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09/26/2012

NAM Economist: Economy is in 'Neutral'

Chad Moutray says consumers and businesses are "sitting on their hands."

Uncertainty is dominating the economic discussion in the U.S. and around the globe. Chad Moutray, chief economist for the National Association of Manufacturers and a board member for the National Association for Business Economics, recently spoke about the factors behind the uncertainty and what needs to be done to address the challenges.

While the U.S. has technically been in recovery since 2009, “most Americans wouldn’t know it,” says Chad Moutray, chief economist for the National Association of Manufacturers. Slow to near-stagnant growth coupled with anxiety and uncertainty about the future have led to an economy that appears to be “stuck in neutral.”

“If you ask manufacturers about how they’re doing, personally, their companies, many of them will tell you that their overall outlook is OK,” Moutray says. In NAM’s quarterly survey with IndustryWeek, 80 percent of manufacturer respondents said they were either “somewhat” or “very” positive about their companies’ outlook.

But tax policy and the overall regulatory environment continue to concern the vast majority.

The problem? “There really has been a sitting-on-the-hands mentality both on the part of consumers and businesses,” Moutray says.

Manufacturers tend to have a long time horizon, he says. But with “politics what they are” right now, businesses don’t know what their tax rates will be in January – just a few months from now. And there is little hope that anything on that front will be decided before the election in November. In addition, depending on the election results, manufacturers may have to wait until January before any answers are provided if the “lame duck” session that follows the election continues down the path of inaction.

In addition to the tax concerns, many manufacturers are worried about the impact of defense sequestration – a $500 billion cut to the defense budget over the next nine years, a result of the Budget Control Act passed in August 2011 and the failed budget supercommittee.

“We have a lot of manufacturers who are in the defense space, whether as a direct contractor or in the supply chain, and they’re quite worried about the effect that’s going to have on their business,” Moutray says. Private sector job losses attributable to the automatic cuts would top 1 million, including 130,000 manufacturing jobs, by 2014, according to a NAM report released in June. “That’s certainly something we cannot afford right now,” Moutray says.

Moutray is currently forecasting annual GDP growth of 2 percent in 2012 and 2013, but “those numbers are extremely flexible.”

Not all of the economic news is bad. Durable goods sectors – including machinery, aircraft and computers, among others – are strong. “Motor vehicle sales continue to be strong, housing continues to gradually improve, the consumer continues to spend, exports continue to rise,” Moutray says.

Additionally, labor productivity in the U.S. has improved, especially in manufacturing. “As a result, we’ve seen U.S. manufacturers become a lot more competitive globally,” he says.

With continued emphasis on innovation and research and development, that trend will likely continue.

But the strengths are not enough to offset the weaknesses, as shown in the latest ISM Manufacturing Report on Business, which showed a second month of contraction for manufacturing.

Output for the nondurable goods sectors declined last month, according to Moutray. “We, of course, would like to see both sectors growing much, much faster,” he says.

Recruitment of qualified workers also remains a challenge for many manufacturers. While that’s an “indictment of the education system overall,” according to Moutray, it also highlights a need for more efforts to get people considering manufacturing jobs as a career option.

“Until we can address some of these uncertainties, we’re going to continue to grow very modestly, at best,” he says. But anxiety and political inaction may prevent that in the near future. The longer this environment continues as is, the more likely it is that the U.S. economy will enter a downturn early next year, Moutray advises.

“What we need to do is focus on the overall business environment. Focus on strategies that will allow us to better compete on the global marketplace,” he says.

“That’s what we really need in order to have a stronger recovery.”

This article originally was published in Modern Distribution Management (www.mdm.com) and is reprinted with permission. The entire interview with Moutray can be heard or downloaded at mdm.com/executivebriefing.


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