Category: Economy

U.S. factory activity unexpectedly rebounded in January after contracting for five straight months amid a surge in new orders, offering hope that a prolonged slump in business investment has probably bottomed out.

The Institute for Supply Management (ISM) said on Monday its index of national factory activity increased to a reading of 50.9 last month, the highest level since July, from an upwardly revised 47.8 in December.

The improvement in the ISM data likely reflects ebbing trade tensions between the United States and China. Washington and Beijing signed a Phase 1 trade deal last month. The deal, however, left in place U.S. tariffs on $360 billion of Chinese imports, about two-thirds of the total, which economists say will remain a constraint on manufacturing.

The ISM’s forward-looking new orders sub-index jumped to a reading of 52.0 last month, the highest since May, from a revised 47.6 in December. Manufacturers also reported paying more for raw materials and other inputs. The survey’s measure of prices paid hit its highest level in 10 months, suggesting some building up of inflation pressures at the factory level.

The ISM’s factory employment index rose to 46.6 last month from a revised reading of 45.2 in December, suggesting manufacturing payrolls could remain weak. Factory employment increased by 46,000 jobs in 2019 after rising 264,000 in 2018.

The improvement in ISMs closely watched national survey follows a series of mixed readings on the manufacturing sector at the regional level.

A purchasing manager survey tracking the Chicago region slumped to a four-year low in January, and manufacturing indexes from the Federal Reserve banks of Richmond and Dallas continued to show contraction in those districts. But factory activity in areas tracked by the Philadelphia and Richmond Feds both showed significant improvement in January, tracking more closely with ISMs findings.

Global trade is forecast to weaken this year to its slowest pace since the depths of the Great Recession due to the U.S.-China trade war, the World Trade Organization said Tuesday.

WTO said it expects volumes of traded goods to rise 1.2% in 2019, well below the 2.6% estimate it issued in April and the weakest growth rate for world trade since 2009.

The organization said estimates for 2020 show growth dropping to 2.7% from 3.0%, but it warned that still depends on resolving trade disputes.

The United States and China are in a wide-ranging dispute that has led to new tariffs on hundreds of billions of dollars’ worth of traded goods. There is little expectation of an imminent resolution to the disagreement, which continues to sap economic growth.

“The darkening outlook for trade is discouraging but not unexpected,” said WTO chief Roberto Azevêdo.

The WTO sees continued risks from the trade wars, saying that “further rounds of tariffs and retaliation could produce a destructive cycle of recrimination.”

The organization noted that some economies are slowing anyway while other outstanding trade issues, such as Britain’s exit from the European Union, are adding to the uncertainty for businesses trading goods.

German Chancellor Angela Merkel, whose country is heading toward recession, said the friction around Brexit showed why Europe had no reason to be haughty about the U.S-China trade dispute.

“We’ve been negotiating for three years over Britain’s orderly exit, and this is causing us great uncertainty, too,” Merkel she said after a meeting Tuesday in Berlin with WTO’s Azevêdo and the heads of four other international economic organizations.

“This exit is meant to happen on Oct. 31, and many businesspeople still don’t know today what their supply chain is going to look like in the future,” said Merkel.

An improving business climate, including tax cuts and elimination of onerous regulations, bodes well for manufacturing in the United States.

During the first quarter of 2018, U.S. manufacturing is riding a wave of 19 consecutive months of growth. This manufacturing growth is largely attributed to improving global economies and robust business investment.

According to the Reshoring Initiative, reshoring and foreign direct investment (FDI) together grew by more than 10 percent in 2016, adding 77,000 jobs and surpassing the rate of offshoring jobs by 27,000. In 2017, reshoring and FDI job announcements soared adding over 171,000 jobs. The jobs equal 90 percent of the total U.S. manufacturing jobs added in 2017. Already, the preliminary data for 2018 is at least as strong as 2017.

An Inviting Destination for Business
The American industrial sector is flourishing, with the United States continuing to be the largest receiver of FDI in the world. A number of factors are contributing to U.S. manufacturing’s rapid growth:

• Manufacturers want to expand in the U.S. because of its abundance of natural resources. In particular, rebounding oil prices have spurred more drilling and investment.
• The U.S. has high labor standards, encouraging a high-quality, safe working environment. Manufacturers are responding to increasing scrutiny of production practices. In addition, manufacturers are pushing training programs and partnering with colleges and universities to create a more competitive workforce. At the same time, states and communities are integrating job training programs as part of their incentive packages to attract manufacturers’ investment.
• The Tax Cuts and Jobs Act, which reduced the corporate tax rate from 35 percent to 21 percent, has created investment opportunities for businesses, and the manufacturing industry has already experienced positive results.
• The American consumer continues to be a draw for manufacturers. Consumer spending is a significant driver of a strong economy. As SelectUSA points out, the U.S. offers the largest consumer market on earth with a GDP of $18 trillion and 325 million people.Manufacturers prefer to be near these consumers.
• The trusted business climate in the U.S. allows businesses to operate in a secure and stable environment.

Companies are finding a wealth of opportunity in the U.S. marketplace. Champion Petfoods, based in Canada, invested in the U.S. economy with a new world-class facility featuring custom-designed kitchens to reach its fastest-growing market — American consumers — as well as select export markets. The DogStar® Kitchens operation is the company’s first manufacturing facility to be located outside Canada.

“Kentucky stood out for its rich agricultural heritage, enabling Champion Petfoods to further our mandate of sourcing fresh regional ingredients through local supply chain partners,” said Frank Burdzy, president and CEO of Champion Petfoods.

Italian-based Sofidel Group, one of the world’s leading manufacturers in paper production for sanitary and household use, broke ground in Circleville, Ohio, in 2016 to build its first integrated plant on U.S. soil, representing the largest private sector investment in Circleville in decades.

“The U.S. market is a key market for our group, because it is the first in the world in terms of per capita consumption in the tissue sector,” explained Luigi Lazzareschi, CEO of Sofidel Group.

Sofidel also recently announced a project in Oklahoma that will include two tissue technology machines producing a total output of 120,000 metric tons a year. This will create some 300 jobs. Both the Ohio and Oklahoma Sofidel facilities are expected to boost the economy for years to come.

Progress in Regulatory Environment
Regulation has significantly influenced manufacturing investment in the United States, but the landscape has improved in the last year. While manufacturers recognize the need for effective legislation, the environment shouldn’t be burdensome.

In January 2017, President Trump told business leaders he planned to cut federal regulations by 75 percent or more. Federal department and agency heads were told there would be a hold on all rules, with the exception of emergencies, to allow a thorough review and approval process. This was quickly followed by the signing of an Executive Order declaring that for every new regulation issued, two would need to be removed. The order was contested in arbitration, but the complaint was recently dismissed, pushing the regulatory reform movement forward.

The administration has touted the withdrawal or delay of some 1,579 regulatory actions from the fall of 2016 to the fall of 2017, according to the Office of Information and Regulatory Affairs. Furthermore, agencies hope to finalize three deregulatory actions for every new governing rule in fiscal 2018.

An executive directive was also issued calling for executive departments to accelerate reviews and approvals of proposals to build and expand manufacturing facilities in hopes of advancing U.S. industry. This action led to a report from the Commerce Department identifying some 20 regulations in need of reform, based on information from manufacturers and industry influencers.

“The current onerous and lengthy processes and inadequately designed rules add to an already overwhelming amount of government waste,”Commerce Secretary Wilbur Ross said in a release. “This report is an important step in correcting the status quo and promoting, instead of shackling, American manufacturing.”

The report found three major themes, including:

• Overlap, duplication, and lack of coordination between states and the Environmental Protection Agency (EPA)
• Uncertainty related to the permitting process.
• Inconsistency in application and enforcement.

In an effort to address these concerns, each federal agency’s Regulatory Reform Taskforce must deliver an action plan to the president responding to the permitting and regulatory problems found in the Commerce Department’s report.

Additionally, an annual forum will be held both for regulators and manufacturers to assess the regulatory landscape. The Commerce Department plans to work with Congress to use the already streamlined permitting procedures established in the Fixing America’s Surface Transportation Act (FAST Act) on other legislation pertaining to manufacturing projects. This should increase projects’ speed to market.

Historically, the EPA has been the source of many of the regulations affecting industrial production. The Clean Power Plan was intended to drastically reduce greenhouse gas emissions from the power sector by 2030. Many companies spoke out against its threats to jobs and manufacturers’ access to affordable energy. The Trump administration has proposed a plan to repeal the act in order to alleviate its negative impact on the industrial sector. However, the EPA intends to develop a replacement plan that will take the sector’s concerns into consideration, while also accommodating concerns about negative environmental effects.

The current onerous and lengthy processes and inadequately designed rules add to an already overwhelming amount of government waste.Wilbur Ross, Commerce SecretaryMore recently, the EPA issued a guidance memorandum to improve the air permitting process for manufacturers working to increase efficiency by building or modifying facilities such as power plants and refineries. In April, the agency determined through its Midterm Evaluation process that the current greenhouse gas emissions standards for 2022 to 2025 model year cars and light trucks are not appropriate and need to be revised. The goal of this development is to set a national standard for greenhouse gas emissions that allows automakers to manufacture vehicles that consumers want and can afford, without compromising environmental impact or safety.

Promise Ahead
Manufacturers, both foreign and domestic, have maintained that regulatory burdens hinder new investment and expansion. Facing nearly 300,000 restrictions on manufacturing operations from federal regulations, according to the National Association of Manufacturers, businesses welcome the recent changes. While much progress has been made, further action is needed to continue to improve investment into the U.S.

Multiple bills have been introduced, with some being partially passed, that seek to increase transparency, expand effective oversight and, most importantly, mitigate overregulation and encourage manufacturing investment. This activity, coupled with growing awareness of manufacturers’ needs, sets the United States apart as an even more enticing destination for business.

“An increase in ‘Made in America’ strengthens the U.S. manufacturing sector,” said Harry Moser, founder of the Reshoring Initiative. “For every manufacturing job added through ‘Made in America,’ somewhere else another one to five jobs are created. As more products are made here, it becomes possible to fill ecosystem niches that had hollowed out from offshoring. As those niches are filled, upstream and downstream sectors expand.”