Two manufacturing surveys released this morning provide a mixed picture of what is happening in the Midwest, with one showing a strong rebound and the other reflecting continued weaknesses.

For its part, the Kansas City Federal Reserve Bank reported that manufacturing activity in its District contracted for the fifth consecutive month. The composite index of general business activity fell from -2 in January to -10 in February. All of the key measures of activity were down sharply across-the-board, including new orders, shipments, production, the average workweek, and inventories. For example, the index for sales dropped from -2 to -25, the largest shift of any of the sub-components. As is often the case, worries about sales tend to depress sentiment.

The sample comments provided some reference to significant decline. One respondent cited the bad weather, with blizzard conditions in the Kansas City region closing facilities. This individual said, “That is putting us behind last year.”

Many of the other comments centered on the across-the-board federal budget cuts, which are slated to go into effect on March 1. A manufacturer said, “Very concerned about the reduction in military spending which will likely happen. This could force us to reduce planned capital spending.” Another respondent added, “Sequestration is causing customers to delay and/or push back orders.”

Despite the dramatically lower data for February, manufacturers in the Kansas City Fed District remained cautiously optimistic about higher activity over the next six months, albeit less so that in January. The forward-looking composite index decreased from 7 to 4, but the index for new orders was still strong at 15 (down from 19 the month before). While hiring is expected to increase slowly in the coming months, the manufacturers surveys anticipate capital spending to rise (up from 3 to 18). (continue reading…)

The Bureau of Economic Analysis revised its real gross domestic product (GDP) estimates up from the previously released -0.1 percent to +0.1 percent growth in the fourth quarter of 2012. While this suggests that the U.S. economy eked out some slight growth last quarter, it also means that the economy was essentially flat.

Economists have assumed that real GDP would be revised higher – with consensus estimates of around 0.5 percent – since the higher-than-anticipated export numbers were released earlier in the month. Both exports and imports declined between the third and fourth quarters, with exports down at a faster pace. The contribution from net exports shifted from subtracting 0.25 percentage points to adding 0.24 percentage points between the first and second estimates. This was obviously helpful in lifting the GDP estimate.

Much of the rest of the story did not change much from the first GDP estimate, which was released at the end of January. The largest declines came from lower spending on inventories and from sharply reduced defense spending. The latter was the result of two things: (1) higher-than-normal end-of-fiscal-year spending on defense in the third quarter which was unlikely to be repeated, and (2) the threat of across-the-board federal spending cuts (or “sequestration”). As a result, defense spending fell 22.0 percent in the fourth quarter, more than offsetting the 12.9 percent increase in the third quarter. Total government spending – including at the federal and state and local levels – subtracted 1.38 percentage points from real GDP. This was larger than the original estimate of 1.25 percentage points.

At the same time, businesses spent less on inventory replenishment in the fourth quarter. Part of this was expected, as firms had already spent large amounts on inventories in the third quarter, helping to boost real GDP in that quarter. In the fourth quarter, though, the decline in inventory spending reduced real GDP by 1.55 percentage points, larger than the original estimate of 1.27 percentage points. (continue reading…)

This morning on Capitol Hill the National Association of Manufacturers (NAM) hosted a Shopfloor event to provide Congressional staff with additional information on the importance of the miscellaneous tariff bill (MTB). The current MTB expired at the end of 2012 and manufacturers have faced higher tariffs on products critical to their operations that are not available here in the United States.

The participants in today’s Shopfloor event included Linda Dempsey, vice president of international economic affairs for the NAM; Jessica Lemos, director of international trade policy; House Ways and Means Committee Chairman Dave Camp, Senator Bob Casey; Ron Eva, global sourcing and contracting manager for BASF Corporation and Ed McAssey, COO of Lasko Products, Inc.

Chairman Camp and Sen. Casey both discussed the importance of passing a bill as soon as possible. The MTB has bicameral and bipartisan support and helps support and create jobs.

Lasko Products produces desktop and oscillating fans at facilities in Pennsylvania, Tennessee and Texas and they employee 900 people. Mr. McAssey discussed how important the MTB is to the competitiveness of the company. Without the MTB they will see costs rise, making it more expensive to manufacture fans, putting jobs at risk. The failure to move an MTB will also resonate throughout the supply chain for manufacturers like Lasko, impacting even more jobs.

Mr. Eva from BASF talked about the importance of the MTB to help maintain competitiveness in markets such as automotive, printing, packaging, telecommunications and agriculture. BASF has more than 100 facilities in 31 states in the United States and employ more than 15,000 people. The global market is becoming increasingly more competitive and the MTB helps BASF better compete against this growing competition.

Following the Shopfloor event dozens of manufacturers met with members of Congress and staff in the House and Senate to drive home the importance of moving an MTB as soon as possible. “There is a lot of talk about growing manufacturing jobs and this is an easy step Congress can take to do just that,” said the NAM’s Jessica Lemos. With manufacturers already facing a 20 percent cost disadvantage compared to our major trading partners it’s important Congress gives manufacturers the tools they need to compete.

This morning Senator Vitter (R-LA) and Congressman Bishop (R-UT) will introduce the Energy Production and Project Delivery Act of 2013. This legislation focuses on increased access to resources on federal lands and streamlining the regulatory process. The NAM supports this legislation and applauds its objectives. Manufacturers, which use one -third of our nation’s energy, need access to competitively priced energy in order for us to compete in the global economy and preserves high paying jobs in the United States.

Increasing access to domestic sources of reliable energy, both onshore and offshore, is essential to the long-term health of American manufacturing. For the first time in decades we have an advantage in energy costs and it is vital that we maintain that advantage if we are to remain competitive. While investments in new energy sources and efforts to boost efficiency gains play critical roles in meeting our nation’s future energy demands we cannot ignore the vital need to develop and utilize our domestic sources of energy.

Further, we can ill afford to place critical resources off limits and it is important that we open up additional areas in the Outer Continental Shelf (OCS) and the Alaska National Wildlife Reserve (ANWR). This would allow for greater exploration and responsible development of promising areas offshore and in the Arctic – all of which could substantially lower our nation’s energy vulnerability with minimal environmental impact. A study by Wood Mackenzie Energy Consulting concludes that policies encouraging domestic oil/gas exploration could add 1.1 million jobs by 2020 and 4 million barrels’ of oil and natural gas per day.

The revenue sharing provisions in this legislation will provide the offshore producing states would provide states with an additional $3 billion a year in revenues. All of this paid for by increased production and additional leases.

Regulatory streamlining continues to be a top priority for manufacturers. The National Environmental Policy Act (NEPA) is in desperate need of streamlining as it environmental and judicial review process can take years to complete. There are hundreds of projects from pipelines to power plants to manufacturing facilities that are being held up by an overly burdensome federal regulatory process. For example, this legislation would require EPA to do a complete economic analysis of the impact of regulations on employment under the Clean Air Act. It also would expedite the permitting of the Keystone XL Pipeline which has been under regulatory review since 2008.

We hope that the Senate will seriously consider this legislation and begin the legislative process quickly. Manufacturers are a vital part of our nation’s economy and affordable domestic energy supplies are vital to manufactures.

Chip Yost is assistant vice president of energy and resources policy, National Association of Manufacturers.

Automobile manufacturer Toyota has announced earlier today that the company will begin exporting the Venza model, which are assembled in the United States, to Russia and the Ukraine in 2013. This is positive news as manufacturers continue to work to find new export markets for products manufactured in the U.S.

The passage of Permanent Normal Trade Relations (PNTR) with Russia late last year was a big step in enabling manufacturers like Toyota to export to the growing and large Russian market. This legislation helps put manufacturers in the U.S. on a level playing field to better compete and sell goods in Russia.

Toyota expects to export about 5,000 Venza vehicles to Russia and the Ukraine this year. The cars are manufactured at Toyota’s Georgetown, Kentucky plant which employees approximately 6,600 employees.

Market opening agreements help manufacturers grow and create more jobs here in the U.S. Nearly 95 percent of the world’s consumer are outside of the U.S. We have to do more to make it easier for manufacturers in the U.S. to reach new markets which will allow them to prosper and flourish.

The Federal Reserve Bank of Dallas said that manufacturing sentiment eased, with the composite index of general business activity down from 5.5 in January to 2.2 in February. Overall, Texas manufacturers continue to report higher levels of activity on net, with the composite index expanding for the third straight month. Yet, in most of the index’s sub-components, the pace of growth was slower than what we saw in January.

This can clearly be seen in the index for new orders, which was down from 12.2 to 2.8. The shift was mainly due to more respondents saying that their sales were unchanged than in the previous month. Similar drops were reported for production, capacity utilization, shipments, employment, and capital expenditures. Finished goods inventories began growing again, having fallen for five months beforehand, and there was some easing in raw material cost increases for the month.

The reduced manufacturing optimism in the current environment produced some mixed changes in the forward-looking measures. On the one hand, the expected business activity index for six months from now edged up from 9.2 to 10.8. It is notable, though, that over 55 percent of respondents did not expect the larger economic environment to change.

Perhaps consistent with that, the various sub-components of the index grew at a slower pace in February across-the-board, but each of them still indicates stronger growth moving forward. The production index, for instance, was down from 35.7 to 28.7, but almost 42 percent of those responding to the survey said that they expect production to increase over the next six months. Manufacturers in the Dallas Fed District remain cautiously optimistic about activity this year, including for sales, shipments, hiring, and investment.

Chad Moutray is chief economist, National Association of Manufacturers.

President Obama addresses the National Governors Association today. Tomorrow, he travels to Newport News, Va., to visit Newport News Shipbuilding. The event is part of the President’s effort urging Congress to avert the sequester, which will take effect at the end of the week.

The Senate gavels in at 2:00 p.m. when Sen. Kelly Ayotte (R-NH) will read Washington’s Farewell Address. Later this afternoon, the Senate will vote on a judicial nomination. The Senate could consider legislation addressing the sequester during the week.

The House convenes today and looks to have a fairly light schedule for the week. You can see the Majority Leader’s schedule here.

Senate Hearings: TUESDAY—The Finance Committee looks at the 10-year budget and economic outlook. The Banking Committee receives the Semiannual Monetary Policy Report from Federal Reserve Chairman Ben Bernanke. WEDNESDAY—The Health, Education, Labor and Pensions Committee holds a hearing on “Animal Drug User Fee Agreements: Advancing Animal Health for the Public Health.” The Agriculture Committee conducts an oversight hearing for the Commodity Futures Trading Commission.

House Hearings: TUESDAY—An Energy and Commerce subcommittee considers “Private-Sector Successes and Opportunities in Energy-Efficient Technologies.” A Science, Space and Technology subcommittee looks at “Cybersecurity R&D Challenges and Solutions.” An Education and Workforce subcommittee holds a hearing on “Putting America Back to Work: Reforming the Nation’s Workforce Investment System.” A Science, Space and Technology subcommittee holds a hearing on ethanol blends. WEDNESDAY—An Energy and Commerce subcommittee asks “Is the Broadband Stimulus Working?” The Financial Services Committee receives the monetary policy report from Federal Reserve Chairman Ben Bernanke. The Transportation and Infrastructure Committee examines the “Implementation of the FAA Reauthorization and Reform Act: One Year Later.” A Judiciary subcommittee looks at the E-Verify program. THURSDAY—A Judiciary subcommittee holds a hearing on “The Obama Administration’s Regulatory War on Jobs, the Economy and America’s Global Competitiveness.” An Energy and Commerce subcommittee looks at the Nuclear Regulatory Commission.

Executive Branch: Acting Treasury Secretary Neal Wolin delivers an address to the Chicago Council on Global Affairs about the President’s jobs plan. Vice President Biden speaks at a meeting of the National Governors Association. Secretary of State John Kerry is in the United Kingdom meeting with government officials there. Secretary Kerry is on a week-and-a-half-long trip that will take him through Europe and the Middle East.

Economic Reports: From The New York Times: “Data to be released this week include the Standard & Poor’s/Case-Shiller housing price index for December and the fourth quarter, new home sales for January and consumer confidence for January (Tuesday); durable goods for January and pending home sales for January (Wednesday); weekly jobless claims, fourth-quarter GDP (revised) and the Chicago PMI for February (Thursday); and personal income and spending for January, the Thomson Reuters/University of Michigan Consumer Sentiment Index for February, the ISM manufacturing index for February and construction spending for January (Friday).”

The Chicago Federal Reserve Bank said that the U.S. economy weakened in January. The National Activity Index (NAI) declined from 0.25 in December to -0.32 in January. Softness in the manufacturing sector contributed to the decrease in the index, with industrial production down 0.4 percent for the month. Other figures which lowered the figure included reduced housing starts and a slightly smaller contribution from employment-related indicators.

One of the unique aspects of the NAI is that it looks at the economy relative to its long-run historical trend, with negative values suggesting that the U.S. economy is growing below its historical average. IN addition, when the 3-month moving average falls below -0.70, the risk of recession is increased.

With these latest figures, the 3-month moving average is 0.30, up from 0.23 last month. This indicates that the national economy continues to grow modestly above its historical trend, even as it is clear (particularly with the January numbers) that there are some persistent weaknesses. Ideally, we would like to see stronger growth moving forward, particularly in the manufacturing sector. But, this will require business leaders feeling more confident about the economic environment than they do right now, with much of the current weakness can be explained by uncertainties related to the political wrangling over the U.S. fiscal situation.

Chad Moutray is chief economist, National Association of Manufacturers.

Yesterday the Administration announced their enhanced strategy to improve protection of trade secrets globally. The Administration Strategy on Mitigating the Theft of U.S. Trade Secrets consists of five pillars: International Engagement, Voluntary Best Practices by Companies, Increased Law Enforcement Domestically, Legislation, and Public Awareness.

Manufacturers continue to face a number of substantial challenges in the global market, including persistently weak economies, and a growing number of trade barriers across the globe – both in the form of tariff and non-tariff barriers. One of the most concerning challenges facing manufactures in the United States is insufficient protection and enforcement of intellectual property (IP) rights abroad. As described in the NAM’s recent submission to USTR on their Special 301 Review, many of our trading partners fail to provide adequate protection of IP rights, including trade secrets.

From biotech and food and beverage and fragrance producers to information technology and medical device makers, manufacturers across numerous types of industries in the United States rely heavily on strong trade secret protection to ensure their global competitiveness.  While the United States has relatively strong protections domestically, manufacturers are facing new and increasing challenges globally, including limited protections or inadequate enforcement, cyber-espionage and theft, and government regulations and practices requiring unnecessary disclosure of confidential business information.

Furthermore, government failure to prevent or deter theft of trade secrets, as well as failure to enforce trade secret protections remain huge challenges to manufacturers who rely on valuable trade secrets in order to continue innovating and growing in the global market.  Many of these government practices or failures are replicated in broader regulatory schemes and may come in the form of indigenous innovation or other localization barriers to trade, non-transparent and discriminatory standards development, non-scientific sanitary and phytosanitary measures, time-consuming and cumbersome government approval processes, and duplicative and unnecessary conformity assessments.

For these reasons, manufacturers welcome initiatives aimed at combating these unfair and illegal practices and look forward to collaborating with the Administration in their efforts to strengthen the international protection and enforcement of IP rights and trade secrets.

Jessica Lemos is director of international trade policy, National Association of Manufacturers.

In contrast to the Empire State survey released last week which found a rebound in manufacturing activity, the Federal Reserve Bank of Philadelphia’s Business Outlook Survey observed contracting levels once again. In fact, the Philly Fed’s composite index of general business conditions declined from -5.8 in January to -12.5 in February, and it has been in negative territory for 7 of the past 10 months. Roughly half of the respondents to the latest survey said that the economic environment had not changed between January and February, with almost 32 percent suggesting it had decreased.

The principle driver of the lower figures in February – as it often is – was lower sales. The index of new orders dropped from -4.3 to -7.8. Nonetheless, there were some signs of modest improvements. The shipments index rose from 0.4 (essentially flat) to 2.4 (slight growth), and there was similar progress for delivery times, employment, and the average workweek. The workweek, though, continued to decline, albeit at a much slower pace. Meanwhile, inventories remain in contraction territory, and the pace of raw material price increases eased somewhat.

Even with the more-negative headline numbers, manufacturers in the Philadelphia Fed District were cautiously optimistic about future activity, even with a number of headwinds zapping current sentiment. In a series of special questions, nearly 54 percent of those surveys said that they expect production to increase in the first (and current) quarter of 2013 relative to what they were doing in the last quarter of 2012, compared to one-quarter who expect a decline. Looking forward to the next six months, the indicators for expected levels of activity remain strongly positive, with just over one half thinking that sales will improve and other measures higher across-the-board.

Chad Moutray is chief economist, National Association of Manufacturers.