A Publication of the National Association of Manufacturers
Monday Economic Report

April 11, 2014
Monday Economic Report Graph
Global Economic/Trade Trends

In its latest World Economic Outlook, the International Monetary Fund (IMF) now predicts global GDP growth of 3.6 percent in 2014 and 3.9 percent in 2015. The forecast for this year was essentially unchanged from the outlook in October, and it suggests that the global economy continues to recover. Global growth in 2013 was 3.0 percent. The IMF projects U.S. growth of 2.8 percent this year and 3.0 percent next year, up from 1.9 percent last year. Europe is another area where the IMF sees progress this year—albeit quite modestly—with real GDP growth of 1.2 percent in 2014 and 1.5 percent in 2015, with the continent emerging from its deep two-year recession. Despite the slightly better data overall, the IMF worries about low inflation in advanced economies, structural challenges in emerging markets and geopolitical risks.

The IMF also notes that China’s economy continues to decelerate, with real GDP growth of 7.5 percent in 2014 and 7.3 percent in 2015. This is consistent with recent data, which show activity in the manufacturing sector slowing down. The HSBC China Manufacturing Purchasing Managers’ Index (PMI) has contracted for three straight months with falling levels of new orders and output. On the positive side, export sales appeared to pick up a bit in March. Next week, we will get new data for industrial production, fixed-asset investment and retail sales. Each has eased significantly in recent reports. Still, even with these slower rates, the outlook for China remains strong overall, and China has already begun to put stimulative measures in place to boost the economy further. As noted in the past report, the Bank of China has also supported a depreciation of the yuan in the past few months, but it asserts that its actions have been mainly to fend off speculators.

Weaknesses in China and Russia have also weighed heavily on manufacturing activity figures for emerging markets. The HSBC Emerging Markets Manufacturing PMI fell below 50 for the first time since July as demand and production stagnated. Nonetheless, outside of China and Russia, the picture for emerging markets was somewhat more positive. Several countries continued to experience modest growth rates, albeit with a slower pace than the month before in some cases. Two notable strengths among emerging markets hail from Eastern Europe. The Czech Republic and Poland continue to see strong growth in their manufacturing sectors despite some deceleration in March. For instance, the production index in the Czech Republic has now exceeded 60 for two straight months, a sign that output is experiencing healthy gains of late.

In all of Europe, manufacturers report slow-but-steady progress. The Markit Eurozone Manufacturing PMI has now expanded for nine consecutive months, an encouraging sign after the deep two-year recession. France, which had lagged behind many of its peers on the continent, had its manufacturing PMI figure exceed 50 for the first time since July 2011. However, overall economic growth remains modest. The unemployment rate continues to be elevated, even as it fell below 12 percent for the first time in 13 months. Weak income growth has caused many to worry about possible deflationary concerns. Annual inflation rates in the Eurozone have fallen from 1.7 percent in March 2013 to 0.5 percent in March 2014, and producer prices declined in February. Aware of these trends, the European Central Bank (ECB) held interest rates steady and said it was prepared to pursue quantitative easing, if necessary, to stimulate the economy further.

Meanwhile, the U.S. trade deficit widened in February due to a decrease in goods exports and an increase in service-sector imports. Manufactured goods exports in the first two months of 2014 were 0.6 percent lower than during the same time period last year, which was disappointing. Nonetheless, we continue to be optimistic that better economic growth rates abroad will lead to improvements on the export front. Fortunately, four of our top five markets for U.S.-manufactured goods notched year-to-date increases in the first two months relative to last year, including Mexico, China, Japan and Germany.

Efforts to move forward U.S.–European and Asian–Pacific negotiations continue, and the World Trade Organization (WTO) is heading to the next stage of implementing the recently completed Trade Facilitation Agreement. On the legislative side, Export-Import (Ex-Im) Bank reauthorization efforts continue, while manufacturers keep pressing for congressional action on key trade legislation, such as Trade Promotion Authority (TPA) and the Miscellaneous Tariff Bill (MTB).

Chad Moutray
Chief Economist
National Association of Manufacturers

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Global Economic/Trade Trends
  • The global economy continues to expand modestly, albeit at a somewhat slower pace. The JPMorgan Global Manufacturing PMI edged lower, down from 53.2 in February to 52.4 in March. This was the lowest level since October, but it also marked the 16th straight month of expanding manufacturing activity worldwide. The underlying data in March were somewhat mixed. New orders (down from 54.6 to 53.2) and output (down from 54.6 to 53.4) were both off slightly, but still reflected modest increases. At the same time, the pace of growth for exports (up from 51.5 to 51.7) and employment (up from 51.3 to 51.5) was marginally higher.

    As noted last month, the United States accounts for one-quarter of the weight in the Global PMI measure, making it somewhat more difficult to disentangle the strength of the U.S. manufacturing sector from the worldwide analysis. For its part, the Markit U.S. Manufacturing PMI declined from 57.1 to 55.5, but it still reflected relatively healthy gains in both sales (down from 59.6 to 58.1) and production (down from 57.8 to 57.5). Likewise, the competing PMI measure from the Institute for Supply Management noted a bit of an improvement in March (up from 53.2 to 53.7) as manufacturers have begun to move beyond the winter storms of January and February, with production turning positive (up from 48.2 to 55.9) and sales accelerating (up from 54.5 to 55.1).

    Looking at the top 10 markets for U.S.-manufactured goods, all but China (down from 48.5 to 48.0) and Hong Kong (down from 53.3 to 49.9) saw manufacturing activity expand in March. South Korea’s economy (up from 49.8 to 50.4) returned to slight growth for the month. In the remaining countries, the data were largely mixed. Most of our key markets had some easing in their growth rates for the month, but some of these nations continue to have decent growth, particularly our trading partners in Europe, such as Germany (down from 54.8 to 53.7), the Netherlands (down from 55.2 to 53.7) and the United Kingdom (down from 56.2 to 55.3).

 

  • Manufacturing activity in emerging markets contracted slightly in March. The HSBC Emerging Markets Index stalled, down from 51.1 to 50.3. More importantly, the manufacturing PMI for emerging markets fell below the threshold of 50 (down from 50.3 to 49.8), contracting for the first time since July. New orders (down from 51.1 to 49.6) and output (down from 51.0 to 49.7) have both stagnated, dragging the headline figure lower. Interestingly, export sales (up from 50.4 to 51.6) and employment (up from 49.1 to 50.3) registered slight gains.

    In particular, the weakness in the data stems largely from two countries: China (down from 48.5 to 48.0) and Russia (down from 48.5 to 48.3). Indonesian manufacturers also reported frozen activity levels in March (down from 50.5 to 50.1), with production lower. Several other countries saw an easing in demand and output, even as they have modest growth rates since last fall. These include India (down from 52.5 to 51.3), Mexico (down from 52.0 to 51.7), Taiwan (down from (54.7 to 52.7) and Turkey (down from 53.4 to 51.7).

    On the positive side, Brazil (up from 50.4 to 50.6), South Korea (up from 49.8 to 50.4) and Vietnam (up from 51.0 to 51.3) reported improvements last month, including slight pickups in new orders and production. Meanwhile, the Czech Republic (down from 56.5 to 55.5) and Poland (down from 55.9 to 54.0) continue to see strong growth in their manufacturing sectors despite some slight deceleration in March. The production index in the Czech Republic (down from 61.1 to 60.8), for instance, has exceeded 60—signifying healthy gains—for two straight months.

 

  • Europe’s economies continue to grow, but with some easing in activity and worries about possible deflation. The Markit Eurozone Manufacturing PMI decreased from 53.2 to 53.0, down for the second straight month. Despite the slight deceleration, this was the ninth consecutive month of expansion for Europe following a deep two-year recession. Even with some easing in the pace of growth, new orders (down from 54.5 to 54.3) and exports (down from 54.5 to 53.4) continue to increase at decent rates, and production (up from 55.3 to 55.6) picked up for the month. Through the first three months of 2014, the output measure has averaged 55.9, which has been definite progress over the average of 50.6 for 2013 as a whole or the 53.1 average recorded in the second half of last year. As such, the Eurozone continues to make slow-but-steady improvements in its economic health.

    France (up from 49.7 to 52.1) serves as a case in point for this. Its manufacturing sector expanded for the first time since July 2011, with modest production growth (up from 50.8 to 53.3) that was the highest in nearly three years. We also saw continued progress in Austria (down from 53.0 to 51.0), Ireland (up from 52.9 to 55.5), Italy (up from 52.3 to 52.4) and Spain (up from 52.5 to 52.8). Similarly, manufacturing demand and production remain strong in Germany (down from 54.8 to 53.7), the Netherlands (down from 55.2 to 53.7) and the United Kingdom (down from 56.2 to 55.3). Many of these countries saw falling output prices. In Germany, for instance, output prices (down from 51.2 to 49.4) contracted for the first time since June, raising deflation worries. Another worry was Greece (down from 51.3 to 49.7), with contracting employment levels and an easing in exports. Fortunately, Greek sales and production remained positive.

    On the topic of deflation concerns, the ECB held interest rates steady at its most recent meeting, but ECB President Mario Draghi said the bank was open to pursuing quantitative easing to stimulate more growth on the continent. He and others are worried about disinflationary pressures, with prices decelerating significantly. Annual inflation rates in the Eurozone have fallen from 1.7 percent in March 2013 to 0.5 percent in March 2014, and producer prices fell 0.2 percent in February. Businesses feel compelled to lower prices to be able to move products, a sign that slow employment and income growth remain a significant challenge, even in light of recent economic progress.

    Real GDP increased 0.3 percent in the fourth quarter, up from 0.1 percent in the third quarter. Forecasts suggest that the Eurozone will grow 1.1 percent in 2014. However, industrial production declined 0.2 percent in January, with year-over-year growth of 2.1 percent. On Monday, we will get new industrial production data for February, which are expected to show modest gains. Beyond that, the unemployment rate fell below 12 percent for the first time since January 2013, and retail sales grew 0.4 percent in February, increasing for the second straight month but up a rather weak 0.8 percent year-over-year.

 

  • The Chinese manufacturing sector has contracted for three straight months. The HSBC China Manufacturing PMI declined further in March, down from 48.5 to 48.0. This index has now decreased each month since October (50.9). March’s data reflect decelerating activity levels for new orders (down from 48.6 to 46.5) and output (down from 48.8 to 47.2). On the positive side, export sales shifted from contraction (48.5) to a slight expansion (51.3), and employment growth declined at a slower rate (up from 47.2 to 49.4). In light of recent weaknesses, China has begun to put stimulative measures in place to boost the economy, with worries that real GDP will fall below Beijing’s annual growth target of 7.5 percent. Real GDP for first quarter 2014 will be released on April 15, with growth expected to be below the 7.7 percent observed in the fourth quarter.

    In addition to real GDP, we will also get new data for industrial production, fixed-asset investment and retail sales next week. Each has decelerated in recent reports. For instance, the annualized growth rate for industrial output has fallen from 10.4 percent in August to 8.6 percent in February. Fixed-asset investment (down from the year-over-year pace of 18.5 percent in December to 15.1 percent in February) and retail sales (down from 13.6 percent at the annual rate in December to 11.8 percent in February) have also eased of late.

    As noted in the last report, the Bank of China has worked to weaken its currency over the past two months. At the beginning of February, the exchange rate was 6.0600 Chinese yuan to the U.S. dollar, increasing to 6.2005 yuan on April 9. This suggests that the dollar can purchase more yuan (or more Chinese goods) than it could have just a few months ago. In other words, the Chinese currency has devalued somewhat. Behind this trend, the Chinese government is trying to fend off speculators. Still, the longer-run trend has been for the yuan to appreciate against the U.S. dollar, a slow-but-steady (and perhaps not fast enough for some manufacturers in the United States) trend engineered by the Bank of China since 2005.

 

  • Canada’s economy has begun to grow modestly, but Mexico’s economy continues to decelerate. The RBC Canadian Manufacturing PMI increased from 52.9 to 53.3, edging higher for the second straight month. Growth remains modest overall, with an increased pace for new orders (up from 52.6 to 53.4), export sales (up from 50.7 to 52.4) and hiring (up from 50.4 to 50.8). Production (down from 53.6 to 53.4) was off marginally.

    Real GDP in Canada rose 2.9 percent in the fourth quarter, up from 2.2 percent in the second quarter and 2.7 percent in the third quarter. Manufacturing capacity utilization edged higher in the fourth quarter to 80.7 percent, its fastest pace in more than a year. In January, manufacturing output grew 2.0 percent, rebounding from December’s 1.9 percent decline. Durable goods sector production increased 2.5 percent, with nondurable goods output up 1.5 percent. The unemployment rate fell from 7.0 percent in February to 6.9 percent in March, its lowest point in four months. Nonetheless, manufacturing employment declined by 9,200 for the month, with 16,000 more workers added year-over-year.

    Meanwhile, the Mexican economy has decelerated recently, with real GDP growth of just 0.7 percent in the fourth quarter of 2013, down from 1.4 percent in the third quarter. Industrial production has also been weak, up 0.7 percent year-over-year in January; however, manufacturing has fared better than other sectors, up 2.5 percent. The HSBC Mexico Manufacturing PMI has fallen from 54.0 in January to 52.0 in February to 51.7 in March. Slower growth for sales (down from 53.7 to 53.0) and output (down from 52.1 to 51.5) contributed to last month’s decrease, but fortunately, exports (up from 49.2 to 51.0) expanded once again.

 

  • Goods exports fell in February on a weak international market. The U.S. trade deficit rose from $39.28 billion in January to $42.30 billion in February. This was the highest deficit since September, and it was the result of a decrease in goods exports (down from $133.75 billion to $131.72 billion) and an increase in service-sector imports (up from $38.49 billion to $39.29 billion).

    The increased goods trade deficit (up from $59.50 billion to $61.73 billion) was almost evenly distributed by petroleum and nonpetroleum factors. Petroleum exports declined somewhat (down from $12.34 billion to $11.09 billion), but petroleum imports also decreased slightly (down from $31.68 billion to $31.03 billion).

    Looking specifically at goods exports by sector, February’s numbers were mostly lower. The exceptions were consumer goods (up $1.19 billion) and automotive vehicles and parts (up $96 million). Lower export levels included industrial supplies and materials (down $2.67 billion), nonautomotive capital goods (down $894 million) and foods, feeds and beverages (down $18 million).

  • Growth in U.S.-manufactured goods exports continue to disappoint. Manufactured goods exports in the first two months of 2014 were $182.75 billion using non-seasonally adjusted data. This was down 0.6 percent from the $183.78 billion observed for January and February 2013. As such, it indicates that manufactured goods exports remain soft despite some economic progress abroad in recent months, continuing last year’s trend.

    In 2013, manufactured goods exports rose 2.4 percent, decelerating from the 5.7 percent annual growth rate in 2012. It is also well below the 15 percent rate needed to double exports by 2015, as outlined in the President’s National Export Initiative. We hope that cautious optimism for better worldwide growth rates will produce improved manufactured goods exports moving forward.

    On the positive side, goods exports to our five largest export trading partners were mostly higher year-to-date. For instance, Mexico (up from $35.61 billion to $37.50 billion), China (up from $18.69 billion to $20.24 billion), Japan (up from $10.18 billion to $10.88 billion) and Germany (up from $7.65 billion to $8.22 billion) all notched increases in exports in the first two months of this year relative to last year. The lone holdout was our largest trading partner, Canada (down from $46.35 billion to $46.15 billion), which had marginal declines.

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International Trade Policy Trends
  • NAM promotes closer U.S.–European commercial ties in Brussels, Berlin and Hannover. NAM President and CEO Jay Timmons was in Europe last week and earlier this week for meetings with European, German, British and U.S. government officials and business leaders to move forward manufacturers’ priorities in the Transatlantic Trade and Investment Partnership (T-TIP) negotiations. From meetings with European Union (EU) Trade Commissioner Karel De Gucht, UK Minister of Business and Energy Michael Fallon and other key government leaders, Timmons pressed for the conclusion of a comprehensive and high-standard T-TIP that included NAM priorities from regulatory cooperation and market access to investment and intellectual property protection and provision on cross-border data flows. While recognizing the many challenges in T-TIP, Timmons explained in his op-ed in Forbes on April 7 that “it’s the enormous potential of a well-structured and sound T-TIP that makes it worth the challenges and why negotiators must remain diligent throughout the process.” In meetings with the NAM’s counterpart organizations from Business Europe to BDI, Timmons discussed strategies to advance our common commercial goals in the T-TIP and beyond. Timmons also spoke at the Hannover Messe trade fair, the largest of its type in the world, on the importance of trade and T-TIP to advance a strong advanced manufacturing agenda.

 

  • NAM highlights trade secrets on Capitol Hill. The NAM is advocating stronger protection and enforcement of trade secrets at home and abroad. Trade secrets have never been more important to manufacturers, but they are increasingly at risk in today’s mobile and interconnected global economy. On April 10, the NAM cohosted a successful Capitol Hill event to highlight the growing threat of trade secrets theft and to press for U.S. legal improvements and robust trade agreement commitments. Sen. Chris Coons (D-DE) opened the event, which also featured speakers from NAM member companies Corning, General Electric and PricewaterhouseCoopers. Sens. Coons and Orrin Hatch (R-UT) are expected to introduce legislation later this month that would provide access to federal civil enforcement for trade secrets. Currently, businesses must enforce their rights state-by-state.

 

  • Chairman Wyden announces plans for alternative TPA bill. The NAM continues to work closely with member companies and other partners to win passage of TPA legislation. At an April 3 House Ways and Means Committee hearing on the Administration’s trade agenda, U.S. Trade Representative (USTR) Michael Froman urged Congress to pass “trade promotion authority that has broad bipartisan support as soon as possible.” The NAM sent a strong letter to committee members in advance of the hearing, urging support for TPA and other top manufacturing trade priorities. However, TPA legislation faces an uphill battle. In an April 9 speech, Senate Finance Committee Chairman Ron Wyden (D-OR) announced plans for an alternative “smart track” bill he said would include changes on labor, environment and other priorities while increasing transparency. He gave no indication of when that bill might be released, saying “substance will drive the timeline.”

 

  • Manufacturers forge ahead with conflict minerals compliance. As manufacturers continue working to comply with the Securities and Exchange Commission’s (SEC) rule on conflict minerals disclosure, the NAM awaits a decision by the U.S. Court of Appeals for the District of Columbia Circuit in NAM v. SEC. The court heard oral arguments in the case in January, when manufacturers emphasized the burdensome nature of the SEC rule and argued that the SEC, in developing the conflict minerals reporting scheme, greatly overreached beyond the authority granted it by Congress. While there is no deadline by which the three-judge panel is required to issue a decision, the court did grant manufacturers’ request for expedited review, and our hope is that a decision will be made by the end of this month, in advance of the May 31 reporting deadline. Earlier this week, the SEC issued additional guidance intended to address some areas of uncertainty with the rule. The SEC’s newly issued guidance can be found here. For additional information on the NAM’s efforts regarding conflict minerals, please contact NAM Director of International Trade Policy Jessica Lemos.

 

  • Manufacturers continue to press for action on the MTB. 465 days have passed without congressional action on the MTB, which eliminates or reduces import duties on necessary manufacturing inputs that are not produced in the United States. The NAM continues working with key policymakers and their staff in both the Senate and House to find a way forward for this critical, jobs-supporting bill, including in our recent letter to members of the House Ways and Means and Senate Finance committees highlighting MTB passage as a critical priority. We are hearing some optimism from those close to the ongoing talks about how best to propel the MTB to the floors of both chambers, but unfortunately, there have been no official announcements yet of a strategy moving forward. In the meantime, it is critical that NAM members continue contacting their members of Congress, urging them to sign MTB into law as quickly as possible. Take action today!

 

  • NAM works to put India commercial relationship back on track. India’s national elections started April 7 and will run through May 16, but the NAM is already looking ahead at ways to engage the next government on outstanding trade concerns and to put the bilateral relationship on a more constructive track. At an April 9 meeting of the NAM’s India Task Force, participants discussed continuing challenges and opportunities to capitalize on new leadership. That conversation will continue, and the NAM welcomes additional input from member companies and associations on next steps. In the meantime, manufacturers continue to participate in the U.S. International Trade Commission’s ongoing investigation of India’s trade, investment and industrial policies. On April 11, the NAM filed a post-hearing submission for that investigation.

 

  • Manufacturers increase focus on Ex-Im Bank reauthorization. Earlier this week, manufacturers, such as Boeing and FirmGreen, participated in a panel hosted by House Financial Services Committee Ranking Member Maxine Waters (D-CA) to highlight the critical importance of reauthorizing the Ex-Im Bank this year. Manufacturers, especially small and medium-sized manufacturers, cannot afford a lapse in the financing support that helps them stay competitive in the global marketplace. House Democratic Whip Steny Hoyer (D-MD) addressed the panel, and he announced at a press conference on April 9 that he is including Ex-Im Bank reauthorization in his manufacturing initiative. The NAM will continue to be an advocate for Ex-Im Bank’s reauthorization on Capitol Hill and with the Administration. In March, we spearheaded a letter that was joined by more than a dozen other business leaders to urge the Senate Banking, Housing and Urban Affairs Committee and the House Financial Services Committee to take immediate action on legislation. We’re also engaging our members to add their voices and influence. Click here to learn more about what manufacturers can do today.

 

  • Efforts continue to secure market access and other outcomes in TPP talks. While no new broad discussions have been scheduled since the February 2014 Ministerial, negotiators from the Trans-Pacific Partnership (TPP) member countries continue to meet to discuss key issues. U.S. and Japanese negotiators have met several times to address market access and other issues. With President Obama traveling to TPP member countries Malaysia and Japan as part of his Asia-focused trip later this month, it is expected that TPP discussions will continue in those venues as well. In testifying before the House Ways and Means Committee, USTR Froman was asked about many issues related to the TPP talks, from market access and currency to the timetable for the discussions. The NAM continues to push forward its core objectives of market access and a level playing field, intellectual property and investment protection and cross-border data flows.

 

  • Work continues to prepare WTO Trade Facilitation Agreement for implementation. This month, the WTO began its legal scrub of the new Trade Facilitation Agreement reached last December. The United States, the European Union, Japan, Hong Kong, Turkey and Singapore have reportedly proposed several technical changes to strengthen legal aspects of the new agreement. The U.S. Agency for International Development (USAID) and the USTR’s office are coordinating work with developing countries to support implementation of the Trade Facilitation Agreement. USAID’s Partnership for Trade Facilitation, launched in 2011, assists 19 developing countries in implementing their commitments. In addition, the USAID is a leading donor supporting WTO Trade Facilitation Needs Assessments. Coming up, the USAID is hosting needs assessments in Morocco as well as training workshops in Sierra Leone. The U.S. government is seeking private-sector participation in these needs assessments and feedback on priority issues and countries. The NAM is working actively with the Global Trade Facilitation Agreement Coalition to ensure the agreement’s implementation achieves its objectives of reducing trade costs and improving border efficiency.

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Exports in Action
  • Discover Global Markets: Europe. The U.S. Commercial Service and the District Export Council of Southern California have opened registration for the second “Discover Global Markets” event, this one focused on building opportunities in Europe. Discover Global Markets: Europe will take place June 3–4 in Los Angeles, Calif. The event aims to help U.S. companies identify and win new business in the international marketplace. Commercial service officers will participate from more than 25 European countries and provide their insights through panel discussions and prescheduled one-on-one meetings. The agenda is found here, and registration information is found here.

    Contact Rafael Patiño by phone at (213) 894-8785 (office) or (213) 200-7172 (cell) or by e-mail at Rafael.Patino@trade.gov.

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

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