Global Manufacturing Update
By Chad Moutray, Chief Economist, National Association of Manufacturers
The minutes of the Federal Open Market Committee’s December 16-17 meeting continue to reflect increased optimism about the U.S. economy, with relative strength in both output and labor markets. Federal Reserve participants expect U.S. real GDP growth of 2.6% to 3.0% in 2015, with the unemployment rate falling to 5.2% to 5.3% and core inflation remaining below its stated goal of 2.0%. At the same time, they expressed worries that global economic challenges might dampen growth here.
Specifically, the minutes say the following on this topic: “Many participants regarded the international situation as an important source of downside risks to domestic real activity and employment, particularly if declines in oil prices and the persistence of weak economic growth abroad had a substantial negative effect on global financial markets or if foreign policy responses were insufficient.”
Indeed, the United States—and for that matter, North America—remains one of the brighter spots in the world right now. While production slowed in both Canada and the United States, these figures also point to continued modest expansion in manufacturing new orders and output, with employment data also encouraging. Meanwhile, Mexico’s economy shows signs of improvement, with its manufacturing purchasing managers’ index (PMI) at its highest point since December 2012.
The relative health of the U.S. economy, in particular, has strengthened the U.S. dollar to multi-year highs. For instance, the euro exchange rate had shifted from 1.3924 euros to the dollar in May 2014 to 1.1792 euros to the U.S. dollar on January 8, a level last seen in late 2005. This development could hurt the ability of the sector to grow exports. At the same time, the dramatic decline in petroleum prices over the past few months has also spooked financial markets, on fear that the weakened global demand for energy might be a harbinger of larger economic challenges worldwide. Since peaking at $107.95 per barrel on June 20, the price of West Texas intermediate crude has fallen dramatically, down to $48.79 on January 8.
Looking at specific countries, there was some progress to note. Eight of the top 10 markets for U.S.-manufactured goods cited expansion in December, up from five in November. Brazil, Germany, and Hong Kong shifted from a slight contraction in November to positive growth in December, albeit with Brazil and Hong Kong not far from being stagnant. Two Asian nations, China and South Korea, experienced reduced manufacturing activity. In the emerging markets, India and Vietnam also had better manufacturing activity data in December, with India’s PMI data at their fastest paces since December 2012. Yet, a number of countries in that group are struggling economically. For example, Russia’s manufacturing sector declined for the first time since June, hurt by lower energy prices and economic sanctions.
Of course, the biggest economic headlines of late have come out of Europe. On the positive side, the Markit Eurozone Manufacturing PMI edged higher, up from 50.1 to 50.6, lifted by stronger data coming out of Germany, its largest market. European manufacturers have now expanded for 17 straight months. Yet, recent real GDP and industrial production data reflect only marginal economic growth, and perhaps more troublesome, the annual inflation rate declined by 0.2 percentage points in December. The European Central Bank had already expressed worry about deflationary pressures, and as such, this finding will only further exacerbate those concerns. Beyond these reports, the other fear will be the outcome of the January 25 election in Greece, especially if it leads to that nation exiting the European Union.
On the policy front, there will be strong pushes to move forward Trade Promotion Authority legislation, as well as Asia-Pacific and European trade agreements in 2015, while the World Trade Organization will seek to celebrate its 20th anniversary with substantial movement on the completed Trade Facilitation Agreement and on broad and sector-specific negotiations. The Administration announced a major change in U.S.-Cuba policy, while legislation applying additional sanctions on Russia entered into force.
Excerpt reprinted with permission. For the full report, visit www.nam.org.
The National Association of Manufacturers (NAM) represents small and large manufacturers in every industrial sector and in all 50 states. For more information, visit www.nam.org.