains below its recent peak of 99.8 in August. Geopolitical events, slowing global growth, stock market volatility and worries about Ebola might help to explain this hesitance. Moreover, Americans remain concerned about labor market and income growth, despite better data of late on the hiring front.

At the same time, the future-oriented index rose from 75.4 to 78.4, its highest level in two years. Lower gasoline prices likely lifted people’s spirits, helping to increase disposable income, at least for now. Overall, this survey suggests that consumers’ views about the economy are quite nuanced, and at least for this month, optimism about the future outweighed the concerns.

We will get final data on October consumer sentiment from the University of Michigan on October 31. The Conference Board will also release its survey data on consumer confidence on October 28.

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

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Housing Starts Exceed 1 Million Units Again in September

The Census Bureau and the U.S. Department of Housing and Urban Development said that housing starts exceeded one million units again in September.  It was the third time this year that it had done so, or the second in three months. Housing starts increased from an annualized 957,000 units in August to 1,017,000 in September. This continues a slow-but-steady trend upward, with an average of 978,111 so far in 2014 relative to an average of 930,000 for all of 2013. Still, there was relatively weak housing activity throughout much of the second half of last year and the first half of this year, and the latest data suggest that the data have begun to stabilize somewhat.

As usual, the bulk of the monthly change stemmed from an increase in the highly volatile multi-family segment. Multi-family housing starts rose from 318,000 at the annual rate in August to 371,000 in September, and the average year-to-date has been 353,667 units. Yet, multi-family starts have ranged from 314,000 in January to 446,000 in July, with large shifts from month to month. Even with such unpredictability, multi-family unit activity has trended higher, up 32.0 percent over the past 12 months.

At the same time, single-family starts were also higher, up from 639,000 to 646,000. The average through the first nine months of 2014 is 624,444, and year-over-year growth in September was 11.0 percent. The recent peak was 652,000 in July.

Meanwhile, housing permits mirrored many of these same developments, with permitting up from 1,003,000 to 1,018,000. On a year-over-year basis, housing permits grew 2.5 percent since September 2013. The underlying data were mixed, however. Multi-family permits were up from 376,000 to 394,000; whereas, single-family permitting edged slightly lower, down from 627,000 to 624,000. Permits for single-family homes have improved after bottoming out at 593,000 in February, but the data have been in a narrow range over much of the past year, with a year-over-year decline of 0.5 percent.

Nonetheless, we still remain optimistic about residential construction activity moving forward, and I would expect continued movement in the right direction, even with some volatility. I continue to predict housing starts solidly in the 1.1 million unit range by the beginning of 2015. One thing that might help spur more activity – beyond an improving economy, of course – is lower interest rates. According to Freddie Mac, average 30-year fixed mortgage rates fell to 3.97 percent this week, their lowest level since June 2013.

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

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New study shows EPA greenhouse gas regulation would raise electricity prices, impose massive new costs on manufacturers

This week, NERA Economic Consulting released an economic study on the impact of the Environmental Protection Agency’s (EPA) proposed new greenhouse gas regulation for existing power plants. The study was supported by groups from most sectors of the U.S. economy, including the American Farm Bureau Federation, American Fuel & Petrochemical Manufacturers, American Coalition for Clean Coal Electricity, National Mining Association, Association of American Railroads, Electric Reliability Coordinating Council and Consumer Energy Alliance.

NERA’s report confirms many of our fears about this new regulation: 43 states will experience double-digit increases in the price of electricity, and overall compliance costs exceed $360 billion. Some states could see price increases that exceed 20 percent. In addition, NERA found that all consumers will have to make major new upfront investments in order to reduce overall electricity demand from their power plants. For manufacturers, that is money that could often be better spent on product development.

Manufacturers are committed to addressing global climate change and have taken strong steps to reduce our emissions, promote energy efficiency and new technologies, and become more sustainable. Those steps are working. But we must also remember that many manufacturers are trade exposed and can rarely stomach major new costs (like higher energy prices) that make us less competitive against our international competitors who don’t play by the same environmental rules. Manufacturers urge EPA to revise its greenhouse gas rule for existing power plants to avoid the higher energy prices and other consequences predicted in NERA’s report.

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Manufacturers Gather in Seattle for NAM’s Leadership Engagement Series

Leading manufacturers gathered in Seattle today to spark a conversation about America’s manufacturing comeback and the important role manufacturers must play to ensure America’s competitiveness in the 21st Century economy.  The economic situation in Washington is better than the rest of the nation. The unemployment rate is lower than the national average, median incomes are higher and we can credit a lot of this to the manufacturing industry here.

Manufacturing employs nearly 10 percent of Washington’s workforce, almost 300,000 jobs. Manufacturers’ ability to compete is significantly affected by decisions made in Washington, D.C. and it’s absolutely critical that they engage in important policy discussions. That’s why NAM is hosting a Leadership Engagement Series, traveling to major cities across the nation to discuss top manufacturing concerns and urge manufacturers to engage in the political process.

From overburdening energy regulations to increasing healthcare premiums and taxes and the need to open the doors to more free trade agreements with Trade Promotion Authority, Congress is preventing the manufacturing industry from reaching its full potential. But as a top employer, manufacturers have a powerful voice in the November elections and it’s time we take action and push for more substantive federal policies that benefit, not punish, job creators.

Follow NAM on Twitter (@ShopFloorNAM) for more information on NAM’s Leadership Engagement Series and visit the NAM’s Election Center for more information on how you can get involved.

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MAPI: Manufacturing Activity Expanded at a Slightly Slower Pace in October

The Manufacturers Alliance for Productivity and Innovation (MAPI) Foundation said that its Composite Business Outlook Index dropped from 71 in July to 67 in October. Despite the decline, manufacturing activity remained quite strong, with index readings over 50 indicating expansion. Indeed, the pace of new orders was unchanged (78) at a healthy rate of growth in the fourth quarter report, continuing to reflect improvements from six months ago (71).

Still, several of the key indicators eased in this survey. This included export orders (down from 67 to 65), the orders backlog (down from 72 to 69), prospective U.S. shipments (down from 87 to 83) and prospective foreign shipments (down from 76 to 72). Each of these readings, however, continues to reflect both strong growth.

In contrast, there were some areas of weakness to note. The percentage of respondents operating above 85 percent capacity dropped from 30.0 percent in July to 26.7 percent in October. Expected business investments also slowed considerably in this survey, with 2015 U.S. investment spending nearly just barely above 2014’s pace (down from 67 to 52) whereas foreign investment activity was expected to decline next year relative to this year (down from 64 to 48). On the other hand, the rate of R&D spending was expected to accelerate slightly (up from 67 to 70).

Overall, these data support the notion that manufacturing activity continues to improve, mirroring similar findings from other indicators. The MAPI Foundation has a generally upbeat outlook for the coming months. They predict that manufacturing production will increase by 3.4 percent and 4.0 percent in 2014 and 2015, respectively.

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

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