Personal Spending Data in July Show a Cautious Consumer Despite Recent Economic Progress

The Bureau of Economic Analysis said that personal spending fell 0.1 percent in July, its first decline since the weather-related storms in January. This finding mirrors recent news of flat retail sales in July, showing the consumer still cautious despite recent economic progress. Purchases of durable and nondurable goods fell by 0.7 percent and 0.1 percent, respectively, in July, with service-sector spending unchanged for the month. Nonetheless, personal spending has increased at an annualized 4.1 percent pace over the past six months. Hopefully, July’s figures represent a pause in what has otherwise been decent growth in consumer spending this year.

Personal income growth also eased to its slowest pace of 2014, down from 0.5 percent in June to 0.2 percent in July. Still, it was the seventh consecutive monthly increase in income growth, with personal incomes up 3.3 percent since December or 4.3 percent over the past 12 months. For manufacturers, total wages and salaries were unchanged at $787.3 billion in July, but they have risen 4.2 percent year-to-date (up from $755.3 billion in December).

The savings rate moved higher, up from 5.4 to 5.7 percent, with personal spending declining. That was the highest savings rate since December 2012. The rate has gradually moved higher so far this year, up from 4.1 percent in December.

In other news, the personal consumption expenditure (PCE) deflator eased somewhat in July, up 0.1 percent relative to 0.2 monthly percent gains from March through June. This reflects an increase in food prices (up 0.4 percent) that was mostly offset by a decline in energy prices (down 0.3 percent). The year-over-year pace was unchanged at 1.6 percent, with core inflation (which excludes food and energy costs) remaining at a 1.5 percent annual pace.

The Federal Reserve prefers the PCE deflator as its measure of inflation, and as such, it will welcome the news that pricing pressures have decelerated slightly over the summer months. At the same time, consumers will likely focus on the fact that both food (up 2.0 percent) and energy (up 2.4 percent) costs have risen modestly over the past 12 months, a pocketbook issue that they will notice when making purchases.

Chad Moutray is the chief economist, National Association of Manufacturers. 

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Real GDP Growth in the Second Quarter Revised Higher to 4.2 Percent

The Bureau of Economic Analysis revised its real GDP growth figures for the second quarter, up from an estimated 4.0 percent at the annual rate to 4.2 percent. This reflects slightly better fixed investment and net export figures. With that said, the underlying story remains the same. The U.S. economy grew frustratingly slow in the first half of 2014, with the strong rebound in the second quarter coming after a decline of 2.1 percent. Averaging these first two quarters together, real GDP expanded just 1.0 percent at the annual rate.

Consumer and business spending were positives. Goods spending rose an annualized 5.8 percent, adding 1.3 percentage points to real GDP in the second quarter. This was led by strong growth in motor vehicles, household furnishings and appliances and recreational goods. In terms of fixed investment, there were healthy rebounds in business spending on structures and equipment, with the restocking of inventories alone adding 1.4 percentage points to growth. Personal consumption expenditures and gross private domestic investment accounted for 4.3 percentage points of real GDP growth.

The other two components of real GDP were mixed. Government spending added 0.3 percentage points, but reduced defense spending served as a slight drag on growth. The biggest disappointment continues to be the trade figures. Goods exports rebounded strongly in the second quarter, up 13.8 percent, but that followed an 11.9 percent decline in the first quarter. Meanwhile, goods imports rose 2.5 percent and 12.3 percent, respectively, in the first and second quarters. Overall, net exports subtracted 0.4 percentage points from real GDP in the second quarter. To be fair, this was better than 0.6 percent rate observed in the first estimate.

Moving forward, manufacturers are mostly upbeat, and I estimate real GDP growth of 2.8 percent for the current quarter and 3.0 for the second half of this year. Still, a number of risks abound, and business leaders and consumers remain cautious. Regarding trade, policymakers should do what they can to increase sales opportunities abroad, including reauthorizing the Export-Import Bank and pursuing new trade agreements. The need to pursue other growth policies extends to other areas as well, as this year has taught us that even an optimistic recovery can still be fragile.

Chad Moutray is the chief economist, National Association of Manufacturers. 

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Richmond Fed: Manufacturing Activity Expanded at Fastest Pace in Three Years

The Richmond Federal Reserve Bank said that manufacturing activity expanded at its fastest pace since March 2011 in August. The composite index of general business conditions rose from 7 in July to 12 in August, marking the fifth consecutive monthly expansion after winter-related contractions in both February and March. Indeed, much like other regional surveys, these data show an uptick in demand and production for manufacturers this summer, with a mostly upbeat assessment for the coming months.

Looking specifically at current activity, manufacturing leaders in the Richmond Fed district noted increased paces for many of the key measures. This included new orders (up from 5 to 13), shipments (up from 3 to 10), capacity utilization (up from 4 to 17) and the average workweek (up from 3 to 8). The index for employment (down from 13 to 11) edged slightly lower, but it still indicated decent growth in hiring and improvement from earlier this year. (Hiring growth was flat as recently as February.)

Enhanced perceptions about the current economic environment also carried through to better expectations about the future. The forward-looking indices for manufacturing activity were mostly higher, and each suggested relative strength over the next six months. For instance, the expected new orders variable rose from 34 to 47, its highest point since December 2010. Manufacturers also planned to expand employment (down from 19 to 18) and invest in more capital (up from 19 to 27), even though the former’s pace eased marginally for the month.

Inflationary pressures decelerated somewhat in August after increasing in July.  Manufacturers in the region said that prices paid for raw materials grew 1.39 percent at the annual rate in August, down from 1.99 percent in July. Yet, looking ahead six months, respondents expect input costs to increase an annualized 2.05 percent, up from 1.89 percent the month before. This suggests that businesses anticipate modest gains in input prices over the course of the second half of 2014, mostly in-line with Federal Reserve projections.

Chad Moutray is the chief economist, National Association of Manufacturers. 

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Soaring Aircraft Sales Boosted Durable Goods Orders in July, but Orders Were Soft Otherwise for the Month

The Census Bureau said that new durable goods orders soared in July, up a whopping 22.6 percent for the month from $244.8 billion in June to $300.1 billion in July. This represented an all-time high for the data series, but it was also largely the result of a jump in nondefense aircraft sales (up from $16.8 billion to $70.3 billion). Commercial airplane orders are choppy, with sales usually announced in batches. This could suggest a return to a more-normal rate in the coming months. With that aside, new durable goods orders have improved from earlier in the year, with sales of just $224.0 billion in January.

Outside of transportation (which included stronger motor vehicle sales, up 10.2 percent), the manufacturing sector was weak in July. New durable goods orders excluding transportation fell 0.8 percent in July, down from $168.5 billion to $167.2 billion. This suggests that the broader market for manufacturers was soft in July despite the sky-high headline figure.

Indeed, the sector-by-sector data were mostly lower. Orders were off for electrical equipment and appliances (down 3.7 percent), machinery (down 1.6 percent), computers and electronic products (down 1.2 percent), fabricated metal products (down 0.4 percent) and primary metals (down 0.3 percent). Beyond transportation, some positives included communications equipment (up 9.9 percent) and miscellaneous durable goods (up 0.3 percent). Still, it is important not to overstate this one negative month too much. Year-to-date, new durable goods orders excluding transportation have risen at a fairly decent pace, up 5.9 percent.

Meanwhile, durable goods shipments were up 3.3 percent for the month, or 1.4 percent when you exclude transportation. Similar to the new orders data described above, the pace of shipments growth has largely improved over the course of this year, with 6.7 percent growth since December. Motor vehicle shipments rebounded after a weak June, up 10.4 percent in July and 13.7 percent year-to-date. Other sectors were also positive for the month in terms of shipments growth, with the largest gains seen in machinery (up 2.4 percent), computers and electronic products (up 2.3 percent), electrical equipment and appliances (up 2.1 percent) and primary metals (up 1.3 percent).

Chad Moutray is the chief economist, National Association of Manufacturers. 

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Heading Down a Cumbersome and Expensive Path

Monday, the Washington Post Editorial Board published the first in a “brief series” of editorials on the status of U.S. greenhouse gas (GHG) policies. The Post article gives a short history of GHG politics over the last 15 years and assesses the current state-of-play in and outside the beltway. Of course, the policy that is driving most of the discussion and debate when it comes to GHGs is the EPA’s June 2 proposed rule for existing power plants – a regulation the Post describes as “a cumbersome and expensive way to reduce emissions.”

If after reading through the 1,600 pages of regulatory text of EPA’s proposal you were looking for two words to sum up what likely consumed the better part of your summer, you could do worse than “cumbersome” and “expensive”. Anyone who sat through EPA’s two-day hearings on the rule in late July in Pittsburg, Atlanta, Colorado or D.C. repeatedly heard similar words used by the industries that will be most impacted by the regulation. The fact is the rule proposes to fundamentally change how energy is made, distributed and consumed in this country. There is little argument that it won’t have at least some upward pressure on energy prices and there is good reason to think the increases could be dramatic in many parts of the country. In fact, at some level, that is one of the end-goals of this regulation – to make electricity, and in particular fossil electricity, more expensive in order send a price signal to producers and consumers alike to change behavior. It’s always going to be hard for manufacturers – consumers of one-third of the nation’s energy – to get behind a policy designed to increase energy prices, particularly when our foreign competitors aren’t paying for similar price increases and are more than offsetting any of our emissions reductions.

However, what makes this rule all the more troubling is all of the uncertainty and questions it has created. Beyond questions regarding EPA’s legal authority to implement such an expansive rule – for which there are many. And beyond uncertainties of whether energy markets throughout the country can deliver uninterrupted electricity and heat under the proposed rule’s framework – EPA hasn’t model it. There are fundamental questions regarding what EPA is even proposing. For instance, how are certain new units treated for a state’s compliance in the rule? How does EPA plan to implement such a program if it does not approve of a state’s plan? How exactly does the interplay between net electricity importing and exporting states work for compliance? We are a month and a half away from when EPA will no longer accept written input on this rule and still these questions persist about what the proposed rule is proposing.

This doesn’t make sense. It’s time for EPA to take a step back. It’s time for the Administration to remove the arbitrary deadlines driving this expedited process. And as the Post will no doubt suggest in its coming editorial series, it’s time to explore better ways to establish our nation’s environmental and energy policies.

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Now is the Time for a Serious Discussion About New Ozone Regulations

In a recent blog post, Media Matters attempts to throw cold water on the notion that EPA’s planned revision to federal ozone standards later this year will carry a heavy economic cost for manufacturers and consumers. While we appreciate the attention that Media Matters is paying to the issue, their dismissal of the significant implications of this rule demonstrates a failure to recognize the urgency of the issue, or the manner in which it threatens to sap the energy from our nation’s economy.

Media Matters puts forth three critiques of our efforts to educate lawmakers and the public as to the dangers inherent to a new ozone standard. They say that our education efforts are biased toward industry. They say that the study NERA Economic Consulting (one of the most respected consultancies in the world and a frequent partner of U.S. government agencies such as the Department of Energy) prepared for us utilizes flawed methodology. And finally, they say that our education campaign is premature given the fact that a rule will not be proposed until later this year.

We’d like to set the record straight on a few of these accusations.

Our Study Shows Heavy Impacts on All Sectors of Our Economy – Not Just Manufacturing

Manufacturers – our members – will certainly be dealt a serious blow at the hands of such a rule, and our advocacy efforts will by design shed light on this fact. The manufacturing boom has brought thousands of jobs back to the United States, and it is poised to continue to do so against the right policy backdrop.

That said, EPA’s own analysis and this research both tell us that the costs associated with more stringent ozone standards will be felt throughout the economy. Businesses of all stripes, state and local governments, and consumers will share the burden of staying out of nonattainment. Many companies and consumers will face drastically higher costs, and all will be forced to contend with the economic pressures inherent to complying with more stringent standards.

Our advocacy efforts are driven by careful empirical study. The NERA analysis demonstrates clearly the widespread nature of this regulation’s potential impact. Manufacturers are among the hardest hit, but far from the only sector with grave concerns. Our campaign reflects this reality – not a bias toward one sector or another.

The NERA study is – by far – the best and most realistic forecast available today.

Media Matters cited statements from a small cadre of outside commentators – many of whom have a long history of bias all their own – to assert that the NERA Economic Consulting data is somehow flawed or unrealistic. This is simply untrue.

The fact of the matter is, NERA Economic Consulting is among the most respected economic consultancies in the world. Their work is utilized by governments around the world. President Obama’s own Department of Energy has commissioned analysis from NERA to forecast the economic impact of natural gas exports and other issues. And, to be blunt, their economic modeling is considerably more sophisticated and better established than the models used by, for instance, the EPA.

The NewERA model utilized to develop the analysis in this report incorporates all sectors of the economy. As Dr. David Harrison of NERA Economic Consulting noted during the press conference that we hosted to launch this study, “one of the key features of the ozone regulation, in contrast to some other regulations, is that virtually every sector of the economy would be affected so it’s necessary to have a model that simulates the interactions of these various sectors as well as the interactions with consumers.”  The NewERA model provides this level of detail, and yields a far more complete picture of the scope of a regulation whose impact will be felt through so broad a cross-section of the economy.

In short, this study has the benefit of a full, bottom-up analysis by the most qualified and knowledgeable economists in this field. We are very confident that NERA’s evidence-based approach is by far the best and most realistic forecast available today, utilizing a thorough, evidence-based methodology to provide the type of reliable information that must be central to stakeholders’ consideration of this issue.

The most costly regulation in United States history could be less than 100 days away. This discussion is not premature – it is overdue.

Via a quote from the EPA, Media Matters contends that the NAM/NERA analysis is premature. This is an audacious claim.  The notion that public input and education regarding an action on the part of the government – whether a small matter or one of great consequence – should wait until a certain procedural point of official proposal is absurd. EPA has offered revised standards twice in the last six years, and they are mere months away from doing it again. The time for this discussion is upon us and it has been for some time.

Regardless of one’s position on the issue, public discourse should be welcomed. Empirical analysis such as our recent study serves as vital intellectual feedstock and helps to inform the public and policymakers alike of what’s at stake.

In short, this dialogue can – and must be allowed to – yield a better path forward.

 

With so much at stake, we can’t allow this issue to become the latest “line in the sand” on environmental policy. We can’t allow one side to shout at the other, casually dismissing the validity or even the need for the other’s analysis. Realistic stakeholders on both sides of the aisle recognize the potential for serious economy-wide impacts from this particular rule. That’s why, after all, President Obama withdrew the most recent attempt to tighten this standard amid widespread concerns amongst Republicans and Democrats regarding the excessive costs and regulatory burdens compared to its assessed benefits.

In the interest of facilitating a careful consideration of the issues related to this regulation, we, along with NERA Economic Consulting, welcome others’ analysis of this important matter. To read more about this issue visit our website at www.nam.org/ozone.

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Manufacturers in Texas Continue to Grow, but at a Somewhat Slower Pace in August

The Federal Reserve Bank of Dallas said that manufacturing activity continued to grow, but at a slower pace in August. The composite index of general business activity declined somewhat from 12.7 in July to 7.1 in August. It was the 15th consecutive month of expanding levels of activity; however, manufacturers reported a near-stagnant pace in February. As such, it suggests that manufacturing sentiment has rebounded since weather and other factors negatively impacted activity earlier in the year.

Nonetheless, with the composite index lower, many of the key subcomponents were less positive in August than in July. This included new orders (down from 13.0 to 2.2), production (down from 19.1 to 6.8), shipments (down from 22.8 to 6.4), hours worked (down from 6.3 to 2.9) and capital expenditures (down from 13.3 to 6.6). Hiring (down from 11.4 to 11.1) was only slightly lower, but still registering decent growth overall.

The declines in many of these indicators could simply be the result of very strong growth over the past few months, with August’s indices mostly sustaining past gains before moving forward. If that is the case, these latest data could reflect a “breather” before continued expansion in the months ahead.

In fact, manufacturers in the Dallas Fed region remain mostly positive about the next six months. The forward-looking measure of one’s company outlook rose from 24.4 in July to 30.1 in August, and several of the underlying data points also moved higher for the month. Over half of the survey respondents anticipate increased sales, production and shipments in the future, with nearly one-third planning new hires and over one-quarter expecting to increase their capital spending. The one negative remains elevated pricing pressures, with 45.5 percent of those taking the survey seeing higher input costs over the next six months versus just 1.9 predicted lower costs.

Chad Moutray is the chief economist, National Association of Manufacturers. 

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Monday Economic Report – August 25, 2014

Here is the summary of this week’s Monday Economic Report:

Market leaders continue to play the guessing game of when the Federal Reserve Board will start to normalize short-term interest rates. Conventional wisdom suggests that the Federal Open Market Committee (FOMC) will begin to raise the federal funds rate sometime in 2015 from the near-zero levels that have been prevalent since the financial crisis in 2008. The Federal Reserve has already announced that it will cease purchasing long-term and mortgage-backed securities in October. In the July FOMC meeting minutes, participants noted recent improvements in the economy, including increased activity among manufacturers (see below). Most notably, they said the following regarding monetary policy over the next few months:

“…many participants noted that if convergence toward the Committee’s objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated.”

That line, which was widely reported in the media, was seen as hawkish. Indeed, financial markets saw that statement as a sign that short-term rates might rise sooner than expected, perhaps as early as the first quarter of 2015. In her keynote speech at a Kansas City Federal Reserve economic symposium at Jackson Hole, Wyoming, Federal Reserve Chair Janet Yellen reiterated this point, noting the role that upcoming economic data will have on the timing of policy normalization. She cited continued “slack” in labor markets, but also highlighted positive developments more recently. Either way, it remains true that monetary policy will remain highly accommodative for the foreseeable future, with short-term rate hikes (whenever they occur) being gradual. Recent data on consumer and producer prices have shown inflationary pressures easing a bit, even as they remain near the Federal Reserve’s stated target of 2 percent.

Meanwhile, economic data released last week suggest that the manufacturing rebound that we have seen since the winter continues to strengthen. The Markit Flash U.S. Manufacturing Purchasing Managers’ Index (PMI) increased sharply, up from 55.8 in July to 58.0 in August, reaching its highest level since April 2010. The indices for new orders and production were both above 60, suggesting strong growth and closely mirroring similar data from the Institute for Supply Management (ISM). The Philadelphia Federal Reserve Bank’s manufacturing survey also reported healthy gains in August, with activity growing at its fastest pace in more than three years, and respondents were very upbeat in their assessment of the next six months. Still, if there are any weaknesses of note, it would be overseas. Manufacturing demand and output were softer in both China and Europe, for instance.

The housing market also appears to be faring better of late, recovering somewhat from the lull that we saw earlier in the year. Housing starts jumped 15.7 percent in July, offsetting significant declines in both May and June. Starts reached their second-highest pace since November 2007, with an annualized 1,093,000 units in July. Both single-family and multifamily construction activity were higher for the month, and housing permits also reflected progress. In addition, existing home sales also notched improved figures in July, with activity up for the fourth straight month. Overall, this is encouraging news for residential construction. We would expect a solid 1.1 million housing starts at the annual rate by year’s end, representing slow-but-steady progress.

This week, we will get an update on second-quarter real GDP, with consensus expectations calling for a slight downward revision from the 4.0 percent growth rate estimate announced in late July. The new figure would still represent a rebound from the first quarter’s decline of 2.1 percent. We will also see if regional activity continues to expand in the August manufacturing surveys from the Dallas, Richmond and Kansas City Federal Reserve Banks, mirroring what we have seen in the similar New York and Philadelphia Federal Reserve reports. Other highlights include the latest data on consumer confidence, durable goods orders and personal income and spending.

Chad Moutray is the chief economist, National Association of Manufacturers. 

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Canada Boosting Export Infrastructure While U.S. Projects Mired in Politics

Canadian officials have given the green light to expand coal export facilities, securing increased  investment and opportunities for (pacific or western) Canadian ports.

Meanwhile, in the U.S., state officials in the Pacific Northwest continue to delay the valuable investments in area ports that come with exporting U.S. coal.

Over $1.5 billion in private infrastructure investment has been proposed in the Northwest for coal and other commodities. Approving the new terminals would strengthen area ports – our closest gateway to Asia – and help make American exports more competitive.

Port expansion at Westshore Terminal in British Columbia and a long term renewal to export coal at the Port of Long Beach, California underscore the growing demand from Asia for U.S. energy, and the benefits meeting that demand provide to our vital ports.

There’s no reason the Northwest shouldn’t benefit from the expansion of port facilities which will increase jobs, stimulate the economy and increase our ability to export a range of commodities, including coal.

Moreover, looking to President Obama’s objective to double exports by 2015, if we hope to meet this goal, it’s essential that we act soon to develop robust, cutting edge facilities where we can safely and efficiently export our goods overseas.

The National Association of Manufacturers will continue to call on Washington State and Oregon State to invest in its own future and work to develop, not delay, the growth of these much-needed export terminals.

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WTO Sides with United States in Trade Enforcement Case Against Argentina

Manufacturers applaud today’s announcement that the United States has prevailed in the World Trade Organization (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 our serious concerns with Argentina’s protectionist policies and their negative impact on U.S. exports to USTR.

Manufacturers in the United States are most successful when our trading partners play by the rules, including treating our products on an equal basis in their markets and not providing their own industries with special advantages. Trade agreements and the WTO set the rules of the global economy, which must be fully enforced.

For our trade agreements to be successful, it is vital to ensure effective enforcement of the commitments contained in those agreements by our trading partners. In manufacturing communities across America, the gains from trade can and should be increased. The United States achieved a record level of $1.38 trillion in manufactured exports last year, but we can and should do better so that America can expand manufacturing and jobs here at home. To improve manufacturers’ global competitiveness and grow our manufactured goods exports, the NAM urges continued enforcement by USTR of our trading partners’ obligations under free trade agreements and under the WTO.

 

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