May 29, 2003
Source: National Association Manufacturers
WASHINGTON, D.C., May 29, 2003 – “Though the current economic picture is decidedly mixed, a variety of positive trends are setting the stage for stronger economic growth later this year that will include an improvement in manufacturing,” said Jerry Jasinowski, president of the National Association of Manufacturers.
An NAM report on the state of the economy released today concedes that the economic picture is overcast at present. “Manufacturing production has been on the decline since last August, capital spending declined in the first quarter, unemployment rose to 6 percent and global growth is sluggish,” Jasinowski said. “All this paints a mixed picture of the economic landscape consistent with GDP growth less than 2 percent in the first half of the year and a manufacturing sector that remains stalled.”
However, the NAM conducted an informal survey of its membership this week that suggests a clear upward trend in orders. A full 40 percent of respondents reported increasing orders in May and only 24 percent reported falling orders. “This is a significant improvement from a similar NAM survey in April when 56 percent of responding NAM member companies reported declining orders for the month,” said NAM chief economist David Huether. “For June, 43 percent expect orders to increase while those expecting lower orders declined to just 12 percent. This signals that conditions are gradually improving in manufacturing and conform to our outlook that manufacturing production should begin to recover in the third quarter.”
The NAM outlook paper concludes that forces are aligning for faster economic growth in the second half of the year. “An analysis of the mixed positive and negative forces impacting manufacturing suggests that low inventories, improving credit conditions, lower energy prices, a more competitive dollar exchange rate, increased defense spending, and tax cuts will improve business and manufacturing in the months ahead,” Jasinowski said. “A reduction in business uncertainty and sharply higher consumer confidence will also improve the economic environment.
“Among the most positive forces for manufacturing recovery is improving liquidity and credit conditions,” Jasinowski said. “The prime rate is down over 50 percent since 2000, the premium on corporate bonds over Treasuries is at the lowest level in more than a year, and bank standards for lending have eased significantly. The number of banks tightening credit for small businesses has dropped from 42 percent a year ago to 13 percent today.
“Second, the tax cut bill signed by the President yesterday provides substantial incentives that encourage business investment as well as consumption that will increase economic growth in the latter half of 2003 by half a percent,” Jasinowski said. “With the acceleration of the child tax credit, marriage penalty relief and the individual rate cuts, consumer spending will increase by 2.9 percent in the second half versus 2.6 percent without the tax legislation. For businesses, the increase in the expensing limit along with the 50 percent first-year depreciation deduction for capital purchases will accelerate the recovery in business equipment spending. With the new tax legislation, investments in equipment and software will increase at an annual rate of 11 percent in the second half of 2003 compared to 8 percent without it.
“Third is the year-long depreciation of the dollar which has declined by 13 percent against the currencies of our major trading partners,” Jasinowski said. “Together with an increase in GDP growth overseas, the lower dollar will accelerate export growth in the second half of 2003 to 7.5 percent after nearly stagnating in the first half of the year. Over the next year, the more competitive U.S. exchange rate could improve the trade balance by $100 billion.
“Finally, to replenish stocks used up in the spring conflict in Iraq, defense spending will increase at an annual rate of 25 percent in the second and third quarters, and account for 1 percent of overall GDP growth during this time,” Jasinowski said. “However, this source of growth is temporary. In the fourth quarter, defense spending will add little to GDP growth and the acceleration we anticipate will be driven by a recovery in investment and exports.”
“Together, these forces will get the investment recovery that began in 2002 back on track, stimulate exports, and boost consumers’ spending power,” Jasinowski concluded. “As a result, we anticipate that GDP growth will accelerate from 1.7 percent in the first half to 3.9 percent in the second half.”
The National Association of Manufacturers is the nation’s largest industrial trade association. The NAM represents 14,000 members (including 10,000 small and mid-sized companies) and 350 member associations serving manufacturers and employees in every industrial sector and all 50 states. Headquartered in Washington, D.C., the NAM has 10 additional offices across the country.
Be sure to visit our award-winning web site at www.nam.org for more information about legislative, policy and workplace developments affecting manufacturers, employees and the economy.