11

““All Eyes on the Economy”All Eyes on the Economy”

David HuetherDavid Huether

National Association of ManufacturersNational Association of Manufacturers

October 27, 2004October 27, 2004

22

OverviewOverview

• The Importance of ManufacturingThe Importance of Manufacturing

• The Economic Situation and OutlookThe Economic Situation and Outlook

• Long Term ChallengesLong Term Challenges

33

Manufacturers Drive Economy in 1990sManufacturers Drive Economy in 1990s

ManufacturingManufacturing22%22%

Software*Software*

Finance/insuranceFinance/insurance/real estate/real estate Retail tradeRetail trade

ServicesServices

Wholesale tradeWholesale trade

Transportation/public utilities Transportation/public utilities

Rest of economyRest of economy

Source: Commerce Department

44

Manufacturers Lead U.S. ExportsManufacturers Lead U.S. Exports

• U.S. Agricultural Exports top $50 Billion a year.

• U.S. Manufactured Exports top $50 Billion a month.

Source: Commerce Department

55

Manufacturing Dominate R&D

0

10

20

30

40

50

60

70

Manufacturing All Other Sectors

Share of R&DPerformance

SOURCE: National Science FoundationSOURCE: National Science Foundation

66

Manufacturers Have Biggest Jobs MultiplierManufacturers Have Biggest Jobs Multiplier

SOURCE: Department of Commerce, NAMSOURCE: Department of Commerce, NAM

Mfg

OtherSectors

0

5

10

15

20

25

Number of Jobs

Number of Jobs (in Millions) FIRE 4%

Const 4%

Mining 2%

Other 5%

Ag 8%

TCU 9%

Services 30%

Trade 37%

}

77

Confidence and Business Activity...are Recovering Confidence and Business Activity...are Recovering

SOURCE: Conference BoardSOURCE: Conference Board

9-11Accounting Scandals Iraq War

40

45

50

55

60

65

70

2000.06 2001.06 2002.06 2003.06 2004.06

100

120

140

160

180

200

220

240

Business Activity

Consumer Confidence

88

Profits are RecoveringProfits are Recovering

Source: U.S. Department of Commerce

700

750

800

850

900

950

1,000

1,050

1,100

1,150

1,200

2000.1 2001.1 2002.1 2003.1 2004.1

$ Billions

-50

0

50

100

150

200

$ Billions

Corporate Profits

Manufacturing Profits

99

Global Conditions are Improving for ExportersGlobal Conditions are Improving for Exporters

SOURCE: Federal Reserve, NAMSOURCE: Federal Reserve, NAM

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

2000 2001 2002 2003 2004

108

110

112

114

116

118

120

122

124

126

128

$ Value of Dollar

Foreign GDP Growth

1010

What a Difference a Year Makes!What a Difference a Year Makes!

SOURCE: Commerce DepartmentSOURCE: Commerce Department

-2

0

2

4

6

8

10

12

14

16

18

GDP Consumption Investment Exports Government

Per

cen

t C

han

ge

fro

m Q

uar

ter

1 Y

ear

Ag

o

2003.2 2004.2

1111

Manufacturing Has Turned the Corner Manufacturing Has Turned the Corner

SOURCE: Federal ReserveSOURCE: Federal Reserve

92

93

94

95

96

97

98

99

100

101

102

2000.06 2001.04 2002.02 2002.12 2003.10 2004.08

Man

ufa

ctu

rin

g P

rod

uct

ion

In

dex

(Ju

ne

2000

=1

00)

1212

……But Still Underperforming Past RecoveriesBut Still Underperforming Past Recoveries

SOURCE: NAM calculations from Federal Reserve DataSOURCE: NAM calculations from Federal Reserve Data

100

105

110

115

120

125

-12 -9 -6 -3 0 3 6 9 12 15 18 21 24 27 30

Months from from Cyclical Trough

Index of Mfg

Output (100=Cyclical

Trough)

Previous Five Mfg Recoveries

2002-2004

1313

Job Losses Concentrated in ManufacturingJob Losses Concentrated in Manufacturing

Source: U.S. Department of Labor

-3,500,000

-2,500,000

-1,500,000

-500,000

500,000

1,500,000

2,500,000

2000.08 2001.02 2001.08 2002.02 2002.08 2003.02 2003.08 2004.02 2004.08

Manufacturing Rest of Economy

1414

Manufacturing Employment DeclineManufacturing Employment Decline

SOURCE: NAM EstimatesSOURCE: NAM Estimates

-800,000

-700,000

-600,000

-500,000

-400,000

-300,000

-200,000

-100,000

0

ManufacturingExport Decline

ProductivityAcceleration

Downturn inBusiness

Investment inEquipment

and Structures

Rising ImportPenetration

InventoryWork Off

200

0-20

03 M

anu

fac

turi

ng

Em

plo

ymen

t L

oss

1515

Manufacturing Employment Declines WidespreadManufacturing Employment Declines Widespread

SOURCE: EcowinSOURCE: Ecowin

-20%

-15%

-10%

-5%

0%

5%

USA Mexico UK Japan France Germany Taiwan Canada Korea China

Percent Change 2000-2003

-3 mil

-190k

-478k-1.5 mil

-216k -296k

-58k -91k

2.6 mil

-69k

1616

4b: U.S. Mfg Employment Down Across the Board4b: U.S. Mfg Employment Down Across the Board

SOURCE: Commerce DepartmentSOURCE: Commerce Department

-25%

-20%

-15%

-10%

-5%

0%Foreign

Affiliates ofU.S.

Companies

U.S. Parents U.S. Affiliatesof ForeignCompanies

Other U.S.Manufacturing

Employment

Percent Change (2000-2002)

-62k

-800k

-330k

-1.1 mil

Overseas In the U.S.

1717

Overseas Markets Dominate Overseas Manufacturing Affiliates Sales

SOURCE: Commerce DepartmentSOURCE: Commerce Department

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Back to the U.S. In Foreign Markets

Percent of Foreign Affiliate Sales

1818

Higher Energy PricesHigher Energy Prices

Source: Ecowin

$0

$10

$20

$30

$40

$50

$60

1999.1 1999.4 2000.3 2001.2 2002.1 2002.4 2003.3 2004.2

0

2

4

6

8

10

12

Oil ($/Barrel) Natural Gas ($/MMBtu)

1919

Economic Outlook – high oil prices lowers growthEconomic Outlook – high oil prices lowers growth

Source: NAM

0

2

4

6

8

10

12

GDP PCE BusinessInvestment

Exports Imports MfgProduction

Percent Change

2020

Manufacturing Employment Recovery Around the Corner Manufacturing Employment Recovery Around the Corner

Source: Labor Department and NAM Estimates

-12

-10

-8

-6

-4

-2

0

2

4

1998.1 1999.2 2000.3 2001.4 2003.1 2004.2 2005.3

Pe

rce

nt

Ch

an

ge

fro

m Q

ua

rte

r 1

Ye

ar

Ag

o

-12

-10

-8

-6

-4

-2

0

2

4

Pe

rce

nt

Ch

an

ge

fro

m Q

ua

rte

r 1

Ye

ar

Ag

o

Manufacturing Output less Productivity Growth

Manufacturing Employment

2121

Challenges Facing Today’s ManufacturersChallenges Facing Today’s Manufacturers

Domestic: High costsDomestic: High costs International: Increased Competition International: Increased Competition

& Trade Barriers to U.S. Exports & Trade Barriers to U.S. Exports

2222

Challenges: Structural CostsChallenges: Structural Costs

Source: NAM Cost Study

Productivity-adjusted Labor Costs ($ per hour)

0

5

10

15

20

25

30

35

UnitedStates

Canada Mexico Japan China Germany UnitedKingdom

SouthKorea

Taiwan France

These costs add 22% to the cost of producing in the U.S.

2323

Challenges: Trade Barriers AbroadChallenges: Trade Barriers Abroad

Source: Commerce Department, ITC

0

50

100

150

200

250

300

350

400

450

Industrialized Countries Developing Countries

U.S

. M

anu

fact

ure

d E

xpo

rts

(B

illi

on

s)

0%

2%

4%

6%

8%

10%

12%

14%

Tar

iff

Rat

es

56%

44%

4%

13%

2424

SummarySummary

Manufacturing is critically important to the U.S. Manufacturing is critically important to the U.S. economy and standard of living.economy and standard of living.A cyclical recovery is finally underwayA cyclical recovery is finally underwayWe are challenged as never before, here and We are challenged as never before, here and abroad.abroad.

WHAT CAN WHAT CAN YOUYOU DO: GET INVOLVED DO: GET INVOLVEDRegister workers to vote Register workers to vote Find out where your representatives stand on Find out where your representatives stand on manufacturing manufacturing www.nam.org/p2www.nam.org/p2 Click on “Take Action”Click on “Take Action”

Contact policy makersContact policy makers

2525

““All Eyes on the Economy”All Eyes on the Economy”

David HuetherDavid Huether

National Association of ManufacturersNational Association of Manufacturers

October 27, 2004October 27, 2004