Industry Crib Sheet: Economy Can't Shake Stop-and-Go Fits
February 3, 2014
U.S. gross domestic product grew by 3.2 percent in the fourth quarter of 2013, a reinforcing sign that the American economy has maintained a healthy pace. But orders for durable goods in December unexpectedly dropped 4.3 percent to a five-month low, according to the Commerce department's advance report. And a key indicator of business spending fell, tempering excitement that the push in 2014 is on.
After 2.6 percent growth in November, the latest new orders data surprised economists, who had expected another expansion in December. More troubling is that new bookings for manufactured durables bounced back and forth over the last three months of 2013, even though durable manufacturing activity had been expanding significantly. Even the generally upbeat manufacturing activity index released by the Institute for Supply Management today tumbled by 5.2 points to 51.3 for January.
Despite a Federal Reserve announcement last week remarking of an underlying strength in the economy, cautionary readings from various economic indicators suggest the economy is not ready to break out just yet. Even as U.S. industrial production last quarter generated the biggest output in three years, and American exports leaped 11.4 percent to an all-time high in the same period, the nation's job growth surprisingly tumbled in December, and new housing starts remain underwhelming despite a 2.6 percent expansion last month, according to the latest construction spending report released today.
Other data are pointing toward an adjustment period after a big buildup in the third quarter last year. While consumer spending rose 3.3 percent in the fourth quarter and the Conference Board's consumer confidence index for January, at 80.7, reached its highest point in five months, orders for new cars tumbled 5.8 percent in December. Even excluding the volatile transportation market, durable good orders fell 1.6 percent from the previous month.
Businesses also slowed down their inventory building last quarter, as expected. After the U.S. private sector furiously raised stockpiles and added 1.67 percentage points to the GDP in the third quarter, it contributed just 0.42 points in the last three months of 2013.
While fourth-quarter GDP growth not surprisingly softened from the 4.1 percent pace of the third quarter, of deeper concern was the Commerce data showing conservative capital spending in December while inventory investment slowed. Orders for core capital goods retrenched 1.3 percent. In the same month, private manufacturing construction spending retracted by 5.1 percent compared with November.
The economic recovery has struggled with starts and stops since the recession ended, but economists have become noticeably more positive. "This isn't news that says the economy has lost upward momentum," Chris Rupkey, Bank of Tokyo's chief financial economist, told Reuters, in spite of the latest report setbacks. "It is steady as she goes for the economy."
Drew Matus, deputy U.S. chief economist at UBS Securities, said in Bloomberg that while business leaders are "being extraordinarily cautious" with capital expenditures, "most of the data suggests things are improving." Millan Mulraine, deputy chief economist at TD Securities, told Reuters that while the latest data present "a sobering glimpse on the weakening growth in recent months," he blamed the particularly tough winter on dragging down activity. "Nevertheless, to the extent that much of this weakening growth momentum has been due to cold weather conditions nationally, we expect this slowdown to prove temporary," he noted.
Despite "mixed" labor market indicators, the Federal Reserve said it will continue to scale back its bond-buying stimulus after seeing sufficient improvement in labor and other economic readings. As Janet Yellen replaced Ben Bernanke as Fed chair, the central bank last week announced that it will taper its asset purchase program to $65 billion per month starting in February.
The drawdown will still keep interest rates at historical low levels, the Fed said, but it will be mindful of employment and inflation conditions in making additional stimulus decisions. Inflation is still running lower than the central bank's 2 percent target, and based on 1.2 percent growth in the domestic price index in the GDP report, businesses are not ready to significantly raise prices. The central bank wants to stimulate both consumer and business borrowing with higher prices and low interest rates.
President Barack Obama's fifth State of the Union address once again put manufacturing in the spotlight and atop his agenda for long-term economic growth and national competitiveness with the rest of the world. Perhaps the biggest note in a speech filled with strong manufacturing overtones was Obama's announcement to bring six more technology development institutes to the National Network for Manufacturing Innovation he is building.
Obama at one point early in the speech told the story of Andra Rush, the founder of Detroit Manufacturing Systems. Rush, who started the company in 2011 as a Ford parts supply business, sat next to First Lady Michelle Obama, as she was praised by the president for creating 600 new manufacturing jobs.
Obama, declaring 2014 as a "year of action," also propped up small business manufacturing and exporting, as well as reshoring. Other touch points were calls to pull back on research and development spending cuts from sequestration, expand the "all-of-the-above" energy policy with an emphasis on natural gas and solar, improve skills training and apprenticeship programs, and overhaul the tax code.
“We have the chance, right now, to beat other countries in the race for the next wave of high-tech manufacturing jobs," Obama said. "And my administration [has] launched two hubs for high-tech manufacturing in Raleigh, North Carolina, and Youngstown, Ohio, where we’ve connected businesses to research universities that can help America lead the world in advanced technologies. Tonight, I’m announcing we’ll launch six more this year.”
The president continued, “Let’s do more to help the entrepreneurs and small business owners who create most new jobs in America... And when 98 percent of our exporters are small businesses, new trade partnerships with Europe and Asia-Pacific will help them create even more jobs. We need to work together on tools like bipartisan trade promotion authority to protect our workers, protect our environment, and open new markets to new goods stamped ‘Made in the USA.’”
Reaction to Obama's speech was mixed, as expected, with energy policy a particular sticking point. The National Association of Manufacturers (NAM) and its president and CEO, Jay Timmons, support a number of the president's initiatives, including workforce development through training and immigration reform, as well as trade promotion authority, but expressed disappointment with the president's views on energy and taxation.
"Tonight President Obama reaffirmed his commitment to manufacturing," read NAM's post-address statement, but "[his] call for an 'all-of-the-above' energy strategy neglected to include the Keystone XL pipeline, and his comment on tax reform once again used the political target of energy producers while failing to call for comprehensive reform that will drive growth for all industries."
Two days later, in NAM's announcement of a multi-industry coalition to fight aggressive newly proposed Environmental Protection Agency (EPA) greenhouse gas emission (GHG) regulations, Timmons said, "Unfortunately, this Administration seems to believe that the only way to reduce GHG emissions is to eliminate fossil fuels. Manufacturers believe we can use these and other fuels while reducing our emissions."
Sierra Club Executive Director Michael Brune also responded with a statement, saying "the President has taken significant steps forward" to cutting carbon pollution but that natural gas is "a bridge to nowhere." Brune said the administration "must look beyond an 'all-of-the-above' policy" and cannot "effectively act on climate and expand drilling and fracking at the same time."
The National Corn Growers Association (NCGA) was quick to capitalize on the president's multi-pronged energy course. "It was great to hear President Obama talk about the importance of an 'all-of-the-above' energy policy. And you can't have such a policy without biofuels," said NCGA President Martin Barbre. "So, we call on his Administration to back away from its proposal to reduce the Renewable Fuel Standard." The NCGA, however, is a supporter of the president's push for trade promotion authority.
Battles around the EPA proposed standards will intensify toward midyear. The power generation industry -- especially coal-fired power utilities -- has criticized the strict measures as being unrealistic.
"A top priority should be cutting emissions from existing power plants," said Andrew Steer, president and CEO of World Resources Institute. "EPA is headed toward a critical deadline on June 1, and it should set emission standards that are both flexible and ambitious. Contrary to what some critics say, these standards can drive innovation and spur new technologies."
While praising Obama that he "made clear" his intention to cut GHG output, Thomas Lorenzen, former assistant chief of the Environment and Natural Resources Division of the Justice department and now a partner at Washington, D.C., law firm Dorsey & Whitney, expressed concern about the administration's and EPA's ability to meet the June 1 date, as the agency's proposed standards weren't published until earlier this month.
"EPA seems to be falling behind," said Lorenzen. "There is also no indication that EPA has sent a draft to the White House for review. That review, which [precedes] signature of any proposed rule, typically runs at least 90 days. This puts the June 1 target date for signature in jeopardy. Businesses that have a stake in the rules should be preparing their comments for submission to EPA by March 10 and to engage proactively."
The Alliance for American Manufacturing (AAM) focused its reaction to the speech on China. "This is the third consecutive State of the Union in which there has been a strong rhetorical focus on manufacturing, and that's welcome," Scott Paul, AAM's president, noted. "But the progress has been painfully slow. And in some cases, such as the trade deficit with China, we've seen backsliding. [Foreign direct investment] into China still blows away FDI coming into the U.S."
The AAM wants Obama to tighten "Buy America" compliance among federal agencies and to cut the U.S. trade deficit with China in half.
While capital spending by U.S. corporations, at least, is off to a moderate start in 2014, Accenture's CEO Briefing 2014 report finds a lifting mood among global business leaders and a confidence in business prospects and profitability. Moreover, executives' optimism for the next 12 months is accompanied by plans to scale up investments across the board this year, with human capital and talent management investments being the most urgent and ahead of physical assets.
Accenture's report compiled feedback from more than 1,000 C-suite executives across 20 countries and 12 industries during the fourth quarter of 2013, and highlights that 76 percent are somewhat or strongly optimistic about their organizations. The corporate consultant found that 19 percent will significantly increase their total capital investments, while 45 percent will moderately increase investments.
Sixteen percent said they will significantly ramp up investments in machinery and equipment, facilities, and real estate, all of which are defined as physical assets. But there was nearly the same number of business leaders who intend to significantly hire and train their workforce as the number of those who see moderate increases in new hires and training (35 percent versus 40 percent, respectively).
Using a forecast produced by the Economist Intelligence Unit (EIU), Accenture notes in the report that the first synchronized growth in the United States, Japan, and the Eurozone in four years, coupled with 7.3 percent growth for China, should result in "noticeable improvements in the global economy." Still, Accenture points out that business leaders have a "slightly more watchful eye on the global economy," and "few interviewees are prepared to be unreservedly bullish on prospects for a rapid global recovery."
Manufacturing, energy, and health care are likely to be the best-performing sectors in 2014. Lower-cost energy will have positive effects on manufacturing, along with innovations in sensors, automation, and data analysis. Business leaders were highly negative on growth prospects for the aerospace and defense industry, however. And survey respondents were divided on growth in the U.S., with 57 percent saying they expect the U.S. economy to worsen and will shift investments away from the nation.
The EIU forecasts 2.6 percent growth for the country this year.
When Accenture drilled down beyond macroeconomic concerns, it found that executives were most worried about competition from new market entrants, falling consumer demand and recession in key markets, and consolidation in their industries. That's not surprising, as many companies are targeting export markets and new customers, wrote Bruno Berthon, managing director of Accenture Strategy, in the report. U.S. exporters, for example, are raising foreign goods and services to record levels.
Forty-seven percent surveyed said they plan to sell new products to new customers that are outside their home markets and in developed countries, and 54 percent are eyeing markets in emerging countries, over the next three years. In fact, nearly three-quarter (74 percent) of them expect significant increases in revenue to come from export business.
The worldwide electronics contract manufacturing market will resume growth this year after a big 4.9 percent slump in 2013, according to an analysis by umbrella association IPC.
However, the news from IPC was not all good. Electronics manufacturing services (EMS) companies and original design manufacturers (ODMs) will not see growth match historical rates over the next four years, as original equipment manufacturers' (OEMs) outsourcing slows, the association predicted. It also determined that sales from system builds are dropping, as is capital equipment spending by EMS companies.
IPC has just released its 2012-2013 Analysis & Forecast for the Global EMS Industry report, wrapping up analysis of trends, spending and investment, market size, and sources of growth based on feedback from 120 EMS companies accounting for 135 manufacturing facilities around the world and $5.3 billion in sales in 2012. That same year, the global EMS market was calculated to be $419.5 billion, while the total electronics market was about $2 trillion. The global printed circuit board (PCB) market is pegged at around $60 billion.
IPC, which represents 3,400 design, PCB manufacturing, and electronics assembly companies, earlier this month released its monthly report on North American electronic product sales, which lags by two months. Semiconductor sales rose in November to around $31.5 billion, while PCB sales were flat around $23.5 billion. The trade group's 0.91 PCB book-to-bill ratio, at less than 1.00, suggests new orders are not keeping up with shipments.
EMS sales were flat through most of 2013 up to November, but IPC said because "orders for electronic products tend to lead sales by about one month," the 1.8 percent rise in computer and electronic product orders to $22.4 billion in November, according to Commerce department statistics, "bodes well for the industry's December results."