Last week I had the opportunity to travel outside the Beltway and meet with a group of tax professionals from manufacturing companies in Missouri. What struck me almost immediately was the general unanimity among these financial professionals that the grave uncertainty caused by looming tax increases and spending cuts is now negatively affecting companies.

Some of the company executives said they’re paralyzed in their decision making on a multitude of issues ranging from capital investments to acquisitions to job creation. Others said they already are making decisions based on “going over the cliff” that will adversely affect next year’s salaries and yearend bonuses. One company rep anticipated significant job losses if the defense sequestration goes into effect as scheduled in 2013 while another said his company may divest certain businesses this year based on tax implications in order to offset the impact of going over the fiscal cliff.

These concerns spread beyond the business community. An educator from a Missouri college echoed apprehension about anticipated cuts in federal funding for his school’s R&D activity.  A concern that’s well-placed since 21 percent of all university and private R&D is funded by federal expenditures according to an ITIF study.

These Midwestern companies also shared the same negative view about the business outlook as many respondents to recent NAM surveys. With time running out before the fiscal crisis hits, federal lawmakers need to take action during the upcoming Lame Duck session of Congress to avoid this self-inflicted wound. Specifically, Congress and the Administration should “maintain the status quo” on spending and taxes ideally for all of 2013, with a “path forward on reaching agreement in 2013 on a long-term package that addresses our deficit problems, including entitlement and tax reform. Now is the time for bipartisan cooperation between the legislative and executive branches of the government to avoid a fiscal crisis that will likely throw our economy into a recession.

Last week the Commonwealth of Massachusetts took a step toward leveling the playing field for companies that invest in information technology and do so by playing by the rules. The Massachusetts Attorney General fined a Thailand-based seafood company $10,000 for using unlicensed software in its operations. The AG sent a strong message that companies competing unfairly against those in her state will not be tolerated.

This case is another example of bad actors using pirated or counterfeit information technology to gain an advantage over companies that follow the rule of law. Unfortunately, we have seen this tactic growing inside the highly-competitive manufacturing marketplace.

Like many other industries, manufacturers place a heavy emphasis on expensive technology tools as they work to out-innovate their competition from around the world. For example, computer software tools run machines, design products, and make facilities run efficiently and it does not come cheap. These tools leveraged in manufacturing environments are quite often the target of unscrupulous actors who steal or copy it. These companies are taking – for free – IT products for which companies have to pay a significant cost. This creates an unfair advantage over law-abiding manufacturers.

Stopping this practice that is hurting manufacturers is a priority for the NAM in Washington. If you feel you have been impacted by unfair competition, we encourage you to contact us and join our efforts. We would also encourage you to consider joining the newly-launched National Alliance for Jobs and Innovation, a coalition formed to use existing law to help stop this unfair competition.

The innovation lead we have enjoyed in the manufacturing sector is what has driven the economy to grow. We need that growth to continue and not be slowed by those not playing by the rules.

The latest data from Markit show a global economy that remains stalled, even with improvements in some areas. In the United States, the Flash Manufacturing Purchasing Managers’ Index (PMI) increased slightly from 51.1 in September to 51.3 in October. This suggests very slow growth in manufacturing activity in the U.S., with improvements masking the fact that these indicators reflect considerable weaknesses. 

The various components of the index reflect mixed news. The index for output rose from 50.6 to 51.5, with similar upticks in employment and inventories. On the other hand, the pace of new orders eased slightly, down from 52.3 to 51.6.

New export orders were virtually unchanged in contraction territory, up from 48.0 to 48.1. Indeed, slowing sales have been the main driver of growth or decline in many of these types of sentiment surveys in recent months, and with weak economies around the world, export sales have generally been lower. Meanwhile, pricing pressures have picked up which is consistent with other surveys, with the index of input prices rising from 52.8 to 57.6.

Across the Atlantic, the Europe’s economic woes deepen. The Flash Eurozone Manufacturing PMI dropped from 46.1 in September to 45.3 in October. This brings it back essentially to where the PMI was in August, when it was at 45.1. Steep falls in new orders continue to be the problem, although the rate of decline appears to have eased somewhat from last month. (continue reading…)

The Richmond Federal Reserve Bank found that manufacturing activity in the region softened again in October. The composite index of general business conditions fell from 4 in September to -7 in October. Last month, the improved figures had suggested some progress on the manufacturing front, with the composite index positive after three consecutive months of negative values. That appears to have been short-lived.

New orders, which had turned positive in September with an index reading of 7, returned to negative territory in October (-6). Poor sales numbers have often been the main driver of these types of sentiment surveys in recent months, and the Richmond Fed one is no exception.

In addition to orders, other components in contraction territory include shipments, capacity utilization, and employment. On the latter element, the index for net job hiring has been at -5 for three months straight. Clearly, there is a skittishness to hiring at this point, with weak sales and production reducing the desire to bring on new workers, at least for now.

The forward-looking measures remain more upbeat, but with mixed and often reduced expectations for the next six months. Respondents anticipate strong growth in new orders, shipments, and capacity utilization, with sales growth below what was forecast in September (but still high). This reflects a degree of cautious optimism regarding future activity, and as a result, the index for expected hiring increased slightly. With that said, some anxiety is still present in these numbers, as capital expenditures are now expected to be flat over the next six months.

Pricing pressures have resurfaced, with raw material prices increasing by 3.21 percent at the annual rate in October. This is more than double the 1.42 percent growth in input prices reported in September. Future costs are also higher, with the prices paid for raw materials expected to be up 2.55 percent over the course of the next six months. That is an increase from the 1.33 percent forecast noted last month.

Chad Moutray is chief economist, National Association of Manufacturers.

President Obama’s assertion last night that the sequester “will not happen,” was encouraging news to manufacturers who are extremely concerned about the impact on jobs and the economy of the $1.2 trillion in federal spending set to begin January 1^st. Although the administration walked back the comments a bit following the debate, it is still an important commitment that we hope the President will uphold.

Earlier this year, we released a report showing that the defense cuts will reduce U.S. employment by more than 1 million jobs in 2014 alone. Similarly, the Information Technology and Innovation Foundation (ITIF), a non-partisan think tank, in September released a study called Eroding Our Foundation: Sequestration, R&D, Innovation and U.S. Economic Growth concluded that close to 200,000 jobs per year could be in jeopardy if across the board cuts to federal R&D investment are implemented. But avoiding the sequester addresses only part of the problem. Pending tax increases for a wide range of individual taxpayers and small businesses along with the spending cuts under sequestration will hit the U.S. economy with a $500 billion fiscal shock on January 1^st, a shock that likely will send our already weakened economy into a tailspin.

So, while manufacturers appreciate the President’s commitment to avoiding the sequester, we also believe it is critically important to maintain the status quo on current tax policy for all Americans. Almost 70 percent of all manufacturers (about 200,000 nationwide) pay income taxes at the individual rate. The average taxable income for these small manufacturers is $570,000 – so unless Congress extends current tax rates, these employers will be subject to new tax rates of almost 40 percent and subject to new restrictions on itemized deductions and exemptions. Not exactly good news for job creation and investment.

 Below is the summary from this week’s Monday Economic Report:

The Conference Board’s Leading Economic Index, which forecasts where the economy is headed in the months ahead, rose 0.6 percent last month. As with many indicators released during the past few weeks, this one suggests some improvement in the current environment, albeit with persistent weaknesses still present in the marketplace. The largest driver of growth for the Leading Economic Index was the large jump in housing permits, which soared from an annualized 801,000 to 894,000 units from August to September. Housing starts also rose to an unexpected high of 872,000 new residential units, a sign that this all-important sector continues to move in the right direction.

Manufacturing production also improved in September; however, the 0.2 percent gain was not enough to fully offset August’s 0.9 percent loss.  Capacity utilization remained unchanged and well below the levels seen earlier this year. Data from the regional Federal Reserve Banks in New York and Philadelphia tend to support this softness. While respondents to the Philly Fed survey were more optimistic on overall business conditions, the underlying components reflected a contraction for new orders, shipments and employment. The same was true in the Empire State survey. Both surveys found manufacturers in their respective regions cautiously optimistic for increasing activity levels six months from now, but with less certainty than in prior months.

On the consumer front, Americans remain more upbeat than the economic headwinds facing the economy might suggest, as seen in recent data on consumer confidence and personal spending. Last week, retail sales reports showed strong growth of 1.1 percent in September, building on impressive gains in retail sales in both July and August. A 4.5 percent increase in electronics spending boosted the September figure, with the new iPhone 5 almost single-handedly moving the market. Other major sectors showed strength as well. Modest inflationary pressures have helped lift consumer spirits. Even with higher energy prices, core consumer prices have risen just 2 percent over the past 12 months, indicating modest pricing pressures.

With inflation in-check for now, the Federal Reserve Board is expected to continue the expansionary policies announced at its September 13 meeting. No major changes are anticipated this week from the Federal Open Market Committee (FOMC), which meets October 23–24. The other big news this week will come on Friday with the announcement of GDP figures for the third quarter. I estimate this should be around 1.8 percent growth in real GDP, an improvement from the 1.25 percent growth in the second quarter but still disappointing overall. Other releases this week include regional manufacturing surveys from Kansas City and Richmond, Flash Purchasing Managers’ Index (PMI) data from Markit regarding the United States and Europe, and durable goods sales.

Chad Moutray is chief economist, National Association of Manufacturers.

Tonight, President Obama and Mitt Romney meet in their last debate before Election Day. The debate, held in Boca Raton, Fla., focuses on foreign policy. On Tuesday, the President is back on the campaign trail, with events in Florida and Ohio.

The House and Senate are out of session.

Executive Branch: Vice President Biden is campaigning in Ohio today. Secretary of State Hillary Clinton visits Haiti today, where she will meet with that nation’s president. Secretary of Labor Hilda Solis is joining Secretary Clinton on the trip.

Economic Reports: From The New York Times: “Data to be released will include new home sales for September (Wednesday); weekly jobless claims, durable goods for September and pending home sales for September (Thursday); and third-quarter gross domestic product and the Thomson Reuters/University of Michigan consumer sentiment index for October (Friday).” More information from The Washington Post.

It’s not just manufacturers who are apprehensive about the “fiscal cliff” looming at the at the end of the year.  According to an October 16^th news story in The Street, the financial services sector is scared as well. According to a survey of fund managers by the Bank of America Merrill Lynch taken earlier this month, 72 percent of respondent said that the impact of the pending expiration of tax rate cuts and new spending cuts has not be “substantially priced into global equities and macroeconomic data,” i.e., people don’t believe it’s going to happen.

Moreover, an increased number of fund managers (42 Percent, up from 35 percent in September and 26 percent in August) said that the impending fiscal cliff is the no. 1 tail risk for the market. Washington—it’s up to you.  We have a fiscal crisis heading our way and it is imperative that Washington act as soon as possible to derail the $500 billion hit to our already weak economy set for January 1.

It’s an old saw people use when it seems no choice will produce a good outcome. It certainly applies in a case ruled on by the National Labor Relations Board a couple weeks ago, which effectively forces businesses to break one law in order to comply with another. Clearly, this is not a good situation for either employers or employees.

Let’s have a look at the background in this particular case – Employee A supports a union fighting for survival in a workplace. This employee brings it upon himself to call attention to pro-union materials left in the employee break room by writing vulgar and offensive terms on the materials and leaving them behind for all to see. In addition to being vulgar, one written message also implies physical or existential harm could come to those addressed. Five women employees complain about the vulgarity and derogatory language and also indicate they felt threatened by the messages. Clearly, the employer is compelled to investigate based on well-established workplace harassment law and as a result does so.

During the investigation, Employee A first denies any knowledge about the writings, but then unwittingly makes a confession to management that he, in fact, did write the offensive and menacing messages left behind for his colleagues. After the union gets involved and all the legal maneuverings are completed, the National Labor Relations Board tells the employer that the employee A’s messages are actually protected speech under the National Labor Relations Act and therefore cannot not be held against him because, even if the terminology he used can be interpreted as sexually demeaning toward women, (as his female colleagues expressed), he really intended his writings to mean something else—supporting the union.

What the NLRB did in its decision is tell workers that the federal law meant to protect and allow them to work in a place free from harassment of any kind is less important than a union protagonist’s right to use vulgarity, sexual innuendo, diminution, degradation or threats to advance their cause. That’s a discouraging message to workers and the Board ought to rethink whether it was the one they intended to deliver. As for employers, it places them squarely between a rock and a hard place.

The Federal Reserve Bank of Philadelphia’s Business Outlook Survey top-line number improved, but larger weaknesses are still persistent in the underlying details. The composite index of general business conditions improved from -1.9 in August to 5.7 in September. This represents a significant gain from the -16.6 reading in June. However, nearly 23 percent of respondents said that business activity was lower.

Looking more specifically at the various components, manufacturing activity remains weak across-the-board. The index for new orders fell from 1.0 to -0.6 for the month, indicating a slight contraction. Shipments were also modestly lower, even with an improvement in its index from -21.2 to -0.2. In addition, there were fewer employees and a shorter workweek. Almost 22 percent of those taking the survey said that they had reduced employment in the past month, with over two-thirds saying that there was no change.

Forward-looking measures remain positive, but with significant easing from last month. The expected general business activity index for six months from now fell from 41.2 to 21.6. While this still suggests strong growth, its pace has clearly diminished. This weaker pace is seen in indicators for new orders, shipments, hiring, and capital spending. In the case of investment, manufacturers now expect for their capital expenditures to decline over the coming months, with that index dropping from 4.8 to -1.9.

Speaking of the future, the Conference Board’s Leading Economic Index reported an increase of 0.6 percent in September, more than offsetting its 0.4 percent decline in August. The primary driver of this gain was housing permits, which soared last month to 894,000 units. Increased permitting alone accounted for 0.3 percentage points – or half—of the increase. The other positive contributing factors included rising stock prices and improved interest rate and credit conditions.

Manufacturing provided a mixed contribution to the leading indicators, which should not be surprising given recent weaknesses. The measures for new orders from Census and the Institute for Supply Management moved in opposite directions, with the workweek of production workers providing no impact to the impact. Consumer confidence was also a drag on the index.

The Coincident Economic Index, which looks at the current environment, rose 0.2 percent in September, reversing the 0.2 percent decline in August. In contrast to the Leading Economic Index, manufacturing did have a positive role in this month’s gain. The increase in industrial production and higher manufacturing and trade sales were both helpful to recent improvements. Other positive factors were slight gains in nonfarm payrolls and personal income. (continue reading…)