Global Manufacturing Economic Update: 020813

A Publication of the National Association of Manufacturers
Monday Economic Report

February 8, 2013
Monday Economic Report Graph
Global Economic/Trade Trends

The new year has begun with some stronger economic data worldwide. While persistent challenges remain - most notably in Europe, but also some lingering fiscal worries in the United States - the overriding trend has been for some modest gains in new orders, production and hiring in a number of key markets for U.S.-manufactured goods. Seven of the top 10 export markets have economies that are expanding, and there were signs that the pace of the contraction in Europe and Japan eased a little. The Purchasing Managers' Index (PMI) for the Eurozone rose from 46.1 in December to 47.9 in January. The largest improvements in manufacturing, however, were in Asia, where the pace of industrial production has picked up some steam in the past few months. This news spreads beyond China and into other parts of Asia as well.

Our largest trading partners are Canada and Mexico. Much like the United States, Canada's economy appears to have stalled of late. This is not surprising given the closeness of our two nations in terms of commerce. U.S. frustrations with the fiscal cliff and upcoming federal budgetary battles tend to resonate beyond our borders, with the effects most felt in Canada. Real GDP is expected to grow around 2 percent this year in Canada, mirroring the forecasts for the United States and essentially repeating last year's rate. Reflecting these trends, Canada's PMI suggested very slow growth in January, unchanged from December. Mexico's economy, meanwhile, decelerated throughout much of the second half of 2012, both leading up to and after its presidential elections. Some of the slowdown involved a wait-and-see approach as business leaders assessed the impact of possible new policies coming from the new presidential administration. Industrial production and PMI values tend to reflect this easing, but Mexican real GDP is still expected to grow 3.8 percent in 2013, which is a solid number.

Even with the progress in foreign markets, the most recent international trade figures were a bit of a surprise. The U.S. trade deficit declined sharply from $48.6 billion in November to $38.5 billion in December. Changes in the petroleum balance partially contributed to the decline, but in general, it was a healthy increase in goods exports corresponding with a decrease in goods imports. For the year as a whole, U.S.-manufactured goods exports rose 4.9 percent in 2012 at the non-seasonally adjusted rate, well below the 15 percent rate necessary for the United States to double exports by 2015. While we were on pace for that in 2011, a number of headwinds globally—including a recession in Europe and slowdowns elsewhere—eased the growth of new export sales significantly in 2012, frustrating manufacturers in the United States. Perhaps the improvements noted in this document more recently will bode well for better export figures in 2013.

Next week, we will be closely following industrial production and GDP releases worldwide. Provisional GDP in the Eurozone is expected to show continental output shrinking around 0.3 percent, with data from a number of member countries reflecting weaker conditions as well. Similarly, Eurozone industrial production is forecasted to fall 1.4 percent. Outside of Europe, China will release its trade figures at the beginning of the week, and if recent surveys are accurate, its exports should be improving. In the United States, the Federal Reserve Board will unveil its latest industrial production figures, with an expected slight gain in January.

Chad Moutray
Chief Economist
National Association of Manufacturers

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Global Economic/Trade Trends
  • The global economy continues to improve. The JPMorgan Global Manufacturing PMI increased from 50.1 in December to 51.5 in January, rising for the fourth straight month and reaching its highest point since last March. New orders, output and employment were expanding as a whole worldwide, and most notably, the pace of hiring began to pick up. Activity in the United States was higher, with the Markit Manufacturing PMI jumping from 54.0 to 55.8 on increased output, hiring and sales. The competing PMI from the Institute for Supply Management also reflected gains in the United States for the sector, up from 50.2 to 53.1.

    As we saw last month, seven of the top 10 markets for U.S.-manufactured goods have PMI readings greater than 50 - the threshold for growth. This represents an improvement from October's data, when just four had readings greater than 50, suggesting that international economies have seen some progress in the past few months. This should bode well for better U.S. exports moving forward. January's PMI values reflect some progress in two of the contracting nations - Germany (up from 46.0 to 49.8) and Japan (up from 45.0 to 47.7) - with new orders falling at a slower rate in both countries. South Korea was the other market to contract, albeit slightly (down from 50.1 to 49.9), replacing the Netherlands , where the opposite occurred (up from 49.6 to 50.2).
  • The Eurozone shows some gains despite persistent challenges. The Markit Eurozone Manufacturing PMI rose from 46.1 in December to 47.9 in January, the highest level since March 2012. Nonetheless, the continent continues to contract, with PMI values below 50 in each month since July 2011. January's increase stems from gains in output, new orders and exports, but employment continued to lag behind.

    Looking at specific countries within the Eurozone, France (down from 44.6 to 42.9) appears to be moving in the wrong direction as we begin the new year. However, a handful of nations made some progress in January, even as some continued to be below 50 in their PMI readings. This includes Germany, Italy (up from 46.7 to 47.8), the Netherlands and Spain (up from 44.6 to 46.1). Meanwhile, manufacturing activity in both Ireland (down from 51.4 to 50.3) and the United Kingdom (down from 51.2 to 50.8) continued to grow, just more slowly than in December, mainly on sales weaknesses (domestic in Ireland, exports in the United Kingdom).

    Industrial production in the Eurozone declined 0.3 percent in November, smaller than October's 1.0 percent decrease. On a year-over-year basis, industrial production was off 3.7 percent. November's data from Eurostat also found that production had fallen 7.6 percent in Italy, 7.2 percent in Spain, 3.6 percent in France, 3.0 percent in Germany and 2.5 percent in the United Kingdom over the past 12 months. The unemployment rate in the Eurozone remained at 11.7 percent in December for the third straight month, with Spain's 26.1 percent being the highest in Europe. However, manufacturer confidence was up slightly in January, but it remains quite challenged.
  • The pace of growth in Asia's economies picks up . The HSBC China Manufacturing PMI rose to 52.3 in January, up from 51.5 in December and the fifth consecutive monthly gain. The Chinese PMI value is at its highest point since January 2011 and reflects an improvement from the November 2011 to October 2012 time frame when Chinese manufacturing activity was contracting. The higher PMI values stem from increases in new orders and exports, and the latest industrial production figures indicate a pickup in Chinese industrial production , with year-over-year growth of 10.3 percent in December. It fell to an annualized growth rate of 8.9 percent in August. Similarly, real GDP increased 7.8 percent in the fourth quarter, slightly faster than expected and stronger than the third quarter's 7.4 percent gain. Chinese real GDP is expected to increase by 8.0 percent in the current quarter.

    Elsewhere in Asia, Hong Kong (up from 51.7 to 52.5), Japan, Taiwan (up from 50.6 to 51.5) and Vietnam (up from 49.3 to 50.1) saw improving performance in January, with Markit PMI values rising on stronger growth in new orders, exports and employment. There were some areas of weakness, however, with Australia (down from 44.3 to 40.2), India (down from 54.7 to 53.2), Indonesia (down from 50.7 to 49.7) and South Korea experiencing slower output and sales growth. India, in particular, was hit with power outages , which cut into production.

    In the last report, we discussed how Japan's manufacturing sector was hurting. As seen in the PMI values, there were some gains since then. Industrial production rose 2.5 percent in December, a nice turnaround from November's 1.4 percent decline. Even with that growth, however, year-over-year production fell 7.8 percent, reflecting the nation’s continuing challenges.
  • The economies in Canada and Mexico continue to grow, but at mixed paces. For its part, Canadian industrial production was flat in December and essentially unchanged (up just 0.1 percent) for the year. The RBC Canadian Manufacturing PMI was equally tepid, as worries about the global economy weighed on business owners’ minds. The PMI edged up from 50.4 in December to 50.5 in January, indicating only marginal growth. New orders and production were higher for the month, but hiring and exports grew more slowly.

    In Mexico, industrial production is expected to grow around 3.8 percent in 2013, and if so, that would represent an increase from its current pace of just below 3 percent. (New numbers will be released next week.) The Mexican economy continues to show some weakness, as reflected in the lower HSBC Mexico Manufacturing PMI in January (down from 57.1 to 55.0). Some easing in new orders, output and employment contributed to the slower pace. Exports also declined for the first time in 14 months. Still, even with these numbers, Mexico continues to grow and is one of the healthier economies in the world right now.
  • The U.S. economy shrunk in the fourth quarter of 2012. Real GDP decreased by 0.1 percent at the end of last year, weaker than consensus estimates of around 1 percent. There were significant weaknesses of note, with slowdowns due to Hurricane Sandy and uncertainties related to sales and the fiscal cliff paramount in manufacturers’ minds. Defense spending, exports, nonresidential construction and inventories were the main drags on growth.

    At the same time, consumer spending grew modestly, which was particularly beneficial for manufacturers, especially for motor vehicles. Overall, durable goods consumption added 1.02 percentage points to growth. Nondurable goods spending increased more slowly, adding just 0.06 percent to real GDP. Other indicators largely support the data, including industrial production numbers, which have shown the auto sector recovering from some of its autumn woes. Other sectors were more mixed, but largely improving.

    Federal defense spending declined sharply in the fourth quarter, down 22.2 percent. The decline more than offset the 12.9 percent rise in the previous quarter, and anxieties about defense sequestration took a toll in this sector. Federal government expenditures - wholly the result of lower defense spending - subtracted 1.25 percentage points from real GDP. With the threat of across-the-board spending cuts slated for March 1, manufacturers remain worried about the impact of sequestration on their businesses and the economy moving forward. This has caused many of them to pull back on hiring and capital spending.
  • The U.S. trade deficit plummeted in December. The Bureau of Economic Analysis and the Census Bureau reported that the U.S. trade deficit fell from $48.6 billion in November to $38.5 billion in December. This was the lowest deficit since January 2010 and resulted from an uptick in goods exports and corresponding decrease in goods imports. Goods exports rose from $129.3 billion to $132.6 billion. At the same time, goods imports dropped from $194.9 billion to $188.8 billion. Meanwhile, the surplus in trade services increased by $669 million to $17.7 billion.

    The largest change occurred within industrial supplies and materials, with exports up $3.8 billion and imports down $4.2 billion. Outside of industrial supplies, the largest net winner was foods, feeds and beverages (up $96 million). There were fewer net exports, however, among non-automotive capital goods (down $431 million), automotive vehicles and parts (down $292 million) and consumer goods (down $240 million).

    For good imports, there were across-the-board declines in all major categories except consumer goods, which eked out a gain of $43 million. Sectors with reduced imports - beyond industrial supplies - included automotive vehicles and parts (down $944 million), non-automotive capital goods (down $264 million) and foods, feeds and beverages (down $75 million).

    Overall, manufacturers sold $1.02 trillion in goods in 2012, at the non-seasonally adjusted rate. This was an increase of 4.9 percent from the $971.7 billion sold in 2011. This suggests that U.S. businesses continue to find opportunities overseas, even as the pace of growth obviously has slowed with numerous headwinds in international economies.
  • Petroleum was part of why the trade deficit fell, but not the whole story. The petroleum trade balance declined from $23.4 billion to $18.7 billion. Petroleum exports were up by $926 million to $11.6 billion, and imports declined by $3.7 billion to $30.3 billion. Illustrating just how much this figure has changed, the petroleum trade balance was $29.9 billion in January 2012, suggesting a drop of more than $11 billion throughout the year. The price of West Texas intermediate crude also dropped during that time frame from $100.24 per barrel in January to $88.25 a barrel in December. (It has since risen, averaging $94.69 in January 2013.)

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International Trade Policy Trends
  • The NAM continues fight for passage of Miscellaneous Tariff Bill (MTB). Manufacturers of all sizes benefit from MTB tariff suspensions for raw materials and inputs that are not available in the United States. Congress’s failure to pass the MTB by the end of 2012 has resulted in a tax increase on manufacturers in the United States, hurting their competitiveness and putting jobs at risk. The NAM is intensifying its calls to the new House and Senate to work together to get the MTB to the President's desk as soon as possible. As part of its ongoing efforts to see the MTB enacted, the NAM is calling on manufacturing CEOs to sign onto a letter to congressional leadership, urging them to act on the MTB as quickly as possible. 
  • Argentina repeals 17 non-automatic import licenses; other trade-distorting measures remain. The United States, along with the European Union (EU) and Japan, requested a dispute settlement panel challenging Argentina's trade-distorting import policies at the World Trade Organization (WTO) in December. The WTO's Dispute Settlement Body  established a panel to review U.S., EU and Japanese complaints about Argentina's import policies. In addition, Argentina's Ministry of Economy and Public Finance repealed 17 of its non-automatic import licensing requirements.  Argentina argued at the WTO that its decision to roll back import licenses rendered the dispute settlement panel unnecessary; however, the United States, EU and Japan are moving forward with their challenge on the grounds that other problematic trade policies implemented by Argentina remain in effect, including trade balancing rules and domestic investment requirements.  
  • The United States and EU continue to prepare for the potential launch of broad trade negotiations. U.S. and EU negotiators continued to meet in January and early February to finalize the High-Level Working Group Report that is widely expected to call for the launch of U.S.-EU trade negotiations. 
  • U.S. Customs reform legislation. Late in the 112th Congress, customs reform and reauthorization legislation was introduced by then-Ways and Means Committee Chairman Kevin Brady (R-TX) ( H.R. 6642 ) and separately by Ways and Means Committee Ranking Member Sander Levin (D-MI) and Rep. Jim McDermott (D-WA) ( H.R. 6656 ). While virtually identical in other respects, the bills differ regarding their treatment of trade enforcement. The NAM has provided recommendations on these bills, which will form the foundation for Customs reform and reauthorization legislation in the 113th Congress. New legislation should be introduced in the coming months, and the NAM is urging Congress to help make manufacturers in the United States more cost competitive by passing a Customs reform and reauthorization bill this year.
  • WTO trade facilitation negotiations moving forward. WTO Director-General Pascal Lamy recently urged the chairs of Doha negotiating bodies to accelerate work on a trade facilitation agreement and requested an outline by April. In a February 1 speech, Lamy said that "removing barriers to trade and cutting red tape in half . . . could stimulate the $22 trillion world economy by more than $1 trillion." An informal trade facilitation negotiating session is scheduled for March 11, where WTO Negotiating Group on Trade Facilitation Chair Eduardo Ernesto Sperisen-Yurt will decide whether to consider new approaches to an agreement. Sperisen-Yurt is slated to issue a 14th version of the draft negotiating text in mid-February, which should include improvements suggested by industrialized and developing countries that are part of the so-called "Colorado Group" on issues such as expedited shipments, authorized operators and goods in transit, among others. A study by the World Economic Forum released on January 22 concluded that reducing trade barriers in global supply chains could result in a nearly 5 percent increase in global GDP, far outweighing potential income gains from complete elimination of import tariffs.
  • Trans-Pacific Partnership (TPP) talks head toward 16th round in Singapore next month. TPP negotiators have been engaged in intercessional meetings on targeted issues following the 15th round of negotiations in Auckland, New Zealand, in December. Each of the TPP negotiating countries (Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam) are also in preparation for the 16th round of negotiations in Singapore (March 4 - 13) where progress is sought across key negotiating groups. 

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

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