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MONDAY ECONOMIC REPORT
September 12, 2014
NAM/IndustryWeek Survey of Manufactures Business Outlook by Quarter, 2012-2014

Net exports have been a drag on the U.S. economy so far through the first half of this year, with manufacturers continuing to experience sluggish sales growth in international markets. With that said, the U.S. trade deficit narrowed a bit in July to its lowest level in six months, with growth in goods exports outpacing growth in goods imports. Petroleum trade accounted for a significant portion of the change in each, and in general, energy has helped to narrow the deficit from that of a couple years ago. Another positive note was the fact that each of the top-five trading partners for U.S.-manufactured goods experienced increases in manufactured goods exports year-to-date relative to the same time frame last year using non-seasonally adjusted data.

Along those lines, manufacturers worldwide saw modest growth, with a slight improvement from the month before. The J.P. Morgan Global Manufacturing Purchasing Managers’ Index (PMI) rose marginally, up from 52.4 in July to 52.6 in August. The good news is that this marks the 21st straight month of expanding activity globally; yet, it is also clear that the pace of growth has not changed much this year. Still, manufacturing activity in August expanded in 9 of the top 10 markets for U.S.-manufactured goods, an improvement from just five markets in May.

Nonetheless, the data also show signs of softness, most notably in Europe and in China. Real GDP in the Eurozone fell 0.2 percent in the second quarter, with recent industrial production and retail sales data trending lower, as well. The Markit Eurozone Manufacturing PMI declined from 51.8 to 50.7, its lowest level since July 2013, when Europe was just emerging from its deep recession. Still, the economic health of various European nations varies widely, ranging from deteriorating activity in France to relatively robust growth in Ireland. For its part, the European Central Bank has once again lowered interest rates in the hope of spurring more economic activity and additional lending. With these actions and slow growth in Europe, the euro has depreciated against the dollar, down from a recent high of $1.3924 for one euro on May 6 to yesterday’s close of $1.2921 on September 11.  

Meanwhile, Chinese manufacturers have reported expanding levels of activity for three straight months (June to August), which by itself is progress after starting the year with five months of contraction. However, the HSBC China Manufacturing PMI declined from 51.7 to 50.2, or just barely above neutral, with decelerating levels of new orders, output and exports. Moreover, while real GDP in China picked up slightly from a year-over-year pace of 7.4 percent in the first quarter to 7.5 percent in the second quarter, we expect to continue to see an easing in growth rates moving forward. We have also seen decelerating rates of growth—albeit still healthy ones by our standards—for industrial production, fixed asset investments and retail sales. Slower growth in China has also helped to pull down overall manufacturing activity in the emerging markets.

U.S. trade talks continue this month with both Asia-Pacific nations and Europe, while the World Trade Organization seeks to move forward both trade facilitation and environmental goods discussions. Domestically, a range of trade and international financing legislation awaits action, including the reauthorization of the Export-Import Bank of the United States, whose charter expires on September 30.

Chad Moutray
Chief Economist
National Association of Manufacturers
 
Global Economic and Trade Trends

The global economy is growing modestly; however, some areas do show signs of slowing, most notably in Europe.
The J.P. Morgan Global Manufacturing PMI increased marginally, up from 52.4 in July to 52.6 in August. On the positive side, it marks the 21st straight month with expanding activity worldwide in the sector; yet, it is also clear that the pace of that expansion has not changed much this year, with the index averaging 52.5 through the first 8 months of 2014. The underlying data in August were mixed, as well. New orders (down from 53.9 to 53.8) and production (unchanged at 53.8) continued to grow modestly, but with little change from July’s readings. Fortunately, new export sales (up from 51.5 to 52.4) accelerated to its fastest pace in nine months, providing some encouraging news on the trade front.

Looking at the top 10 markets for U.S.-manufactured goods, nine of them had expanding levels of activity in August, an improvement from just five who were in expansion in May. Brazil (up from 49.1 to 50.2) and South Korea (up from 49.3 to 50.3) both shifted from contractions to ever-so-slight growth in August, with softness in Hong Kong (down from 50.4 to 49.6) being the one negative. Manufacturing activity picked up in both Canada (up from 54.3 to 54.8) and the United States (up from 55.8 to 57.9), but a number of European economies experienced notable easing. This included, among the top 10 markets, Germany (down from 52.4 to 51.4), the Netherlands (down from 53.5 to 51.7) and the United Kingdom (down from 54.8 to 52.5). The country’s index readings reached their lowest point since June 2013, as its PMI had registered 57.0 as recently as April.

Europe’s economy has stalled, prompting more stimulus measures from the European Central Bank.
The Markit Eurozone Manufacturing PMI declined from 51.8 to 50.7, its lowest level since July 2013, when manufacturing activity was just emerging from its deep recession. Indeed, the various measures dropped across the board, including new orders (down from 52.1 to 50.7), output (down from 52.7 to 51.0), exports (down from 52.6 to 51.7) and hiring (down from 49.9 to 49.3). This marks the second consecutive month with net employment decreasing, reversing a six-month streak of positive gains.

With that said, growth varies widely from country to country. France (down from 47.8 to 46.9) continues to be one of the weaker economies in the Eurozone, with manufacturing activity deteriorating further in August. Italy (down from 51.9 to 49.8) also contracted for the first time in 14 months, and decelerations were observed in Germany (down from 52.4 to 51.4), the Netherlands (down from 53.5 to 51.7) and the United Kingdom (down from 54.8 to 52.5) as well. At the same time, there was slight growth in Austria (unchanged at 50.9), Greece (up from 48.7 to 50.1) and Spain (down from 53.9 to 52.8), with the latter seeing strong gains in new orders and exports despite easing in production. Meanwhile, Ireland (up from 55.4 to 57.3) is one of the bright spots, with indices for sales and output exceeding 60 and exports and employment moving in the right direction.

Behind these sentiment surveys, the data show significant softness in Europe. Real GDP remained unchanged in the second quarter, down from 0.2 percent growth in the first quarter. Moreover, it has increased just 0.7 percent year-over-year, illustrating just how sluggish the recovery has been. Indeed, industrial production fell 0.3 percent in June, with activity flat over the past 12 months. (A new number is being released today, and it is expected to be negative as well.) Retail sales dropped 0.4 percent in July, its first decline since December. The unemployment rate remains elevated, even as it held steady in July at 11.5 percent. Overall, worries about economic and income growth in Europe have significantly weakened economic confidence, with just 4.1 percent of survey respondents calling the current situation “good.”

As of August, Eurozone inflation had risen just 0.3 percent over the past 12 months, prompting continued worries about deflationary pressures in the economy. The annual inflation pace is down from 1.3 percent in August 2013. With that in mind, the European Central Bank has once again lowered interest rates in the hope of spurring more economic activity and additional lending. Moreover, there is an expectation of further stimulus in the coming months. With these actions and slow growth in Europe, the euro has depreciated against the U.S. dollar, down from a recent high of $1.3924 for one euro on May 6 to yesterday’s close of $1.2921 on September 11.

Manufacturing activity in China expanded for the third straight month, but at a much slower pace in August.
The HSBC China Manufacturing PMI declined from 51.7 to 50.2, its lowest level since contracting from January to May. The reduced index reading stemmed from easing in the pace of growth for new orders (down from 53.3 to 51.3), output (down from 52.8 to 51.8) and exports (down from 52.6 to 51.9). Employment growth (down from 49.4 to 47.4) continued to deteriorate, contracting for the 10th consecutive month. In addition, the official government PMI data for manufacturers also declined for the month, down from 51.7 to 51.1.

As noted last month, Chinese GDP slightly improved from a year-over-year pace of 7.4 percent in the first quarter to 7.5 percent in the second. Still, the Chinese economy is expected to grow around 7.3 percent in the current quarter, suggesting a possible continued deceleration from what businesses might have been accustomed to in past years. Industrial production increased 9.0 percent over the past 12 months, down from 9.2 percent in June but better than rates observed earlier in the year. Similarly, fixed asset investment also slowed, down from a year-over-year pace of 17.3 percent in June to 17.0 percent in July. Moreover, investment remains decelerated from a more-robust 18.5 percent year-over-year pace observed in December for the sector. Retail sales were also marginally lower, down from an annual pace of 12.4 percent to 12.2 percent.

Slower activity in China helped to pull down overall manufacturing growth in the emerging markets.
The HSBC Emerging Markets Index increased from 51.7 to 52.5, its highest point since March 2013. However, its manufacturing component decreased slightly, down from 51.4 to 51.1. Production growth remained unchanged (52.3), continuing to expand modestly, but other measures decelerated somewhat for the month. This included new orders (down from 52.6 to 52.3), exports (down from 51.7 to 51.6) and hiring (down from 50.0 to 49.1). Fortunately, survey respondents were more upbeat about future output (up from 64.3 to 64.8), suggesting some hopefulness for a possible pickup in the coming months.

Along those lines, stronger demand for manufactured goods helped push activity levels in Brazil (up from 49.1 to 50.2), South Africa (up from 46.4 to 51.1), South Korea (up from 49.3 to 50.3) and Turkey (up from 48.5 to 50.3) from contractions to their highest levels since earlier in the year. Taiwan (up from 55.8 to 56.1) experienced the strongest gains in August, with its PMI values at three-year highs. Meanwhile, we see slight-to-modest growth in the Czech Republic (down from 56.5 to 54.3), India (down from 53.0 to 52.4), Vietnam (down from 51.7 to 50.3) and Russia (unchanged at 51.0) despite slower production growth in the sector in each. Of those four, new orders and output growth remain decent in both the Czech Republic and India. In contrast, manufacturers reported contracting levels of activity for the first time in both Indonesia (down from 52.7 to 49.5) and Poland (down from 49.4 to 49.0), with Indonesia’s weaknesses a bit of surprise given recent strengths.

Canadian and Mexican manufacturers reported improvements in August.
The RBC Canadian Manufacturing PMI increased from 54.3 to 54.8, with the pace of growth rising for the third straight month to its fastest pace since November 2013. This suggests that winter and spring softness has begun to dissipate, mirroring trends seen in the United States. Production (up from 55.2 to 56.5) rose by the most, with higher levels also observed for new orders (up from 55.2 to 55.3), exports (up from 52.0 to 52.4) and employment (up from 53.8 to 54.4). Indeed, real GDP rose an annualized 3.1 percent in the second quarter, rebounding from 0.9 percent growth in the first quarter, boosted by increases in manufacturing production. Retail sales were also higher, up 1.1 percent in June. Beyond these measures, the unemployment rate stayed at 7.0 percent in August. Unfortunately, Canadian manufacturers lost 11,000 workers for the month, with a year-over-year decline of 29,600.

Meanwhile, the HSBC Mexico Manufacturing PMI edged somewhat higher, up from 51.5 to 52.1, its highest level since January. Still, the underlying data were mixed. Respondents said that output (up from 51.8 to 52.9) and employment (up from 49.3 to 51.2) accelerated to modest levels, but the pace of new orders (down from 53.8 to 52.6) and exports (down from 53.0 to 51.2) eased slightly. The increase in net hiring ended two months of declines. Nonetheless, real GDP in the second quarter fell short, up 1.6 percent year-over-year versus 1.9 percent in the first quarter. The 3.4 percent year-over-year growth in manufacturing production in June was also slower than the 4.0 percent gain in May. At the same time, manufacturers fared better than other industries. Mexico’s unemployment rate rose from 4.8 percent in June to 5.5 percent in July, but summer vacations likely played a role in this increase.

The U.S. trade deficit declined marginally in July.
The U.S. trade deficit narrowed ever-so-slightly, down from $40.81 billion in June to $40.55 billion in July to its smallest since January’s $39.18 billion level. The July figure stemmed from goods exports (up from $136.82 billion to $138.57 billion) that were high enough to offset an increase in goods imports (up from $197.23 billion to $198.77 billion). The service-sector trade surplus also widened marginally (up from $19.60 billion to $19.65 billion).

While the deficit changed little for the month, the breakouts show that the increases in goods exports and goods imports resulted from both petroleum and non-petroleum trade flows. For instance, petroleum exports increased $1.12 billion in July, with non-petroleum exports up by $937 million. Similarly, petroleum imports rose by $915 million, and non-petroleum imports increased by $714 million.

Digging even deeper into the data, the automotive vehicles and parts (up $1.66 billion), industrial products and materials (up $1.26 billion) and non-automotive capital goods (up $427 million) sectors also had increased goods exports. Most of the gain in industrial products and materials came from petroleum. In contrast, exports fell for consumer goods (down $650 million) and foods, feeds and beverages (down $632 million).

International Trade Policy Trends

TPP talks move forward.
Chief negotiators from the 12 Trans-Pacific Partnership (TPP) countries met in Hanoi, Vietnam, from September 1 –10. Their next round of talks is expected to take place in mid- to late October, with TPP trade ministers potentially meeting in November to seek to resolve outstanding difficult issues. Locations have not yet been announced. President Barack Obama has indicated he would like to see some sort of TPP outcome reached in time for the Asia-Pacific Economic Cooperation (APEC) leaders meeting on November 10 – 11 in Beijing, China, while New Zealand Trade Minister Tim Groser and Australian Trade Minister Andrew Robb have indicated that TPP will not be concluded this year. House and Senate Republicans have urged the Administration not to conclude a deal without first securing Trade Promotion Authority (TPA).

Juncker names Malmström new EU trade commissioner, as United States and European Union prepare for round seven of the Trans-Atlantic Trade and Investment Partnership (T-TIP) talks.
On September 10, Jean-Claude Juncker, the European Union (EU) Commission president, nominated Swedish politician Cecilia Malmström as the next EU trade commissioner. A member of Sweden’s centrist Liberal People’s Party, Malmström previously served as a member of the European Parliament and as EU commissioner for home affairs. Former EU Energy Commissioner Gunter Öttinger, who was widely rumored to be the front runner for the trade post, was tapped as the next commissioner for digital economy and society. The European Parliament is expected to hold a hearing on each nominee in the coming weeks but can only accept or reject the entire slate. It remains unclear where Malmström will steer Europe’s engagement in T-TIP and other ongoing negotiations. She has played a leading role in galvanizing international support against cybercrime and child sex abuse, but has not been as prominent on trade policy.

While the Commission remains in a process of change, U.S. and EU negotiators will meet September 29 to October 3 in the United States for the seventh round of talks. This round is expected to focus on more technical aspects of the negotiations given the change in leadership at the commission.

World Trade Organization (WTO) Trade Facilitation Agreement remains on hold.
In the days before a key July 31 deadline, India was able to block implementation of the WTO Trade Facilitation Agreement (TFA) reached last year in Bali. On July 17, the National Association of Manufacturers (NAM) was joined by eight other associations in sending a letter to G20 Trade Ministers—in advance of their July 19 meeting—in support of the TFA. The NAM remains committed to the objectives outlined in the TFA and is continuing to work with the Administration to provide private-sector feedback to the U.S. government on TFA implementation.​ U.S negotiators at the Office of the U.S. Trade Representative (USTR) are continuing to consult with other WTO members, and the WTO will hold a series of meetings in Geneva next week to determine how best to move forward. The NAM has repeatedly urged India and other countries to unlock their hold on this important agreement that will cut red-tape at the border and promote greater growth around the world.

Round two of environmental goods talks to take place later this month.
The second round of environmental goods talks at the WTO will begin September 22. In July, the NAM’s Director of International Trade Policy, Jessica Lemos, participated in the official launch of the Environmental Goods Agreement (EGA) negotiations at the WTO in Geneva. Manufacturers welcomed these efforts to build on progress already achieved in the APEC forum to eliminate and reduce tariffs on green goods. The Coalition for Green Trade, co-chaired by the NAM and others, also launched in July and released a global business letter by a broad range of international industry associations in support of the EGA talks. The NAM recently submitted these comments on the EGA to the European Commission.

Manufacturers weigh in on first 100 days of India’s new prime minister.
As part of the NAM’s ongoing work to address trade barriers in India, NAM Vice President for International Economic Affairs Linda Dempsey issued a September 9 statement on progress achieved during new Indian Prime Minister Narendra Modi’s first 100 days in office. She highlighted valuable opportunities to engage India’s new leadership and urged concrete action on longstanding trade and investment barriers. In the lead up to Prime Minister Modi’s planned visit to the United States at the end of this month, the NAM will be working with its partners in the Alliance for Fair Trade with India to press the Obama Administration to raise manufacturing concerns at the highest levels and to press for real results.

Manufacturers call for action on trade priorities.
The NAM is working aggressively to “expand access to global markets to enable manufacturers to reach the 95 percent of consumers who live outside our borders”—a key goal of its Growth Agenda. But with little time left for federal lawmakers to address a range of critical trade priorities, the NAM is urging members and their employees to tell members of Congress to act now to increase manufacturing competitiveness and jobs by passing the Trade Promotion Authority, reauthorizing the Export-Import Bank, approving a Miscellaneous Tariff Bill and continuing the Generalized System of Preferences program. Click here to tell Congress to move this legislation now. The NAM will continue to advocate aggressively for pro-growth trade policies that are critical to U.S. competitiveness and job creation. Make your voice heard, and help us tell Congress to get the job done.

Extension of Export-Import Bank included in House spending bill.
On September 9, the House introduced a continuing resolution to fund government operations through December 11, with the expectation that additional work on appropriations would be undertaken during a November–December lame duck session. This legislation also includes a renewal of the U.S. Export-Import Bank’s (Ex-Im) charter through June 30. A vote on this continuing resolution, or a modified version of the bill, is expected next week. The NAM and its members continued strong efforts throughout the August recess to seek a multiyear reauthorization of the Ex-Im Bank, as reported by Bloomberg News and other media outlets, and brought to Washington on September 9 several companies that have recently used Ex-Im Bank to grow their exports. NAM President and CEO Jay Timmons also emphasized the importance of a long-term reauthorization in an Op-Ed yesterday in the Washington Times, and he was joined by 10 other association CEOs on September 10 in calling for Congress to pass a long-term reauthorization for Ex-Im Bank. 

Miscellaneous Tariff Bill (MTB) and the Generalized System of Preferences (GSP) await action.
The NAM continues to lead business efforts to move the MTB process forward so that manufacturers can renew or obtain new tariff suspensions on imported inputs and products not produced in the United States to advance manufacturers’ global competitiveness. Despite advocacy efforts this spring and recent proposals to reform the MTB process, legislative renewal of this important bill remains on hold. GSP legislation expired on July 31 last year, and Congressional action is required to restore these trade benefits. While the NAM has been urging renewal of this program, there remains no legislative movement. On May 7, the President notified Congress of his intent to remove Russia from the list of beneficiary countries, which became effective in early July. Discussions on the renewal of both pieces of legislation will continue as the NAM pushes for their renewal before year’s end.

Trade secrets legislation proceeding on Capitol Hill.
Manufacturers continue to push for swift passage of legislation (S.2267/H.R.5233) that would provide access to federal civil enforcement for trade secrets theft. Right now, firms must go state by state to defend their rights—a time-consuming and expensive process, especially for small businesses. Manufacturing voices participated in a successful Senate Judiciary Committee briefing on trade secrets on September 4. A House Judiciary Committee markup of the Trade Secrets Protection Act (H.R.5233), originally scheduled for September 10, has been moved to the week of September 15. The NAM will continue to press for action on this important legislation before the end of the year.

The NAM continues leading efforts to address country of origin labeling (COOL) concerns.
The NAM has been working with others in the business community to lead the COOL Reform Coalition, aimed at addressing U.S. country of origin labeling (COOL) requirements for meat that have prompted a WTO case by Mexico and Canada. The coalition has been working to emphasize the importance of ensuring that COOL requirements meet our international obligations. The COOL rule currently in place is expected to be found WTO noncompliant in the coming weeks and could potentially result in $2 billion in retaliatory tariffs on a broad range of U.S.-manufactured exports. The NAM recently signed onto a letter to the chairs and ranking members of the House and Senate Agriculture Committees, urging them to authorize and direct the Secretary of Agriculture to suspend the current COOL rule indefinitely upon adjudication of noncompliance by the WTO and co-authored an Op-Ed with the U.S. Chamber of Commerce. To ask your member of Congress to take action on COOL, go to www.coolreform.com..

United States may expand Russian sanctions.
A tentative ceasefire between Ukraine and Russia took effect on September 5, with monitoring from the Organisation for Security and Cooperation in Europe (OSCE). Despite a weekend flare-up of shelling near two cities in the disputed territory, the ceasefire appears to be holding. Although the EU tentatively put its new sanctions on hold earlier this week, the United States is reportedly close to imposing another round of energy sanctions on Russia and the EU is expected to re-impose its sanctions. The sanctions, which the European Union is expected to match, would ban energy companies from working with Russia on future oil exploration in the Russian Arctic, deep seas and shale rock formations. Since March, the U.S. government has released a series of executive orders to impose sanctions on entities in the financial services, energy and arms sectors. Manufacturers support the Administration’s efforts to pursue multilateral approaches that will effectively resolve the crisis in Ukraine, rather than unilateral economic sanctions that would cut off U.S. commercial engagement with Russia.

WTO sides with United States in Argentina trade enforcement case.
Manufacturers applauded USTR’s August 22 announcement that the United States prevailed in the WTO trade enforcement case against Argentina. The WTO panel agreed with the United States that Argentina’s use of import license requirements and other import restrictions violate international trade rules. In 2012, the United States was joined by the European Union and Japan in challenging Argentina’s trade-restrictive measures imposed on imported goods. Manufacturers have long called on Argentina to reverse their harmful trade policies, which damage U.S. exporters’ ability to enter that market, and on USTR to raise our concerns at the WTO. Last year, the NAM and a group of other business associations detailed to USTR our serious concerns with Argentina’s protectionist policies and their negative impact on U.S.


Exports in Action
The NAM requests input for trade barriers report.
The NAM is seeking member input for its public submission for USTR’s 2015 National Trade Estimate (NTE) Report on trade barriers in overseas markets. In an August 15 Federal Register notice, USTR requested comments for the NTE Report by October 29. This report is a critical opportunity to highlight obstacles to U.S. manufacturing exports and investment and to prioritize them for Administration action. Please provide input to the NAM’s Senior Director of International Business Policy, Chris Moore, by the end of the month. To see USTR’s 2014 NTE Report, click here. To see the NAM’s submission for that report, click here.

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Contact Chief Economist Chad Moutray at cmoutray@nam.org.