Economic Data and Growth

The higher tax burden being levied on manufacturers continues to hit home.

That’s the message from respondents to the NAM’s just-released Q4 2023 Manufacturers’ Outlook Survey.

What’s going on: Historically low levels of optimism persisted among small and medium-sized manufacturers—which compose the majority of the manufacturing sector—in the final quarter of 2023, according to the survey, which was conducted from Nov. 14 to Dec. 1, 2023.

• Among firms with fewer than 50 employees, 65.9% reported feeling positive about their own company’s outlook, while 63.0% of companies with between 50 and 499 employees reported the same.
• Overall, 66.2% of respondents felt either somewhat or very positive about their company’s outlook, edging up slightly from 65.1% in the third quarter. It was the fifth straight reading below the historical average of 74.8%.

Burdensome taxes: Some 89% of respondents said higher taxes on manufacturing activities would make it more difficult for them to hire additional workers, invest in new equipment and/or expand their facilities.

Other top challenges: The majority of respondents—61.1%—cited an unfavorable business climate as a top challenge to their company.

• Hiring and retaining quality employees was high on the list of challenges, too, with 71.4% of manufacturers calling it a primary concern.

A bright spot: Fewer manufacturers now expect a recession in 2024, at just over 34%. In Q3, the figure was 42.2%.

Washington, D.C. – The National Association of Manufacturers released its Manufacturers’ Outlook Survey for the fourth quarter of 2023, showing that small companies with fewer than 50 employees and medium-sized firms with between 50 and 499 employees, which make up a vast majority of the sector, continued to have historically lower levels of optimism with 65.9% and 63.0% positivity rates in Q4, respectively.

“It’s clear that Congress’ failure to enact pro-growth tax policies to support innovation and investment before year-end is affecting the manufacturing outlook,” said NAM President and CEO Jay Timmons. “Combined with the ongoing regulatory onslaught from the Biden administration, we’re facing economic headwinds that threaten all of the bipartisan wins achieved in recent years.”

Overall, 66.2% of respondents felt either somewhat or very positive about their company’s outlook, edging up slightly from 65.1% in the third quarter. It was the fifth straight reading below the historical average of 74.8%.

The NAM has been urging Congress to swiftly restore three critical manufacturing tax policies: immediate R&D expensing, a pro-growth interest deductibility standard and full expensing (100% accelerated depreciation). These competitive tax policies are critical to empowering manufacturers to grow their operations, hire more workers, increase wages, expand facilities and invest for the future.

Key Survey Findings:

• Eighty-nine percent of respondents said higher tax burdens on manufacturing activities would make it more difficult to expand their workforce, invest in new equipment or expand facilities.
• Workforce challenges also continue to dominate the sector, with more than 71% of manufacturers citing the inability to attract and retain employees as their top primary challenge.
• A weaker domestic economy and sales for manufactured products (63.7%), an unfavorable business climate (61.1%) and rising health care and insurance costs (59.8%) are also impacting manufacturing optimism.

You can learn more at the NAM’s online tax action center here.

The NAM releases these results to the public each quarter. Further information on the survey is available here.

-NAM-

The National Association of Manufacturers is the largest manufacturing association in the United States, representing small and large manufacturers in every industrial sector and in all 50 states. Manufacturing employs nearly 13 million men and women, contributes $2.75 trillion to the U.S. economy annually and accounts for 53% of private-sector research and development. The NAM is the powerful voice of the manufacturing community and the leading advocate for a policy agenda that helps manufacturers compete in the global economy and create jobs across the United States. For more information about the NAM or to follow us on Twitter and Facebook, please visit www.nam.org.

In the third quarter of 2023, private-sector R&D spending fell by 1.2%, according to the Bureau of Economic Analysis. Since a harmful R&D amortization requirement took effect in 2022, R&D spending’s rate of growth has slowed dramatically, from 6.6% on average over the previous five years to less than 1% over the past 12 months.

• To protect well-paying R&D jobs and America’s competitiveness, Congress must restore immediate R&D expensing, manufacturers told Congress this week.

What’s going on: At a Monday briefing for staffers of the Main Street Caucus—a group of more than 70 Republican House members that advocates for small businesses—Westminster Tool Chief Financial Officer Colby Coombs talked about the harmful impact the R&D tax change has had on his injection-mold-making business.

• “We’re paying more than double what we made in cash profit last year to the IRS for federal income tax,” he said.
• “To put it differently, we paid just under an additional $27,000 per full-time employee in [our] tax bill this year. It is impossible to continue running your organization paying this amount in taxes [and] not being able to expense our research and development expenditures immediately.”

The background: For close to seven decades, the U.S. tax code allowed businesses to immediately deduct R&D expenses. But starting in 2022, it began requiring companies to amortize, or deduct, these costs over a period of years.

• Also in 2022, a stricter interest limitation—essentially a tax on investment—went into effect. According to a new analysis recently released by the NAM, the stricter limitation could cost nearly 900,000 jobs.
• Earlier this year, full expensing, which allows businesses to deduct the full cost of capital equipment purchases, began to phase down. It is set to fully phase out by 2027.

The effects: According to the Q2 2023 NAM Manufacturers’ Outlook Survey, 78% of manufacturers say the higher tax burden has decreased the funds available to expand core manufacturing activities in the U.S.

• The tax changes “forced us to cancel a major aviation contract this year that would’ve added five new jobs in our community,” Coombs continued. “Five jobs might not seem a lot, but that’s almost 17% of our workforce growth.”
• “We do what we love, which is make good products and make improvements for our country, [but] this is greatly handicapping our ability to continue to grow.”

NAM in action: The NAM has mounted an all-out campaign calling on lawmakers to reinstate immediate R&D expensing, pro-growth interest deductibility and full expensing (or 100% accelerated depreciation).

• Earlier this month, the NAM led more than 1,300 businesses and associations in calling for the measures’ reinstatement.
• It also launched the Restoring Pro-Growth Tax Policies Action Center, which provides background information on these priorities, as well as a digital engagement tool that helps manufacturers and industry advocates contact their senators and representatives.

The last word: Manufacturers are “absolutely vital … to continu[ing] to create good products that are safe and environmentally innovative to help our country,” Coombs said.

• “We need to be able to fully expense immediately, and we need to retroactively fix this [situation] so we can put our money into growing our workforce, purchasing new machines and improving our capabilities so we can compete at a global level.”

This holiday season, instead of overstocking shelves with merchandise, retailers “have pared back their inventories while trying to focus their supply chains more tightly on products that shoppers want,” The Wall Street Journal (subscription) reports.

What’s going on: “Many retailers have spent much of the year working through the stockpiles from last year and now say they have cleaned up their distribution centers and their balance sheets.”

• After the global pandemic, sellers bulked up their stocks in case of another major supply chain disruption—but it was a “strategy that left many companies saddled with goods.”

A different holiday season: Owing to high inflation and more spending on services than goods, “[h]oliday retail sales in the U.S. are expected to grow at a slower rate this year.”

• “The National Retail Federation predicted sales will rise between 3% and 4% over 2022 to between $957.3 billion and $966.6 billion. Last year, holiday sales grew 5.3% to $936.3 billion.”

​​​​​​​ What they’re doing: Retailer strategies for this year include paying close attention to consumer trends and offering “variety [over] redundancy.”

• Said one retailer’s CEO, “The customer today does not want an endless aisle. They want the best aisle.”

The still-robust U.S. economy and tight labor market could mean further interest rate hikes, Federal Reserve Chair Jerome Powell said Thursday, Reuters (subscription) reports.

What’s going on: “We are attentive to recent data showing the resilience of economic growth and demand for labor,” Powell said during a talk at the Economic Club in New York. “Additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy.”

• The Fed’s aim in raising rates has been to reduce inflation to 2%.
• Since it began raising rates in March 2022, however, unemployment has stayed largely steady, and “economic growth has generally remained above the 1.8% annual growth rate Fed officials see as the economy’s underlying potential.”

A delicate balance: While Powell said there is evidence of a cooling labor market, the Fed must account for new “uncertainties and risks”—including the Hamas–Israel war—as it seeks “to balance the threat allowing inflation to rekindle against the threat of leaning on the economy more than is necessary.”

• Data since the central bank’s last meeting, in September, have shown unexpected U.S. job growth and surprisingly strong retail sales, “offering inconsistent signals about whether inflation is on track to return to the Fed’s 2% target in a timely manner.”

Hike likely: Most Reuters-polled economists expect the Fed to raise interest rates at its next meeting on Oct. 31–Nov. 1.  
 

Sales of existing homes fell to their lowest level in 13 years in September, according to Reuters (subscription).

What’s going on: “Existing home sales fell 2.0% last month to a seasonally adjusted annual rate of 3.96 million units, the lowest level since October 2010, the National Association of Realtors said on Thursday. They are counted at the closing of a contract, and last month’s sales likely reflected contracts signed in August, when the rate on the popular 30-year fixed mortgage vaulted above 7%.”

• Sales fell 1.1% in the South, 4.1% in the Midwest and 5.3% in the West. They rose 4.2% in the Northeast.

Anemic inventory: There was 3.4 months’ worth of unsold existing home inventory for sale in September, a decline of more than 8% from a year ago.

• “A four-to-seven-month supply is viewed as a healthy balance between supply and demand.”

Why it’s happening: Mortgage rates have spiked recently, “mostly because of expectations that the Federal Reserve will keep interest rates higher for longer in response to the economy’s resilience.”

The number of new homes being built “showed a substantial rebound” in September, while the number of permits to build declined, according to Markets Insider.

What’s going on: “The Commerce Department said housing starts spiked by 7.0 percent to an annual rate of 1.358 million in September after plunging by 12.5 percent to a revised rate of 1.269 million in August.”

• At the same time, permits—an indicator of future demand for housing—dropped by 4.4% to an annual rate of 1.475 million, following a surge in August.

Less than predicted: Economists had predicted that September housing starts would spike to a rate of 1.380 million from the previous month.

Why it’s important: Mortgage rates have risen to record highs recently, pushed by the Federal Reserve’s still-elevated interest rate target.

• Higher rates have led to a decline in home sales and prices.

Industrial production and retail sales both rose in September and exceeded growth expectations, according to MarketWatch and CNBC.

What’s going on: Industrial production increased 0.3% for the month, above the 0.1% gain expected, MarketWatch reports.

• Meanwhile, retail sales rose 0.7% for the month, more than twice the 0.3% rise estimated by Dow Jones, according to CNBC.

The details: In industrial production, “[m]anufacturing rose 0.4% and motor vehicle production rose 0.3%, held down by the ongoing strike against three automakers,” MarketWatch reports.

• For retail, “the biggest increase [was] at miscellaneous store retailers, which saw an increase of 3%. Online sales rose 1.1% while motor vehicle parts and dealers saw a 1% increase and food services and drinking places grew by 0.9%, good for a yearly increase of 9.2%, which led all categories,” according to CNBC.

What it means: The retail numbers “indicate that consumers more than kept up with price increases,” CNBC said, though that could change as employment growth is expected to slow.
 

Economists polled by The Wall Street Journal (subscription)—including NAM Chief Economist Chad Moutray—say they now believe that the U.S. will likely avoid a recession.

What’s going on: “In the latest quarterly survey by The Wall Street Journal, business and academic economists lowered the probability of a recession within the next year, from 54% on average in July to a more optimistic 48%. That is the first time they have put the probability below 50% since the middle of last year.”

• Economists on average expect gross domestic product to increase 2.2% in Q4 of this year from a year earlier, which is “a sharp upward revision” from the last survey.

Why it’s happening: Playing a role in the revised outlook are declining inflation, an interest rate that the Federal Reserve has held steady at its past two meetings, a robust job market and surprisingly strong recent economic growth.

A “soft landing”: While that growth and job creation are both expected to weaken in the first half of next year, “the latest forecasts suggest confidence in the Fed’s ability to achieve a so-called soft landing, in which inflation falls without a recession.”

• However, recent events—such as the Israel–Hamas war—could alter the accuracy of these predictions, given the potential effect on energy prices.

Our take: “Despite weaknesses in manufacturing demand and production and a multitude of challenges globally, consumers and businesses continue to spend, providing resilience to the U.S. economy,” Moutray told us.

• “Even with recent cooling, the labor market and wage growth remain solid, and firms continue to make investments in the domestic market. While real GDP is likely to slow in the next few quarters following a very strong Q3, the ‘soft landing’ scenario has become more probable in recent months.”

Prices paid by consumers for a variety of goods and services rose faster than expected last month, according to CNBC.

What’s going on: “The consumer price index, a closely followed inflation gauge, increased 0.4% on the month and 3.7% from a year ago, according to a Labor Department report Thursday. That compared to respective Dow Jones estimates of 0.3% and 3.6%.”

Core CPI: Core CPI, which excludes often-volatile food and energy costs, were in keeping with economist expectations, inching up 0.3% on the month and 4.1% year over year.

The details: Housing costs accounted for most of the inflation uptick.

• The shelter index—which composes about a third of the CPI weighting—rose 0.6% in September and 7.2% from September 2022.
• Food and energy costs rose 0.2% and 1.5%, respectively.
• Prices for services, “considered a key for the longer-run direction for inflation,” rose 0.6% excluding energy services.

What it means: “These data are not likely to change the trajectory of monetary policy, with the Federal Open Market Committee likely to pause [interest-rate hikes] once again at its Oct. 31–Nov. 1 meeting,” said NAM Chief Economist Chad Moutray. “Interest rates are not likely to see a cut until mid-to-late 2024.”