Manufacturers Support Pension Law Clarification

There is no question that maintaining a traditional defined benefit pension plan comes with significant complexity and costs for the manufacturers that sponsor these plans. We have written before about the millions of dollars manufacturers must pay the Pension Benefit Guaranty Corporation (PBGC) in the form of premiums, but manufacturers are also running up against further costs as a result of the PBGC’s interpretation of an existing pension law.

Under Section 4062(e) of the Employee Retirement Income Security Act (ERISA), companies with traditional pension plans must notify the PBGC when they cease operations at a facility and 20 percent of employees in the pension plan are separated from employment. The PBGC then determines if the company is liable for providing financial security to the pension plan. Unfortunately, the PBGC has been interpreting the law in an overly broad manner and undertaking enforcement measures even if it is not clear that a 4062(e) triggering event occurred.

As a result, manufacturers are holding off on making important changes to their business operations, such as closing a plant in an inconvenient location and moving employees to another location, because the liability requirement can force the company to sideline millions of dollars away from productive business investments.

The NAM met with the PBGC twice this year as well as the Department of Commerce to voice the concerns we have heard from manufacturers facing 4062(e) liability. Soon after these meetings, the PBGC announced that they would place a moratorium on their enforcement of 4062(e) until the end of 2014.

While the moratorium is a positive first step, manufacturers need the certainty of a permanent solution. To that end, Senators Tom Harkin (D- IA) and Lamar Alexander (R-TN) introduced legislation (S. 2511) to clarify the definition of substantial cessation of operations contained in Section 4062(e) so that manufacturers will know exactly what type of changes to business operations will trigger liability.

The NAM wrote a letter supporting the Harkin-Alexander bill, which was approved by the Senate Committee on Health, Education, Labor, and Pensions Committee today by voice vote, and urges the Senate and House to pass S. 2511 as soon as possible.

 

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Manufacturers Be Aware: Money Market Fund Reform Rules are Now Finalized

For years, regulators have threatened to impose new reforms on money market funds (MMFs) in an attempt to reduce the risk of future runs and maintain financial stability. Today, by a 3-2 vote, the Securities and Exchange Commission (SEC) approved final rules that will change the way MMFs operate. Since many businesses use MMFs to meet short term financing and investment needs, manufacturers should be aware that these new rules may impact how manufacturers manage cash.

The new rules, effective over a two year transition period, require that institutional prime funds adopt a floating net asset value (NAV) instead of using the current stable value, meaning that the share price will fluctuate. The rule also implements new discretionary liquidity gates and fees for all non-government MMFs.

After the reforms were proposed last year, the NAM, in a joint letter to the SEC, noted that the floating NAV may carry negative accounting, tax, and operational implications. The NAM also requested that the SEC hold a roundtable on the proposal to gain the perspective of key stakeholders before any changes are finalized – a request that was unfortunately ignored. The NAM has blogged before about the negative impact that the proposed MMF reforms could have on manufacturers and other business. For example, moving to a floating NAV could cost investors up to $2 billion initially and close to that amount in annual operating costs.

In her statement, SEC Chairman Mary Jo White said the Commission has worked to address at least one concern raised by the business community regarding the additional tax burden that the floating NAV would bring. To that end, the Department of Treasury and Internal Revenue Service will release guidance and proposed rulemaking today aimed at providing relief through a simplified aggregate tax accounting method and exempting investors from tracking individual transactions for tax reporting.

Republican Commissioner Daniel Gallagher voted in favor of the final rule, stating that his support had been contingent upon fixing the tax issue. On the other hand, Republican Commissioner Michael Piwowar told his fellow Commissioners that the public should have the opportunity to review and weigh in on proposed IRS tax rules before the SEC’s MMF rules are finalized, and opposed the rule for this and other reasons.

Now that the rules are final, manufacturers should consider the costs and administrative impacts that moving to a floating NAV, along with potentially paying fees or facing a gate when trying to redeem cash from a fund fees, will have on their cash management practices. Manufacturers should also review the proposed tax changes that the Treasury and IRS release today and consider if they adequately provide relief from additional tax reporting burdens.

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Improved Trade Policies Will Foster Indian Innovation and Opportunity

While there are many variables that factor into a country’s development, the ability for businesses and individuals to innovate is key to empowering economic growth and fostering opportunity. When countries like India embrace innovation, they can create new jobs, expand trade opportunities and strengthen international relations.

There is reason to hope that the government of newly elected Prime Minister Narendra Modi will improve the India’s innovation environment and reverse a worrying downward trend in the protection and enforcement of intellectual property rights. Case in point, India was ranked 76th in the annual Global Innovation Index (GII) Survey published earlier this week by Cornell University, INSEAD, and the World Intellectual Property Organisation. With a drop of 10 spots from last year, India was the worst performer among the BRICS nations and the only BRICS member that did not improve its position from last year.

Part of this drop in rankings is the result of protectionist policies that undermine international trade norms and unfairly prop up domestic markets by closing off markets to foreign competition. For example, India has implemented retail investment caps that require stores to purchase from Indian producers as well as domestic manufacturing requirements that mandate certain materials be manufactured within India. As a result of these harmful policies, this is the fourth consecutive year that India has dropped in the GII rankings.

Ultimately, these policies create barriers to cutting edge technologies and harm domestic companies by restricting innovators’ access to next generation technologies. Rather than creating false protections for domestic producers at its own economic expense, India should incentivize ingenuity and entrepreneurship by implementing policies that reward the invention and creativity of its citizens.

Manufacturers hope the Indian government will continue on a path toward productive trade negotiations that will ultimately lead to policies that incentivize innovation and foster creativity. We are ready to work with Indian businesses to share best practices and improve operations to grow economic opportunity and create jobs in both of our nations.

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Manufacturers Lead Charge to Close the Skills Gap

President Obama signs the Workforce Innovation and Opportunity Act into law

President Obama signs the Workforce Innovation and Opportunity Act into law

President Obama put his signature to important legislation to address the skills gap – an issue that has plagued manufacturers in recent years, with 80 percent of them reporting a serious difficulty in finding skilled workers. Recently, a Monster.com jobs expert took a close look at the skills gap and what manufacturers are facing.

The NAM and Manufacturing Institute have led the business community’s effort to ensure that employers have access to the 21st century workforce that they need to drive innovation, production and growth. Enacting the Workforce Innovation and Opportunity Act into law provides much needed streamlining of skills certification programs and the direction of necessary funding to ensure manufacturers have the workforce they need to succeed in a globally competitive environment.

The United States has long been the home of the most productive and successful workforce in the world. By coming together in a bipartisan manner (a sight too rarely seen in Washington these days), Congress and the President have taken an important step toward ensuring that the American workers’ reputation as the world’s best will continue.

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Exporters for Ex-Im:Mint Oil Maker Wants Ex-Im Bank Reauthorized

Terry Cochran didn’t know it at the time, but growing up on a mint farm helped prepare him for his career.

Mr. Cochran and his brother run Norwest Ingredients in Royal City, Wash., a 15-person company that makes mint and other oils used in gum, confection and a range of oral care products from mouthwash to toothpaste. They buy mint oil from farms around the country and process it to ensure it’s safe and of high quality before selling it in giant barrels that cost more than $10,000.

He and his brother started the company in 1998 and started exporting shortly thereafter. They’ve gained enough credibility that they count toothpaste giant Colgate among their customers. But as they grew, getting financing from private banks was a problem.

“As we grew and more and more of our sales were overseas, our local banks began to get a bit uneasy about it because as you know once it’s overseas it can be hard to get paid,” Mr. Cochran said. So the company turned to the U.S. Export-Import Bank and has been using  Ex-Im loan guarantees for its customers ever since. Their sales have increased, on average, about 20% per year since they began exporting.

Norwest Ingredients is like the many other small firms that rely on the Ex-Im Bank when private banks aren’t willing or able to help them expand abroad. The Ex-Im Bank has supported 1.2 million jobs in the last five years, and those jobs could be at risk if Congress doesn’t reauthorize the Ex-Im Bank by the end of September.

Mr. Cochran doesn’t want to see that happen. If the Ex-Im Bank doesn’t get reauthorized, his sales will suffer.

And some of the company’s suppliers, including the employees and sons who work on mint farms like Mr. Cochran did as a kid, will suffer.

“Exporters for Ex-Im” is a blog series focused on the importance of the Export-Import Bank to manufacturers. To learn more or to tell Congress you support reauthorization of the Export-Import Bank, visit http://www.nam.org/Issues/Trade/Ex-Im-Bank.aspx.

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Setback for the ACA Started Years Ago

To my mind there is no rejoicing in the decision reached by a federal appeals court this morning. The decision determined that subsidies given to those enrolled in federally-facilitated exchanges (FFE) are unlawful because the Affordable Care Act (ACA) law clearly states the subsidies are for those in state-based exchanges. This decision is a severe blow to the Administration and supporters of the ACA as a majority of the exchanges up and running around the country are now ineligible for subsidies to offset the cost of coverage.

The reason there is little to rejoice about this decision is the origins of the decision began about five years ago, before the ACA was the law of the land. What it demonstrates to me is that the legislative process matters and is ignored at the executive’s peril. It also shows us that bad things are more likely to happen when one party decides to effectively cut the other out of the process. Remember, the House was forced to take up the poorly written Senate version of healthcare reform, because Senator Ted Kennedy was replaced by a Republican during a special election held due to his death in 2009, which reduced the Senate Democratic Majority to 59.

Further exacerbating the situation, the White House insisted today that the subsidies will continue to be distributed – in clear contradiction to a federal court decision. The Jacksonian reaction to effectively ignore the decision is only going to create more trouble and puts the millions of Americans who are caught in the middle of this fight in a position of accepting something the federal judiciary has deemed unlawful.

It’s long past time for the President and his administration to accept that the legislative process is integral to the functioning of our government and is not something to be ignored or tolerated. It’s also time for Congress to be legislators.

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TRIA Reauthorization Passes Senate with Strong Support from Manufacturers

This week, in a rare moment of bipartisanship, the Senate passed Terrorism Risk Insurance Act (TRIA) reauthorization legislation. The program was created during the aftermath of 9/11 when primary insurers and reinsurers ceased to provide coverage for terrorism events. While it has never been used, the program provides a federal “backstop” in case of a catastrophic event.  Under TRIA, once claims against the insurance industry reach $100 million, the government would pay a portion of a company’s insured losses, after the insurer pays a deductible. The law caps the government’s annual liability at $100 billion and requires [] the Secretary of the Treasury to impose surcharges on property/casualty insurance policies to recoup 133 percent of outlays to insurers under the program.

So why is this important for manufacturers? TRIA has prevented the cost of workers’ compensation (WC) from increasing significantly. Unlike other lines of insurance, WC statutes rigidly define the terms of coverage so, without TRIA, insurance companies would limit their exposure by raising premiums and declining coverage to employers facing high terrorism risk. Because WC coverage is mandatory for nearly all U.S. employers, manufacturers operating in areas deemed to have a high risk of terrorism would be forced to purchase coverage in alternative markets, at a significantly higher cost.

Manufacturers support TRIA because it ensures that businesses in high-risk areas have access to affordable terrorism coverage and taxpayers are protected from any losses.  The NAM is pleased that S.2244, the Terrorism Risk Insurance Program Reauthorization Act passed with overwhelming bipartisan support – a vote of 94-3. We hope that the House passes its own reauthorization legislation that allows terrorism coverage to be available and affordable for all manufacturers.

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Richmond Fed: Manufacturing Activity Expanding at a Modest Pace

The Richmond Federal Reserve Bank said that manufacturing activity grew at a modest pace, expanding for the fourth straight month. The composite index of general business conditions edged slightly higher, up from 4 in June to 7 in July. Note that historical data in the Richmond Fed survey were revised in this edition to reflect new seasonal adjustments.

Despite the improved top-line figure, the underlying data were largely mixed. The biggest positive was hiring, with the employment index up from 4 to 13. This was the fastest pace of hiring growth since December, which was encouraging. Wage (up from 12 to 16) and shipments (up from 2 to 3) were also higher. Yet, new orders (5) expanded at the same pace, and both capacity utilization (down from 7 to 4) and the average workweek (down from 5 to 3) decelerated somewhat for the month.

Still, manufacturers in the Richmond Fed’s district were mostly upbeat about the next six months, with forward-looking measures increasing in July for many indicators. For instance, new orders (up from 27 to 34), shipments (up from 24 to 36), capacity utilization (up from 18 to 29), employment (up from 12 to 19) and capital expenditures (up from 18 to 19) were all higher, with each suggesting relatively healthy paces of growth.

Inflationary pressures have picked up a bit for the month, but remain mostly in-check. Manufacturers in the region said that prices paid for raw materials grew 1.99 percent at the annual rate in July, up from 1.47 percent in June. Looking ahead six months, respondents expect input costs to increase an annualized 1.89 percent, up only marginally from 1.84 percent the month before.

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

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Consumer Prices Ease a Bit in June, Still Reflect an Acceleration in the Second Quarter

The Bureau of Labor Statistics reported that consumer prices increased 0.3 percent in June, easing a bit from the 0.4 percent growth rate seen in May. Still, it is clear that prices have accelerated in the second quarter, led by higher food and energy costs. The annualized rate of growth in the second quarter was 3.5 percent, a substantial jump from the 1.8 percent annual pace seen in the first quarter. Of course, this figure perhaps overstates the significance of the last three months, with the consumer price index up 2.1 percent over the past 12 months. Even there, though, the year-over-year rate has jumped from being just 1.1 percent in February.

In the June data, the largest jump in consumer prices came from energy, up 1.6 percent for the month and building off of the 0.9 percent increase in May. Indeed, the price of West Texas intermediate crude has increased from an average of $97.63 per barrel in December to $100.80 in March to $105.79 in June. Much of the latest rise in prices has stemmed from Middle Eastern turmoil, particularly in Iraq at that time. Energy costs have risen 2.8 percent in the past three months alone, primarily from higher gasoline prices.

Meanwhile, food prices were up 0.1 percent, its slowest pace of growth in four months. In fact, prices of food for the home were unchanged in June, the first non-positive growth figure in six months. Higher prices for meats and eggs were offset by some easing in the costs of bakery items, cereals, dairy products and fruits and vegetables. Nonetheless, the cost of food for the consumer has risen 1.8 percent over the past six months, something that Americans are bound to notice in the grocery aisle.

Outside of food and energy, core consumer inflation decelerated in June to 0.1 percent growth in June. Over the past 12 months, core consumer prices have risen 1.9 percent, unchanged from May but up from 1.6 percent in January. In June, the largest increases were seen in airfare, apparel, housing, medical care and tobacco.

While pricing pressures have definitely picked up in the second quarter, the year-over-year pace still remains mostly in-line with the Federal Reserve Board’s stated goals. They will no-doubt continue to watch inflation numbers closely, but the Federal Open Market Committee (FOMC) is unlikely to deviate from its current monetary policy trajectory at next week’s meeting.

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

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Monday Economic Report – July 21, 2014

This is the summary for this week’s Monday Economic Report: 

With more and more data starting to trickle in for June, we are seeing some definite trends taking shape. One positive is that the manufacturing sector continues to expand, suggesting that the rebound from winter-related softness earlier in the year has mostly continued. Manufacturers also tend to be mostly upbeat about the second half of this year—a sign of optimism that is encouraging. Yet, there were also indicators suggesting that the pace of activity slowed somewhat in June, most notably in the industrial production, housing starts and retail sales numbers that were released last week.

Indeed, manufacturing output in June increased at its slowest rate since January, with relatively mixed news overall. Nondurable goods production edged higher, up 0.1 percent, but output from nondurable goods manufacturers declined by 0.3 percent. Monthly declines in production in such sectors as apparel, machinery and motor vehicles nearly offset output gains for aircraft, furniture, metals and plastics, and rubber products. Longer-term trends remain reassuring, even if they still leave room for improvement. Over the past 12 months, manufacturing production has increased 3.5 percent, a decent figure overall and progress from the much slower pace of just 1.5 percent in January. Durable goods output has risen by a healthy 5.5 percent year-over-year, whereas nondurable goods activity was a less robust 1.5 percent in the past year.

Housing starts in June were also weaker than expected, down from an annualized 985,000 in May to 893,000 in June. Starts were lower for both single-family and multifamily units. There have been suggestions that rain might have attributed to the weaker construction activity, with storms preventing some units from breaking ground. Yet, single-family starts have struggled for some time, down 4.3 percent over the past 12 months. On the positive side, single-family housing permits rose for the second straight month, up from 615,000 to 631,000 at the annual rate for the month. This could suggest stronger growth in the housing market in the coming months for single-family homes. Along those lines, homebuilder confidence increased to its highest point since January, with better expectations for sales over the next six months.

Meanwhile, surveys out last week reported multiyear highs in the pace of manufacturing activity. New orders and shipments were up sharply in surveys from the New York and Philadelphia Federal Reserve Banks. Hiring also picked up in both regions, and raw material costs remained elevated relative to prior months. More importantly, manufacturers in each survey said they were optimistic that sales, output, employment and capital spending would increase over the next six months. In fact, the Philadelphia Federal Reserve report found that 56.1 percent of its respondents anticipated higher new orders, with 60.4 percent predicting increased shipment levels. In addition, the Manufacturers Alliance for Productivity and Innovation (MAPI) reported that the business outlook rose for the sixth consecutive quarter on accelerated sales domestically and abroad. Shipments and capital spending were also anticipated to grow strongly moving forward.

On the consumer front, Americans continue to be cautious in their purchase decisions. Retail spending increased 0.2 percent in June. This was the slowest pace since January, and it was below expectations. Reduced auto sales contributed to this lower figure. Despite the slower activity levels in June, the year-over-year pace continues to grow at decent levels, up 4.3 percent over the past 12 months. Preliminary consumer confidence data also indicate some nagging anxieties in the economy, according to the University of Michigan and Thomson Reuters. The Consumer Sentiment Index unexpectedly decreased from 82.5 in June to 81.3 in July, and consumer attitudes have not changed much since December. Much of July’s decrease stemmed from weaker expectations about the future economy. However, higher gasoline prices might have also been a factor. Indeed, the producer price index increased in June largely on higher energy costs.

This week, we will get additional insights on the health of manufacturing worldwide. Markit will release preliminary purchasing managers’ index reports for China, Japan, the Eurozone and the United States for July. We will be looking for continued progress in Asia and the United States and we hope a reversing of the easing in activity in Europe. The Kansas City and Richmond Federal Reserve Banks will also report on their latest manufacturing surveys. Beyond these releases, the Bureau of Economic Analysis will publish real GDP data by industry for the first quarter; given the 2.9 percent drop in real GDP during the first quarter, we would anticipate minimal contributions to growth from the manufacturing sector. Other highlights include the latest data on consumer prices, durable goods orders and existing and new home sales.

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

manufacturing production growth - jul2014

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