A monthly round-up of the MAPI resources available to NFPA members through NFPA's membership in MAPI.

Issues in the Brief

Mexico’s Reform Momentum
Mexico's prospects for reforms that would eventually unleash the country's economic growth potential are on the rise since Enrique Peña Nieto was elected president in July 2012. Since the election and taking office on December 1, 2012, the president has focused his energy on a host of proposals, including ambitious reforms that would shake up an economy that has shown disappointing results on the growth front for two decades. Lacking a majority in Congress, Peña Nieto has also spent significant time building a much-needed consensus for meaningful reforms.

Survey on the Business Outlook: Individual Indexes Mixed
The Composite Business Outlook Index was 55 in December, down slightly from 56 in September, pointing to continued expansion over the next three to six months. Most of the individual indexes remain above 50, the dividing line between expansion and contraction. The small drop in the composite index, coupled with the improvement in the forward looking indexes, suggests that the decline in manufacturing activity that started in March 2012 may be bottoming out. This quarter's wildcard questions ask whether companies have brought operations back to the United States or are planning to do so and the factors affecting location decisions.

U.S. Oil Consumption Declines
While the recent attention paid to rising U.S. oil production clearly is warranted, the other side of the coin -- the trend in U.S. petroleum consumption -- also deserves recognition because it is no less dramatic, especially against the backdrop of long-term forecasts made just a few years ago. It once appeared inevitable that economic growth would be accompanied by increased consumption of oil and petroleum products. Now, long-term projections of relatively flat growth in petroleum consumption coupled with projections of increasing oil production (which will add to the diversity of world oil supplies) point to an improvement in the U.S. energy balance.

The Fiscal Cliff Deal: A Missed Opportunity for Tax Reform
The last-minute fiscal cliff package delayed deep, automatic spending cuts and did not address the debt ceiling, but it did contain several tax provisions important to manufacturers. The American Taxpayer Relief Act of 2012 provides some much-needed certainty with respect to the individual rates, but it does not solve many of the deep, underlying problems with the tax code that undermine the United States’ economic growth and international competitiveness. It’s possible that the deal killed the prospects for tax reform in 2013; however, tax reform needs to remain on Washington’s must-do list for the year.

The Trans-Pacific Partnership—U.S. Free Trade Agenda Appears to be Picking Up Steam

While trade professionals and business leaders are well aware of the ongoing Trans-Pacific Partnership (TPP) negotiations, the U.S. public does not seem to be. These negotiations (now involving 11 countries—the United States, Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam) represent the first potential free trade agreement the Obama administration has initiated and the only such formal talks the United States has under way. If the partnership comes to fruition, it would be the largest free trade agreement since the WTO commenced in 1995.
This report examines the general thrust of the agreement, competitive trade liberalization efforts in the Pacific Rim, and some of the issues that MAPI believes are important in the TPP negotiations.

The Building Blocks of Regional Competitiveness
Gaining currency among a surge of ideas for a post-2009 economic revival in the United States is the optimality of a region-based economic and manufacturing development strategy. In this Issues in Brief, Cliff Waldman discusses an important conceptual building block of regional economics—the cluster. The definition of a cluster and the regional benefits of strong clusters are explained as are the current shortcomings of the cluster model. Cliff notes that manufacturers should understand the cluster concept on a gut level given their production world of suppliers, customers, competitors, R&D labs, governmental organizations, and universities.

“Shared Responsibility”—The Chief Justice Called It a Tax

The Internal Revenue Service released draft regulations last month clarifying many but not all of the issues around the penalties that employers will pay if they choose to drop insurance coverage or if they provide coverage that fails to meet certain minimums. The new rules shed light on the “pay or play” decisions that many manufacturers will have to make over the next few years. This Issues in Brief reviews the proposed IRS regulations and examines some of the options available and possible consequences if large employers elect to discontinue health insurance coverage.

China Is the World’s Largest Manufacturer, and by an Increasing Margin
China has the largest manufacturing economy in the world, and it widened its lead over the U.S. in 2011. At its pace of growth over the decade ending in 2011, China's manufacturing value-added measured in dollars doubled every four years. When manufacturing value-added is normalized into a per capita metric, however, China's rank among global manufacturers falls to 11th.

The Building Blocks of Regional Competitiveness
Clusters -- a conceptual building block of regional economics -- were born on the pages of economic literature, but their identification and development is now essential for policy and planning in many states and localities. Cluster strength, as the emerging evidence is showing, has implications for regional and ultimately national competitiveness. On a gut level, manufacturers should understand the cluster concept very well given their production world of suppliers, customers, competitors, R&D laboratories, governmental organizations of various kinds and universities.

Chinese Surplus Continued to Surge
U.S. and Chinese exports of manufactures grew at a slower pace in 2012, although the 8% growth in Chinese exports was almost double the 5% U.S. growth. Far more important was the continued surge in the trade imbalances -- the U.S. deficit and the Chinese surplus -- for a third year. The U.S. deficit rose by 8% in 2012, to $498 billion, while the Chinese surplus soared by 15%, to $755 billion. The $35 billion increase in the U.S. deficit resulted in the loss of 140,000 to 280,000 American manufacturing jobs.

Skills Shortages in China
Management-level human resources constraints are a major challenge for multinational firms operating in China. The rapid growth of China’s domestic companies with global ambitions intensifies the stiff competition for highly qualified professionals, and the increasing staff turnover rate now surpasses those of all other major countries in the region. The potential talent pool appears to be enormous and so the talent shortage challenge seems puzzling. This report analyzes the supply- and demand-side causes of the skills shortage and discusses how the labor markets and skills pools will likely evolve.

 Economic Review

Latin America Manufacturing Outlook: A Cyclical Rebound in 2013
Fernando Sedano, Ph.D., economic consultant
MAPI predicts manufacturing production in Latin America will post a weak 0.5% growth rate in 2012, dragged down by a manufacturing recession in Brazil and a sudden stop in output growth in Argentina. Mexico's manufacturers are in relatively better shape, benefiting from solid U.S. demand and resilient domestic demand. Conditions are set for solid growth in 2013, although uncertainties in the global outlook pose risks to our estimates. We expect our index to grow 4% in 2013.

Industrial Base Metal Market Outlook 2013
Yingying Xu, Ph.D., economist
After a robust recovery during 2009-10, industrial base metal prices started to fall in 2011, and the downward trend continued through the second quarter of 2012 before leveling off in the third quarter. In recent months, there were some signs that metal prices have hit bottom and are starting to recover. This report covers six major base metals used widely in manufacturing production and provides detailed analysis and a near-term consensus price forecast for each metal.

Manufacturing activity January 2013
Daniel J. Meckstroth, Ph.D., vice president and chief economist
In this audiovisual presentation, Dan reviews the most recent manufacturing data and discusses the recent rebound in U.S. manufacturing output growth. Fortunately, 18 out of the 25 industry groups showed an increase in output in December, indicating broad gains throughout manufacturing. At this point, manufacturing production is about 73% recovered from the 2008-2009 recession. Dan also shares MAPI's manufacturing growth forecast for both 2013 and 2014 and concludes with a discussion of manufacturing employment growth.

The Decline in Number of U.S. Manufacturing Plants
Daniel J. Meckstroth, Ph.D., vice president and chief economist
Single-minded attention on runaway plants, and for that matter their return to the United States, is misplaced. Relatively few plants are shut down in the United States by an owner who opens up an identical facility abroad and supplies the U.S. market with imports from the foreign affiliate. A widespread, more fundamental reason for plant closings and openings is the sourcing decision (where firms purchase intermediate goods and services -- from domestic or foreign suppliers).

U.S. Economic Outlook for 2013 and 2014
Daniel J. Meckstroth, Ph.D., vice president and chief economist
MAPI believes that the fourth-quarter decline in economic activity is not the beginning of another recession or a harbinger of one. On the contrary, the end-of-year weakness was a correction in production to temporary surges in the third quarter. We predict that manufacturing production will increase 2.2% in 2013 and 3.6% in 2014, versus 1.8% and 2.8% growth, respectively, for the economy as a whole. The bottom line is that stronger growth in business fixed investment and residential construction is offset by government spending austerity.

Europe's Recession Deeper, Crisis Resolution Far From Over
Krzysztof Bledowski, Ph.D., Senior Economist
The Eurozone will remain in recession for most of this year. We see only a gradual improvement in industrial sectors of the Eurozone this year. The feeble recovery that will follow is expected to drag on throughout 2014.

 Economic Report

Canadian Economic Review 12-14
For the Canadian economy and its manufacturing sector, 2012 was a difficult year. Nevertheless, there is confidence that 2013 will bring positive news. The MAPI industry forecasting model suggests that recovery will be stronger in 2013 and 2014, especially for durable goods industries. Anticipated 2013 growth leaders include motor vehicles and machinery industries. Projected annual GDP growth for 2013 is above 2%; there is great uncertainty, however, and improvement of the U.S. economy will definitely contribute to reaching these growth rates.

Manufacturing Facts: A New MAPI Production, is a collection of the key facts and figures that define the state of the U.S. manufacturing industry.

Manufacturing Facts: The Manufacturing Workforce is Behind in Higher Education
While the manufacturing workforce has become more educated, it is still behind the overall economy by some measures of educational attainment. The share of workers with a B.A. degree and higher has risen steadily for both the economy and the manufacturing sector; however, the latest data for 2011 show that the share of the manufacturing workforce with a B.A. degree or higher -- 28% -- is 9 percentage points below the economy-wide average.

Manufacturing Facts: Among 9 Largest Trading Partners, Only France has Higher Structural Costs than the U.S.

The excess structural cost burden facing the U.S. manufacturing sector more than offsets the competitive advantage it holds with regard to labor and capital costs. This "raw cost index" was just under $30 per hour in the United States, $3 less than the trade-weighted average of our nine largest trading partners. When the effects of higher structural costs are factored in, however, this cost advantage turns into a burden of $3 per hour. The excess corporate tax burden alone erases the U.S. manufacturing advantage, and the effects of employee benefits, torts and regulatory compliance simply add insult to injury.

Manufacturing Facts: Sectors Critical to the U.S. R&D Picture
A number of sectors have outsized R&D intensities that are broadly critical to the innovative strength of the U.S. economy. Pharmaceuticals and aerospace are two sectors with strong innovation investment propensities. During 2009, R&D investment in pharmaceuticals and medicine was 13.2% of domestic net sales, nearly three times the manufacturing average. In aerospace, R&D investment was 10.4% of domestic net sales.

Manufacturing Facts: The U.S. Manufacturing Sector is the 10th-Largest Economy
The U.S. manufacturing sector is so huge that if it were its own country, it would rank as the 10th-largest world economy. American manufacturers account for a larger volume of production than the entire GDP of India, Canada or Korea. In 2011, manufacturers generated $1.8 trillion worth of value-added.

Manufacturing Facts: No Region has been Immune to the Decline in Manufacturing Employment

In good times and bad, job losses have been a fact of life in the manufacturing sector for well over a decade. No region has escaped the seemingly inexorable decline. Since the mid-1990s, the Southeast alone has lost nearly 1.7 million manufacturing jobs. Largely because of the importance of automotive and machinery manufacturing in the Southeast and Great Lakes states, those regions have borne the brunt of the job losses that characterized the Great Recession.

Manufacturing Facts: The Sector's Falling Unit Labor Costs Increase Global Competitiveness
Between 2000 and 2011, U.S. manufacturing's unit labor costs declined by an average annual rate of 1.6%. Based on data for major manufacturing countries (excluding China), just four -- Taiwan, Japan, the Czech Republic and Singapore -- experienced larger declines. The decline in unit labor costs in the United States has occurred even though hourly labor compensation (adjusted for inflation) increased by an average annual rate of 0.9% over the decade, largely as a result of productivity growth.

Manufacturing Facts: The U.S. is Competitive but not Dominant in Total R&D Investment
Total U.S. R&D spending rose from 2.6% of GDP in 2006 to 2.8% in 2009; however, while competitive, the nation is clearly not dominant in this arena. Japanese R&D spending as a share of GDP is notably higher. While China's level of investment remains far behind those of the U.S. and other rich nations, it has been rising steadily and significantly.


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