Member Briefing July 25, 2023
Federal Reserve: Manufacturing Production Fell in June
Manufacturing production fell 0.3% in June, declining for the third time in the past four months. Since April 2022, when manufacturing production reached its highest level since the end of 2018, output in the sector has pulled back 1.1% on weaker global growth and ongoing geopolitical and economic uncertainties. The current forecast is for manufacturing production to decline 0.5% in 2023 but expand 1.2% in 2024.
Factory output moved up 1.5 percent at an annual rate, buttressed by a second-quarter jump of 36.7 percent in the production of motor vehicles and parts during the quarter. The indexes for nondurable manufacturing and durable manufacturing fell 0.6 percent and 0.1 percent, respectively; the index for other manufacturing edged down 0.2 percent. Within nondurables, only chemicals recorded an increase, whereas decreases of at least 1 percent were recorded by most other industries. Notable declines occurred in the indexes for printing and support (2.5 percent) and petroleum and coal products (1.6 percent). The index for durable manufacturing, on the other hand, posted more mixed results in June, with declines in the output of motor vehicles and parts (3.0 percent) and of nonmetallic mineral products (1.2 percent) being mostly offset by gains elsewhere.
War in Ukraine Headlines
After A Pause, US Fed Likely to Hike Interest Rates to 22-Year High
After pausing in June, the U.S. Federal Reserve is widely expected to hike interest rates again on Wednesday, adopting its most restrictive monetary stance for 22 years despite recent signs of slowing inflation. After 10 consecutive hikes in just over a year, the Fed halted its aggressive campaign of monetary tightening last month to give policymakers more time to assess the health of the U.S. economy and the impact of recent banking stresses on lending conditions.
In the weeks since, positive upgrades to economic growth and cooler inflation data have reinforced the likelihood that the Fed's rate-setting committee will vote for a quarter percentage-point hike on July 25-26. Futures traders now assign a probability of more than 99% that the Fed will hike its base rate by 25 basis points at its next meeting, according to CME Group. While a July rate hike is now widely expected, questions remain about how much further the Fed will need to go this year to bring inflation back down to its long-term target of 2%.
Untangling the U.S. From China’s Economy Is Messy
The Biden administration’s attempt to surgically cut economic ties with China is proving difficult to execute. Treasury Secretary Janet Yellen touted growing trade with other countries last week in a visit to Vietnam, where annual trade with the U.S. has surged in the past five years to $140 billion. The share of U.S. goods imports from China slipped in recent years, while it expanded with other Asian countries.
But disentangling China’s role in global supply chains is far from straightforward. Many alternative nations such as Vietnam or South Korea are themselves deeply intertwined with China. And Vietnamese production in many cases still involves Chinese companies. China’s dominant role in clean-energy technology complicates matters. Vietnam has become an important provider of solar panels to the U.S., but an investigation found that Chinese companies sidestepped tariffs by rerouting products through Vietnam and other southeast Asian countries.
COVID Update – Vaccine Fatigue is Already Here, But Many Americans Will be Urged to Get Three Different Shots this Fall
Dr. Mandy Cohen, director of the Centers for Disease Control and Prevention, is already thinking ahead to cold and flu season this winter. “We’re going to have three bugs out there, three viruses: Covid, of course, flu and RSV,” Cohen said in an interview. Spread of all three respiratory viruses is currently low, but the CDC has begun to detect slight increases in positive Covid tests and Covid-related emergency department visits. And the decline in Covid hospitalizations has stalled.
An unexpectedly severe surge of respiratory syncytial virus, or RSV infections in late 2022 overwhelmed children’s hospitals with babies and young kids whose immune systems hadn’t been exposed to the virus during lockdown. For the first time this fall, the U.S. will have access to vaccines for RSV. Those shots, along with a new monoclonal antibody injection for babies and a third vaccine up for approval, have the potential to drastically reduce cases of the virus that typically hits infants and older adults hardest, experts say.
EY CEO Outlook Survey: Faith in AI, Growing Appetite for M&A
CEOs globally are embracing AI as a force for good while remaining wary of unknown, unintended consequences. They believe more needs to be done to mitigate significant social, ethical and cyber risks. An EY study of 1,200 CEOs globally focuses on how they currently use AI as well as their plans to leverage the technology in the future. It also provides insights on capital allocation, investment and transformation strategies, as well as plans to embed sustainability into the growth agenda – all against a backdrop of economic headwinds.
Among those findings - a full 98% of them “expect to actively pursue a strategic transaction in the next 12 months” (up from 89% in January 2023), with 59% looking to M&A, 47% looking to divest, and 63% looking to enter strategic alliances or joint ventures. The reality is that an increasingly data-saturated world is making getting M&A right harder still. The future of M&A dealmaking means significantly more information now needs to be captured, processed, analyzed and interpreted than ever before. Traditional means are no longer effective in delivering a competitive edge. Artificial intelligence capabilities, deployed correctly, may be the key to unlocking more value through M&A.
Aerospace, Defense Industries Struggling To Attract Talent
Whether it is in Europe or the United States, companies in the aerospace and defense sectors are facing a wave of retiring workers and struggling to attract skilled personnel to take their place, according to the global management consulting firm McKinsey & Company. There is a “gray to green” workforce transition. There is a retirement bubble on the horizon for both manufacturing jobs and engineers, with one out of every three employees in the sector nearing a “retirement window.”
The aerospace and defense sector has long benefited from veteran employees with a wealth of knowledge that have worked their entire careers almost exclusively in the sector, he said, and they are needed to onboard the “greener,” or less experienced workers. “We also know that the greener talent has fundamentally different expectations [of work life], so this presents a real challenge as we think about building the next generation of leaders,” he said. However, these different expectations have led to attrition problems with the younger workers, he added.
As Japan Aligns With U.S. Chip Curbs on China, Some in Tokyo Feel Uneasy
Japan's imposition of export controls on chip making tools to align with a U.S. policy restricting China's ability to produce advanced semiconductors is worrying some officials in Tokyo who believe a combative U.S. approach may hamper coordination and needlessly provoke Beijing. From this week, Japan is restricting 23 types of equipment, ranging from machines that deposit films on silicon wafers to devices that etch out the microscopic circuits of chips that could have military uses.
Tokyo and Washington share concerns about China's push for advanced technologies and in May agreed with other Group of Seven industrial democracies on "de-risking" from potential Chinese economic coercion. However, differences in chip making equipment controls could test that unity, should either gain a competitive advantage over the other by allowing exports the other blocked. Japan is not applying a U.S. standard of presumption of denial and will allow exports whenever possible, a second Japanese government official said
McMahon: At Mid-Year, NY Still Far Below Most States in Pandemic Jobs Recovery
New York has added private-sector jobs in all but three of the 38 months since the COVID-19 outbreak of March 2020—but the Empire State remains below its pre-pandemic employment level and continues to trail the national recovery. As of June, New York was one of only nine states still significantly short of a full post-pandemic jobs recovery. Roughly tied with Alaska, North Dakota, Louisiana, and West Virginia, all of which remain about 1 percent below their February 2020 job levels.
On a seasonally adjusted basis, private-sector employment in New York totaled 8.26 million jobs as of June, according to the latest state Labor Department report. This figure was 78,000 jobs (0.9 percent) short of the record 8.34 million jobs counted in February 2020, the month before the start of the pandemic. By contrast, private employment in the U.S. as a whole is now nearly 4 million jobs (3 percent) above the pre-pandemic level.
DHS Announces Rule for Remote Verification of I-9 Documents
On July 21, 2023, the Department of Homeland Security (DHS) announced a final rule, which will be officially published on July 25, 2023, that will provide eligible employers filling out the Employment Eligibility Verification Form I-9 an optional alternative to the in-person physical document examination method that employers have followed as part of the Form I-9 process. DHS explained, “This rule responds to lessons learned during the COVID-19 pandemic, which demonstrated the substantial practical benefits of an optional alternative to the physical documentation examination procedures required by the employment eligibility verification regulations.”
Only employers who are enrolled, and participating in good standing, in E-Verify, will be eligible to use this optional alternative I-9 process. In addition to the requirement that employers use E-Verify, the optional alternative verification process requires several other actions to occur within three business days of the first day of employment. Follow the link below to learn what those requirements are.
Teamsters Push Back Strike Threat at Trucker Yellow
The Teamsters union pulled back its threat of a strike this week at financially-ailing trucker Yellow, averting an action the company had said would send the business into liquidation. The union said Sunday that it withdrew plans for the walkout, which could have started as soon as Monday, after a pension fund agreed to continue to extend health benefits to unionized workers at Yellow and a sister company and would give Yellow another 30 days to make a missed payment to the fund.
Nashville, Tenn.-based Yellow, one of the largest trucking companies in the U.S. and a major service provider to the Defense Department, has sought to delay payments totaling $50 million to Central States as the company copes with a heavy debt burden and falling cash reserves. Yellow employs about 30,000 workers, including about 22,000 union members several hundred of which are in Marybrook, Orange County. A federal judge in Kansas City, Mo., on Friday rejected Yellow’s request for an order blocking a strike after telling the court a walkout would send the 99-year-old company into chapter 7 liquidation proceedings.
Data Transfers Permitted Across the Pond Via New EU-U.S. Data Privacy Framework
On July 10, 2023, the European Commission adopted its adequacy decision on data transfers for the EU-U.S. (European Union/United States) Data Privacy Framework (DPF). The adequacy decision concluded that the United States provides an adequate level of protection for personal data, with the implementation of this new framework. This landmark decision will be a welcome sea change for EU and U.S. companies, as those who participate in the DPF will be able to effectuate transatlantic data transfer safely and lawfully without need for additional transfer safeguards, including Standard Contractual Clauses (SCCs).
This decision comes nearly three years after the European Union’s high court struck down the EU-U.S. Privacy Shield Framework and almost eight years after the CJEU declared the EU-U.S. Safe Harbor Framework invalid. Both frameworks were found to lack adequate protections from expansive U.S. governmental access to data or redress mechanisms for EU data subjects.
June Manufacturing Jobs Gain Winner - Texas
Unemployment rates were lower in June in 11 states and stable in 39 states and the District of Columbia, the U.S. Bureau of Labor Statistics reported Friday. Twenty-two states had jobless rate decreases from a year earlier, 8 states and the District had increases, and 20 states had little change. The national unemployment rate, 3.6 percent, changed little over the month and was the same as in June 2022.
Over the year, nonfarm payroll employment increased in 41 states. The largest job increases occurred in Texas (+542,500), California (+397,400), and Florida (+319,500). Texas created the most net new manufacturing jobs in June, adding 6,100 workers, and it also generated the greatest employment growth over the past 12 months, with 31,000. At 1.8%, New Hampshire and South Dakota had the lowest unemployment rates nationally.
Pfizer Plant Damaged in Tornado, Potentially Worsening U.S. Drug Shortage
A Pfizer manufacturing facility, responsible for making nearly 25% of the company’s sterile injectable medicines used at U.S. hospitals, sustained heavy damage from a tornado in North Carolina, potentially worsening an already deep drug shortage. The continuing trend of severe weather has added to another problem in the U.S.— damage from an unusually strong tornado may create nationwide drug shortages after a large Pfizer plant in North Carolina was nearly destroyed by the storm.
Although all staff were safe and accounted for, Pfizer’s Rocky Mount plant saw serious damage, with some sections nearly flattened. A report in FiercePharma quoted Pfizer as saying the plant manufactures one-quarter of all sterile injectables used in U.S. hospitals. The drug manufacturer said that its facility has 1.4 million square feet of manufacturing space and is one of the largest sterile injectable facilities in the world. The plant had recently been expanded and also manufactures plastic vials, syringes, flexible containers, and semi-rigid bottles.
China on Track to Smash Coal Import Records
China has been importing a sensational amount of coal in recent months, with the People’s Republic now on course to import 400m tonnes this year, smashing last year’s total by 100m, as well as the record set back in 2013 of 327m tonnes. The full year target figure of 400m has been mentioned by China’s National Coal Association with analysts at broker Braemar saying the coal buying binge comes against a background of more affordable international thermal coal prices, and energy security appears to be the priority in Beijing this year, building stockpiles as the country faces extreme heat with temperatures recorded in excess of 50 degrees Celsius in the west of the country recently.
Total Chinese coal imports for the first half of 2023 were 221.93m tonnes, double the 2022 comparable period, according to analysis from UK consultancy Shipping Strategy.Figures from BIMCO show that in the year to date Chinese seaborne coal imports are up 66% over the same period in 2022. Ralph Leszczynski, global head of research at Italian broker Banchero Costa, described the coal news coming out of China as “price-driven opportunism. Imports tend to spike when imported coal is simply cheaper than what is produced domestically, and tend to fall when international prices – and/or freight – are high,” Leszczynski said.