A Publication of the National Association of Manufacturers
Monday Economic Report

January 4, 2013
Monday Economic Report Graph
Global Economic/Trade Trends

While much of the focus of late has been on the fiscal cliff, manufacturers have also been worried about slowing global sales. Business leaders have said that increasing their exports has been a struggle. Yet, despite these headwinds, year-to-date growth in U.S.-manufactured goods has risen almost 5 percent. The good news is that this figure represents positive growth, but it also shows significant easing from the same time period last year. Much of the deceleration in exports corresponded with challenging economic environments in a number of countries, going beyond Europe's struggles to include Brazil, China, Japan and elsewhere.

The latest data indicate that the global economy appears to be strengthening, which should bode well for improving international trade this year. Europe and Japan are exceptions as both continue to experience significant weaknesses in their respective markets. The purchasing managers' indices (PMIs) for both remain negative, with new orders, production and employment contracting. Political and economic uncertainties permeate these data, with manufacturers uncertain about what the future holds. Elsewhere, the trends are more positive. Seven of the top 10 markets for U.S.-manufactured goods have economies that are growing - a definite improvement from three months ago when just four of them did. As a result, we are seeing pickups in manufacturing activity and business confidence. This does not mean that these economies are growing strongly, but it does suggest that global trends have stabilized and are moving in the right direction. 

Ironically, the political battles over U.S. fiscal policy had implications beyond our borders, with concerns about a possible economic downturn a top concern among our trading partners. This was especially the case for Canada, our largest trading partner, but other nations fretted about our fiscal situation, as well. With a deal to avert the fiscal cliff, at least some of these anxieties will go away for now. However, there are still larger concerns about the long-term fiscal health of the United States, and possible battles over raising the debt ceiling will keep these issues front and center. Nonetheless, the United States is now poised for modest growth in 2013, with rising exports a major contributor both to our macroeconomic picture and to manufacturers' business plans.

Next week, we will receive data on November's U.S. trade balance. The previous month saw a widening of the trade deficit, with both exports and imports lower. Hopefully, a slowly improving global economy will help to turn that around. Globally, we will get the latest industrial production and retail sales data from a number of European countries, with the European Central Bank meeting to discuss its monetary policy plans for the first time in 2013. Trade data will also be released for China, as well as indices for consumer and producer prices. The larger number to watch from the Chinese perspective will be real GDP growth, which will be out on Wednesday, January 16, and is expected to show an increase of 7.7 percent.

Chad Moutray
Chief Economist
National Association of Manufacturers

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Global Economic/Trade Trends
  • Outside of Europe and Japan, the global economy is improving. Seven of the top 10 markets for U.S.-manufactured goods have PMI readings above 50 - the threshold for growth. This is a nice turnaround from just two months ago, when just four of them did. Of these 10 markets, the only ones with contracting manufacturing activity in December were Germany, Japan and the Netherlands. The JPMorgan Global Manufacturing PMI moved higher, as well, up from 49.6 (a slight contraction) in November to 50.2 (a slight expansion) in December. This suggests that the manufacturing sector has begun to recover globally, even as it is essentially stagnant. A pickup in sales and employment pushed the figures higher, but export orders continue to lag. 
  • Europe's economic struggles persist. The Markit Eurozone Manufacturing PMI was down marginally from 46.2 in November to 46.1 in December. This index has reflected a contraction in the Eurozone for 17 straight months, with output, employment and orders - particularly for exports - declining. While some nations have seen progress in recent months, almost all of them continue to contract, with the exception of Ireland (down from 52.4 to 51.4) and the United Kingdom (up from 49.1 to 51.4). Manufacturing continues to struggle in France (virtually unchanged at 44.6), Germany (down from 46.8 to 46.0), Italy (up from 45.1 to 46.7) and the Netherlands (up from 48.2 to 49.6).

    Weaker demand for goods has diminished Eurozone industrial production, which fell 2.3 percent in September and 1.4 percent in October, according to the latest data from Eurostat. This same data show production was off 3.3 percent in Spain, 2.6 percent in Germany, 1.1 percent in Italy, 0.8 percent in the United Kingdom and 0.7 percent in France. Continent-wide, the unemployment rate rose to 11.7 percent in October, with Spain's rate of 26.2 percent the highest in the Eurozone. Not surprisingly given the data, the Eurozone Business and Consumer Survey finds that consumers were more pessimistic in November, with industrial sentiment up slightly (but still depressed).
  • Japan's manufacturing sector is hurting. Real GDP in the third quarter was off 0.9 percent, with lower consumer spending and a sharp decline in exports. Industrial production also decreased in November, down 1.7 percent, and it has been down 5.8 percent over the past year. Reflecting this weakness, the Markit/JMMA Japan Manufacturing PMI dropped to its lowest point in almost four years, down from 46.5 in November to 45.0 in December. Falling new orders, particularly for exports, were to blame. Markit cites "uncertainty over the direction of domestic and global economies," with the former a reference to the election of a new Japanese government back on December 16. 
  • In contrast to Europe and Japan, China's trends are moving in the right direction. The HSBC China Manufacturing PMI rose for the fourth straight month, up from 47.6 in August to 51.5 in December. It was the second month in a row with the index above 50. Higher new orders led the monthly increase, but exports declined on weak demand in Europe, Japan and the United States. In fact, exports to those regions have declined 18.0 percent, 3.8 percent and 2.6 percent year-over-year, respectively, according to China's Ministry of Foreign Trade and Economic Cooperation.

    As a result of this progress, Chinese industrial production picked up its pace, with year-over-year growth of 10.1 percent in November. This represents a steady increase from August's 8.9 percent rate and is consistent with the upward trend seen in the PMI data. Other data show improvements in fixed asset investments, including a 22.8 percent increase in manufacturing investments over the past 12 months, and retail sales, which rose 14.9 percent from one year ago. New data on Chinese GDP will be released for the fourth quarter of 2012 on Wednesday, January 16. The data are expected to show an increase of 7.7 percent year-over-year, up from 7.4 percent in the third quarter.
  • North American economies are expanding, albeit at different paces. Mexico's economy is one of the healthier ones in the world right now, with manufacturing production up 5.0 percent year-over-year in October. This is still slower from earlier in 2012, with many business leaders eager to see what policies the new government will enact. The most recent HSBC Mexico Manufacturing PMI notes a sharp rise in activity, with the index up from 55.6 in November to 57.1 in December. Therefore, to the extent that manufacturers were in a wait-and-hold pattern in October, this appears to have dissipated by year's end, with increased new orders boosting the number higher. Production and employment were also up.

    Meanwhile, the Canadian economy has decelerated of late. Ironically, business leaders in Canada have worried about the fiscal cliff and slowness in the United States, its largest trading partner. Exports to the United States declined 0.2 percent in October, according to Statistics Canada, and as noted in the last report, real GDP rose just 0.6 percent in the third quarter at the annual rate. This was a significant easing from the 1.7 percent growth rate experienced in the first and second quarters. The RBC Canadian Manufacturing PMI reflects this weakness, with the composite index unchanged at 50.4. To illustrate the slower pace of growth, Canada's PMI has fallen from 54.8 in June.

    Elsewhere in the Americas, Brazil, which is our largest trading partner in South America, expanded for the third consecutive month. However, the HSBC Brazil Manufacturing PMI declined from 52.2 in November to 51.1 in December. While production and sales were stronger, hiring remains negative. The latest industrial production data also suggest some improvements, with a 0.9 percent monthly gain in October. This was a turnaround from September's lower manufacturing activity levels.
  • The U.S. economy grew more during the third quarter than originally thought. The Bureau of Economic Analysis revised its figure for third quarter real GDP to 3.1 percent, up from previous estimates of 2.7 percent and 2.0 percent. This reflected higher consumer spending on services, increased net exports and a now-positive contribution from state and local spending.

    Overall, consumers, housing, end-of-fiscal-year federal government spending, inventory replenishment and net exports mainly fueled the faster pace of growth during the third quarter. The primary drag was nonresidential fixed investments, with manufacturers and other businesses anxious about slowing sales and the fiscal cliff. This uncertainty led to business investments subtracting 0.23 percentage points from real GDP, with reduced spending on equipment and software the primary factor.

    This sluggishness continued into the fourth quarter, with growth expected to slow to around 2 percent or less. The latest Institute for Supply Management survey reports a PMI of 50.7 in December, up from 49.5 in November. New orders were unchanged at 50.3, with exports shifting from contraction (47.0) to expansion (51.5).
  • The U.S. trade deficit widened in October. The Bureau of Economic Analysis and the Census Bureau reported that the U.S. trade deficit widened from $40.3 billion in September to $42.2 billion in October. This brings us back to essentially August's level, erasing the narrowing of the deficit that occurred in September. Both goods exports and imports were lower in October. Goods exports dropped from $133.9 billion to $127.5 billion, and goods imports decreased from $191.3 billion to $186.6 billion. Because exports fell by more than imports, the trade deficit widened.

    Goods exports were lower across-the-board, hitting all of the major categories. These included industrial supplies and materials (down $2.9 billion), nonautomotive capital goods (down $1.9 billion), foods, feeds and beverages (down $1.4 billion), automotive vehicles and parts (down $370 million) and consumer goods (down $73 million). However, as noted earlier, goods imports were also down, with the consumer goods sector declining the most (down $3.7 billion).

    Manufactured goods exports were up $654 million between September and October using non-seasonally adjusted data. This indicates that manufacturers continue to find opportunities despite numerous global headwinds. Year-to-date manufactured goods exports are up 4.7 percent over what they were during the same point in 2011. While export growth has slowed, it is still a positive number. Export gains were with most of our major trading partners, with the exception of the Eurozone, which was essentially flat.
  • The petroleum trade balance widened in October, but still improved from earlier in the year. A fair share of the monthly change in exports and imports could be attributed to the petroleum market. The petroleum trade balance widened from $21.6 billion to $24.6 billion for the month, as exports dropped by $661 million and imports rose by $2.4 billion, largely the result of higher costs. The average petroleum trade balance for 2012 year-to-date was $25.1 billion. October's figure still represents an improvement from earlier in the year. January's petroleum trade balance was $30.0 billion.

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International Trade Policy Trends
  • Trans-Pacific Partnership (TPP) talks continue into 2013 with major issues yet to be resolved. Efforts continue to move the TPP talks (with Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam), with a potential conclusion by the October 2013 APEC Leaders' Meeting in Bali, Indonesia. The 15th round of negotiations - held in Auckland, New Zealand, in December - produced some progress, including bringing Canada and Mexico into the negotiations. However, major divisions and differences continue among the countries, including on the following issues: 
    • Market access (tariffs on sensitive manufactured and agricultural products - from textiles and apparel to sugar and dairy - as well as non-tariff barriers on key goods and services)
    • Intellectual property protection and enforcement
    • Investment openness and protection
    • Treatment of state-owned enterprises
    • Openness of government procurement markets

Three negotiating rounds have been scheduled for 2013, starting in March in Singapore. Work will also continue in intercessional meetings (more targeted negotiations between rounds).

  • U.S - China Joint Commission on Commerce and Trade (JCCT) concludes, and investment treaty negotiations continue. The United States and China concluded the 23rd JCCT meeting on December 19, which covered a broad range of topics, including intellectual property protection and enforcement; government procurement; regulatory obstacles, such as testing, certification and encryption requirements; and indigenous innovation and localization barriers in China. As in past JCCT meetings, commitments were made in a number of areas to address key commercial issues, although there is no formal enforcement mechanism related to such commitments. More information can be found here. In December, U.S. and Chinese negotiators also met to move forward Bilateral Investment Treaty (BIT) talks. The next round of talks is expected to take place early this year.
  • World Trade Organization (WTO) concludes Trade Policy Review (TPR) of the United States. The WTO completed its 11th TPR of the United States in December. The TPR chairperson emphasized in his concluding remarks the importance of the United States as the "world's largest single economy and largest trader," noting that in "2011, 68 members had the United States as their first, second or third largest export market, and the United States continued to be the world's largest recipient of FDI, with accumulated stocks of $2.9 trillion." U.S. Deputy USTR Ambassador Michael Punke emphasized the continued importance that the United States places on the WTO and the world trading system:

    The United States played a leading role in creating this system as well as building upon it and sustaining it. While the system is far from perfect, we remain fully committed to supporting it and making it even better.

The chairperson's concluding remarks are found here, and Ambassador Punke's statement can be found here. The TPR can be found here.

  • WTO dispute panel formed in Argentina import licensing case; United States requests public input. The United States issued a Federal Register notice on December 26 announcing that it had requested a WTO panel in the case it brought against Argentina regarding import licensing measures. Written comments from the public are sought by Friday, January 18.
  • Congress fails to act on Miscellaneous Tariff Bill (MTB). The 112th Congress failed to pass tariff relief for manufacturers in the United States. Congress's failure to act results in higher costs on about 600 raw materials and inputs that are imported, damaging manufacturers' global competitiveness and threatening jobs. Manufacturers urge the House and Senate in the 113th Congress to work together and find a path forward for this critical legislation.
  • Russia PNTR is a positive step toward boosting exports. President Obama signed legislation on December 14 to establish Permanent Normal Trade Relations (PNTR) with Russia, and the United States and Russia fully normalized WTO relations on December 21. As a result, manufacturers in the United States will have new trade opportunities in Russia, and the United States will be able to address trade disputes with Russia in the WTO system, if necessary. Russia is the ninth-largest economy in the world, importing about $300 billion worth of goods in 2011.

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Questions or comments? Please contact Chad Moutray at cmoutray@nam.org

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