A Publication of the National Association of Manufacturers
Monday Economic Report

December 7, 2012
Monday Economic Report Graph
Global Economic/Trade Trends

The global economy remains fragile, but there have been some positive signs during the past month. China's economy began to expand (albeit marginally) for the first time in 13 months, with overall activity accelerating. Other countries also improved last month, even if some of them continue to have a Purchasing Managers' Index (PMI) value below 50 - the threshold for contraction. The JPMorgan Global Manufacturing PMI rose from 48.8 to 49.7, or near neutral in terms of manufacturing behavior. Sales and employment appear to have stabilized even in Europe, which remains mired in fiscal and economic challenges. The Eurozone is in a recession, with real GDP lower in two consecutive quarters (down by 0.1 percent in the third quarter), but several countries saw improvements.

At the same time, the North American market appears to be decelerating. Other nations are concerned about our nation’s ability to avert the fiscal cliff. This is especially true with our closest trading partners in North America. Canada and Mexico continue to expand, but at a slower pace. Real GDP in Canada eased to 0.6 percent growth during the third quarter, and its PMI dropped from 51.4 to 50.4. In Mexico, real GDP also weakened, decelerating to 4.4 percent, with the slower pace largely the result of weakening demand for manufacturing exports. Of course, the dominant player in North America is the United States, and worries about the fiscal cliff and softer new orders have negatively impacted industrial production and business confidence. Hurricane Sandy also has been a factor. The latest NAM/IndustryWeek Survey of Manufacturers illustrates how diminished optimism has reduced hiring and capital spending plans. 

Despite major headwinds, U.S. exports continue to be a strength for the macroeconomy and for manufacturers. Net exports provided a positive contribution to real GDP growth during the third quarter, and year-to-date manufactured goods exports through September were 6.1 percent higher relative to the same time period in 2011 on a non-seasonally-adjusted basis. While this represents a significant slowdown, it is nonetheless impressive given global weaknesses. Moreover, more than 40 percent of manufacturers in the NAM/IndustryWeek survey said that increasing international sales was a primary driver of growth for their businesses, and those firms that expected growing exports were more optimistic in their outlook than those that were not.

Next week, the Commerce Department will release new international trade data. The October trade balance is not expected to change dramatically, but we will be looking for indications of continued modest growth in U.S.-manufactured goods exports. Other highlights will be updates on industrial production in a number of European countries and the United States. On the policy front, Congress has now ensured manufacturers can get the full benefits of Russia’s accession to the World Trade Organization (WTO), Trans-Pacific Partnership (TPP) talks are moving forward, trade talks with the European Union (EU) are still under discussion, Ukraine is seeking to raise tariffs and U.S. investment treaty talks are heating up.

Chad Moutray
Chief Economist
National Association of Manufacturers

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Global Economic/Trade Trends
  • China's economy improved during the past month. The HSBC China Manufacturing PMI shifted from contraction to a slight expansion, up from 49.5 in October to 50.5 in November. This index had been below 50 - the threshold for contraction—for 13 straight months but has risen over the past three months. Improvements in new orders have helped to lift activity, with exports higher for the first time since April. In fact, China's trade surplus rose to $32.0 billion in October, largely on a pickup in its exports. The official PMI from China’s National Bureau of Statistics also registered progress, up from 50.2 to 50.6 for the month.

    China’s industrial production also accelerated, with year-over-year growth of 9.6 percent in October. This represents an increase from the 8.9 percent and 9.2 percent growth rates seen in the prior two months, further proving that the Chinese economy has begun to turn a corner. Other evidence includes improvements in fixed asset investment, including a 23.1 percent increase in manufacturing investment over the past 12 months, and retail sales, which rose 14.5 percent from one year ago. As noted in last month's report, Chinese real GDP decelerated to 7.4 percent in the third quarter, but it is expected to rise to 8.0 percent growth by the first quarter of 2013.
  • Europe's economic problems continue, even with modest progress in some areas. The Markit Eurozone Manufacturing PMI rose from 45.4 in October to 46.2 in November. While the index has indicated a contraction in the region for 16 straight months, the pace of the decline in new orders and employment appears to have eased. Similar improvements were seen in France (up from 43.7 to 44.5), Germany (up from 46.0 to 46.8) and Spain (up from 43.5 to 45.3), even as these countries continue to experience contractions in activity overall. Meanwhile, Italy (down from 45.5 to 45.1) and the Netherlands (down from 48.9 to 48.2) are moving in the opposite direction, largely on reduced sales and employment. One of the stronger European economies is Ireland, with its PMI rising from 52.1 to 52.4.

    Economic output in the Eurozone has declined for two consecutive quarters, with real GDP off 0.1 percent in the third quarter. Behind these numbers were lower capital investments (down 0.7 percent) and government spending (down 0.2 percent). Uncertainty on the continent has dampened business confidence despite European Central Bank intervention. Moreover, consumer spending was flat. Data vary by country, with France and Germany (with real GDP up 0.2 percent each during the third quarter) doing better than the United Kingdom (down 0.1 percent), Spain (down 1.6 percent) or Greece (down 7.2 percent).
  • Economic growth in other regions remains mixed. The latest Markit data suggest that five of the 10 largest export markets for U.S.-manufactured goods have PMI readings below 50. Brazil, Canada, China, Hong Kong and Mexico all expanded. The switch from last month was China (see above). Overall, the JPMorgan Global Manufacturing PMI is hovering near the threshold of 50, with the index up from 48.8 in October to 49.7 in November. Worldwide production edged higher, but new orders and employment continue to fall even with some improvements for the month.

    North America has been one of the stronger regions in the world, but Canada's real GDP rose just 0.6 percent in the third quarter. This is a significant easing from the 1.7 percent growth rate experienced in the first and second quarters. Weaker business investment and exports were a drag on growth. The RBC Canadian Manufacturing PMI reflects this softness, with the composite index down from 51.4 to 50.4, or just shy of being neutral. At the same time, Mexico's economy grew 3.3 percent in the third quarter. This was a deceleration from the 4.4 percent growth experienced in the second quarter, with slower exports restraining manufacturing activity. Nonetheless, manufacturing production was up modestly at 2.4 percent in September, and the latest HSBC Mexico Manufacturing PMI edged slightly higher from 55.5 to 55.6.
  • The U.S. economy is growing modestly, but persistent weaknesses continue. The Bureau of Economic Analysis reported that the U.S. economy grew 2.7 percent in the third quarter, higher than the original estimate of 2.0 percent. Increased consumer spending and positive contributions from investment replenishment, end-of-fiscal-year government spending and net exports all pushed this figure higher. Still, business investment remains a weak spot, dragging real GDP lower, and it is clear that manufacturers and other businesses are nervous about the fiscal cliff and weaker sales growth. Real GDP in the current quarter is likely to be 2 percent or less.

    Other data back up these weaknesses. The Federal Reserve Board reported that industrial production declined 0.4 percent in October, and it has fallen 1.4 percent in the past three months. Production in the manufacturing sector declined even more, by 0.9 percent in October and 1.7 percent since July. Hurricane Sandy could explain a sizable amount of this decrease; however, the larger story is of a manufacturing environment that remains choppy. This was echoed in the Institute for Supply Management’s PMI data, with the index falling from 51.7 in October to 49.5 in November. Slowing sales, especially on exports, spurred this return to contraction, where it has done so four of the past six months.

    Moreover, in the latest NAM/IndustryWeek survey, just 51.8 percent of manufacturers said that they were positive about their company’s outlook, down from 88.7 percent earlier in the year. At the same time, uncertainties about the fiscal cliff and other issues are dampening hiring and investment.
  • The U.S. trade deficit narrowed in September on improved exports. The Bureau of Economic Analysis and the Census Bureau reported that the U.S. trade deficit narrowed from $43.8 billion in August to $41.5 billion in September. The improvement stemmed from growth in goods exports, which rose from $128.7 billion to $134.0 billion, a new record high. Goods imports were also higher, up from $187.5 billion to $191.5 billion. This suggests a higher level of trade activity in September—something that has been on-again/off-again throughout the year, particularly given global economic weaknesses.

    More specifically, total goods exports were higher for the month in the following categories: industrial supplies and materials (up $3.4 billion); foods, feeds and beverages (up $1.1 billion); consumer goods (up $487 million); and capital goods, except automotive (up $432 million). The only major category to see declining exports was motor vehicles and parts, down by $289 million.

    Looking at data that is not seasonally adjusted, manufactured goods exports continue to be higher year-to-date this year than last. Year-to-date manufactured goods total $765.7 billion, or 6.1 percent higher than over the same time period in 2011.

    The narrowing of the trade balance is positive news, particularly as it is a sign that manufacturers are selling more of their goods overseas. However, these numbers continue to be choppy with the goods trade balance up and down throughout the year. Nonetheless, the larger trend has been for the goods trade balance to narrow, improving from a $66.8 billion deficit in January to $57.5 billion in September. Higher year-to-date export growth is even more impressive given the challenges seen worldwide, with slowing global growth clearly dampening potential activity.
  • Increase in goods exports was split between petroleum and non-petroleum sources. Petroleum exports were higher, up from $9.0 billion to $11.2 billion; meanwhile, non-petroleum exports rose from $118.2 billion to $121.4 billion. The petroleum trade balance shrunk from $23.5 billion to $21.7 billion. The non-petroleum goods trade balance widened from $34.9 billion to $35.2 billion, mostly on higher imports.

    On a country-by-country basis, there were monthly export gains seen in South and Central America (up $648 million, not seasonally adjusted), Africa (up $518 million), OPEC nations (up $384 million) and the Pacific Rim (up $339 million). Chinese goods exports rose from $8.6 billion to $8.8 billion. EU goods exports ($21.3 billion) were essentially flat for the month, up by just $8 million. Within Europe, however, there were some positives, with higher exports made to Germany, Italy and the United Kingdom. Weaker exports to Europe were observed going to Belgium, France, the Netherlands and Spain.

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International Trade Policy Trends
  • Congress establishes Permanent Normal Trade Relations (PNTR) with Russia. Russia formally joined the WTO on August 22 and agreed to reduce tariffs and non-tariff trade barriers, provide protections for intellectual property and abide by other basic WTO rules, all subject to a binding dispute settlement. The United States must establish PNTR with Russia before manufacturers in the United States can fully benefit from Russia's WTO membership. Russia is the ninth largest economy in the world, making it a key emerging market for U.S.-manufactured goods exports. Russia imported nearly $300 billion in goods in 2011, yet the United States accounted for less than 5 percent of those imports. Clearly, there is room for growth. Congress recently passed a bill to establish PNTR with overwhelming bipartisan support in both the House and Senate. The House passed the Russia and Moldova Jackson-Vanik Repeal Act of 2012 (H.R. 6156) by a vote of 365-43 on November 16. The Senate passed the bill by a vote of 92-4 on December 6. President Obama is expected to sign the bill into law before the end of the year. Click here for more information on Russia PNTR or read testimonials from small and medium-sized manufacturers on the importance of Russia PNTR.
  • TPP talks progress in Auckland, with three rounds slated for 2013. All 11 TPP countries (now including Canada and Mexico) started the 15th round of negotiations in Auckland, New Zealand on December 3. The Auckland Round seeks to make progress on a host of key issues, from market access and intellectual property protection to government procurement and investment rules. More sensitive and challenging issues are not expected to see any resolution until 2013. At least three additional rounds, in addition to several intercessional meetings on particular chapters, are expected between January and September 2013, with a possible end date of October 2013 being the goal.
  • The United States and EU continue discussions on potential new trade talks. U.S. and EU officials continue to meet on the potential outlines of new U.S.-EU trade talks that could be launched early in 2013. Among the key topics under discussion are regulatory issues and technical standards, tariffs, government procurement and investment. The United States and EU already share a $4.5 trillion trade and investment relationship, the largest in the world. The EU was the United States' second largest export market for goods in 2011, with about $269 billion in U.S. exports despite difficult economic conditions. For the EU, the United States is already the largest destination for its goods exports, followed by China, Switzerland, Russia and Turkey. The EU exported about $368 billion to the United States last year in goods.  While sharing the largest commercial relationship in the world, expanding, simplifying and deepening that relationship, if successful, could produce enormous benefits.
  • The Ukraine intends to raise tariffs on imports of more than 300 products. On September 12, the United States and other WTO members received notification of Ukraine's intent to raise its tariff rates by invoking Article 28 of the General Agreement on Tariffs and Trade (GATT). This provision of the GATT provides WTO members the ability to renegotiate bound tariffs after entering into additional compensation agreements with affected WTO members and has only been used infrequently in the past for a few tariff line items. Ukraine's notification kicked off the 90-day clock - which will expire on December 11 - for other WTO members to review the proposal, provide comments and raise any concerns. The list includes 371 tariff lines, covering a wide range of agricultural products, machinery, appliances and automobiles. The United States and the international community are continuing to raise significant opposition to this action, as Ukraine is now seeking to substantially alter its binding commitments made when joining the WTO in 2008. Under GATT Article 28, tariffs cannot be raised until compensation deals are concluded or until after the expiration of the modification period, which would be in December 2014.
  • U.S. investment treaty negotiations heating up. U.S. negotiators have restarted talks with China and India on the negotiation of bilateral investment treaties, and policymakers are looking at other possible areas of negotiation, including in Africa and Asia, potentially including Russia. Bilateral investment treaties (BITs) help open markets by eliminating equity caps and other barriers to investment, set in place core rules to protect property and investors and provide for a neutral dispute settlement between an investor and foreign government if problems arise. The United States has 40 BITs in force throughout the world, as well as similar investment provisions in trade agreements with another 17 countries. The United States is far behind other nations, particularly in Europe and parts of Asia, which have more than twice the number of investment treaties in place.

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

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