Member Briefing May 17, 2023
U.S. Industrial Production Edges Past Forecasts in April, Driven by Manufacturing
Manufacturing production increased 1.0% in April, pulling overall industrial production past expectations, according to MarketWatch (subscription). April’s manufacturing increase—which came after a 0.8% drop in March—was owed to a surge in the output of motor vehicles and related parts.
- Motor vehicles and parts increased 9.3%, following a 1.9% dip in March.
- Manufacturing capacity utilization bounced back from 77.6% in March to 78.3% in April.
- Business equipment was up 1.2%.
- Mining output, which includes oil and gas was up 0.6%.
- Utilities output fell 3.1% after gaining 8.4% in March.
On a year-over-year basis, industrial production has increased 0.2%.
War in Ukraine Headlines
- Ukraine and Russia: The Latest News – The Guardian
- Kyiv Says it Shoots Down Volley of Russian Hypersonic Missiles - Reuters
- ‘Bakhmut Trap’: Ukrainian Advances Vindicate Defense of Besieged City - WSJ
- Ukrainian Troops Gird for Counteroffensive they Hope Will End War – Reuters
- Zelensky Meets PM Sunak as More Ukraine Weapons Pledged - BBC
- Britain to Send Long-Range Attack Drones to Ukraine – Reuters
- UK Considers ‘Fighter Jet Coalition’ With Ukraine – Fox News
- Russia Sows Far-Reaching Chaos Using Crimea as a Base - WSJ
- Pope Tells Zelensky He is 'Praying for Peace' - BBC
- Justice Department Files Criminal Charges in Cases of American Tech Stolen for Russia, China and Iran - CNN
- Interactive Map: Assessed Control of Terrain in Ukraine - Institute for the Study of War
- Map – Tracking Russia’s Invasion of Ukraine – Live Universal Awareness Map
U.S. Retail Sales Miss Expectations, But Core Sales Strong
U.S. retail sales increased less than expected in April, but the underlying trend was solid, suggesting that consumer spending likely remained strong early in the second quarter, despite growing risks of a recession this year. Retail sales rose 0.4% last month, the Commerce Department said on Tuesday. Data for March was revised slightly lower to show sales dropping 0.7% instead of 0.6% as previously reported. Economists polled by Reuters had forecast sales rebounding 0.8%.
Excluding automobiles, gasoline, building materials and food services, retail sales rebounded 0.7% last month. Data for March was revised slightly down to show these so-called core retail sales slipping 0.4% instead of 0.3% as previously reported. Core retail sales correspond most closely with the consumer spending component of gross domestic product. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, accelerated in the first quarter, offsetting the drag on GDP growth from an inventory liquidation.
Loss of R&D Deduction Hits Defense Businesses
A coalition of Aerospace Industries Association members is calling on leaders in Congress to reinstate timely tax deductions for research and development. New rules require companies to spread their research and development costs out over five years, as opposed to allowing businesses to immediately deduct them as they previously were. "We are already feeling the very real, punitive effects of this policy," the coalition writes. "When filing our taxes last month, many of us were hit by alarming numbers."
“These higher tax bills greatly reduce our cash flow – meaning that we will struggle to hire and retain qualified talent, and for some of us we will need to take ou loans to cover these larger-than-expected expenses. Additionally, we will have fewer dollars to invest into the future R&D that will keep our country on the cutting edge of aerospace and defense technologies – and ahead of our foreign competition,” the letter reads.
COVID News – Employers Need to be Careful About How They Proceed in the Post-COVID Emergency World
The official United States government-decreed COVID-19 national emergency may have ended on May 11, but employers still need to respond appropriately in the future, particularly when it comes to different requirements that continue to be in force in various states and other jurisdictions.
“The COVID-19 era of employment law is transitioning, and with this transition come new challenges that require employers to carry on the lessons gained from the pandemic about workplace safety,” say attorneys for the law firm of Proskauer Rose. “Employers should consult state and local requirements to determine what is necessary in order for them to comply with applicable law.” However, it is true that in the absence of applicable federal, state or local requirements, employers now have significantly more flexibility to determine how best to promote a productive and healthy work environment while mitigating the risk of workplace disruption from illnesses, the attorneys stress.
McCarthy and Biden Meet on Debt Ceiling
Democratic President Joe Biden and top congressional Republican Kevin McCarthy's U.S. debt ceiling negotiations ended on Tuesday after less than an hour, as the looming fear of an unprecedented American debt default prompted Biden to cut short an upcoming Asia trip. But the meeting ended on an upbeat and unexpected note as McCarthy, coming out of the meeting with Biden and other congressional leaders, said, "It is possible to get a deal by the end of the week."
"We've got a lot of work to do in a short amount of time," McCarthy told reporters, saying the less-than-an-hour session had set the stage for future conversations. Ahead of the Oval Office meeting, Biden and McCarthy's aides have discussed the requirements for two key programs that provide food and cash aid to families, in the past week's negotiations over raising the government's $31.4 trillion debt ceiling to avoid an economically catastrophic default. Expanding the work requirements has been a key demand of Republicans, who are also pushing for spending cuts in exchange for their votes to raise the debt limit.
With a Potential U.S. Default Just 15 Days Away, U.S. Tax Revenue is Coming in $250 Billion Short
So far this fiscal year, the IRS has brought in $2.7 trillion in tax receipts, according to the Congressional Budget Office. That’s about $250 billion short of what it predicted just a few months ago. And that shortfall is part of what makes this week’s debt limit talks so urgent. Economists were expecting a drop in tax revenue after last year’s boom — but not a 26% drop.
So, why were the forecasts so far off? “Full disclosure, we don’t really know,” confessed Caroline Bruckner, a tax expert at American University. She said the Congressional Budget Office is probably waiting for more data before it names a culprit. But if she had to guess, “It could be that there were fewer capital gains transactions.” Early in the pandemic, sales of homes, stock shares and other taxable assets were soaring, and so were capital gains receipts.
China April Industrial Output Rises 5.6%, Below Expectations
China's industrial output grew 5.6% in April from a year earlier, official data showed on Tuesday, missing expectations by a large margin but accelerating from a 3.9% gain seen in March. The data, released by the National Bureau of Statistics, lagged a 10.9% increase seen in a Reuters poll of analysts but it was the quickest growth since September 2022, largely due to the recoil effect from the contraction suffered last April when the commercial hub Shanghai was under stringent COVID lockdown.
China’s latest data follows a mixed picture in the country’s growth trajectory, with services remaining a bright spot in the economy despite factory data falling into contractionary territory in April. The Caixin China general manufacturing purchasing managers’ index fell to 49.5 in April, marking the first reading below the 50-mark in three months. The 50-point mark separates growth from contraction. The National Bureau of Statistics’ manufacturing PMI also fell to 49.2 in April from March’s reading of 51.9. Imports for the month also plunged further by 7.9%, missing estimates – exports rose 8.5%.
China’s Youth Unemployment Hits Record High in April in ‘Worrying Sign’ for Economic Recovery
Unemployment among China’s youth rose above 20 per cent for the first time in April, and the situation could continue to worsen, analysts said, presenting a growing economic and social risk for policymakers. The jobless rate for the 16-24 age group hit a record high of 20.4 per cent in April, up from 19.6 per cent in March, the National Bureau of Statistics (NBS) confirmed on Tuesday.
The overall urban surveyed jobless rate stood at 5.2 per cent in April, down from 5.3 per cent in March, but with 11.6 million college graduates set to enter the workforce this year, youth unemployment could increase further in the coming months.
NY Fed: Businesses Report Minor Deterioration in Recent Credit Conditions
Supplemental questions in the May 2023 Empire State Manufacturing Survey focused on current credit conditions—specifically past and projected changes in access to credit. Respondents were asked whether access to credit had worsened (less credit availability or higher costs of financing), improved (more credit availability or lower costs), or remained unchanged, in the last three months. About 20 percent of firms reported worsening conditions over the past three months.
When those reporting worsening conditions were asked about the specific factors that have been worsening over the past three months, the most highly cited factor was interest rates on both new and current loans. 86.4 percent of manufacturing firms said that interest rates on new loans had worsened. This factor was closely followed by worsening availability of new loans. When firms were asked whether they were, or are, considering any action in response to worsening credit availability, the most widely cited measures among manufacturers were adjusting the number of employees on payroll or wages, reported by nearly three in four respondents, followed by adjusting prices, reported by about half. The most widely cited measure among service firms was price adjustments.
Home Depot Sees First Annual Sales Decline in More Than a Decade, Cuts Forecast
After years of explosive growth during the pandemic, Home Depot’s revenue during the first quarter fell short of expectations and the company cut its profit and sales outlook for the year, sending shares lower at the opening bell. Home Depot on Tuesday projected its first decline in annual revenue since 2009 in the aftermath of the bursting of the housing bubble and financial crisis.
For the three months ended April 30, revenue dropped to $37.26 billion from last year’s $38.91 billion, and it was short of the $38.45 billion projected by analysts polled by Zacks Investment Research. Sales at stores open at least a year, a key indicator of a retailer’s health, dropped 4.5%, and it dropped 4.6% for stores in the U.S. The company earned $3.87 billion, or $3.82 per share, in the quarter. A year earlier it earned $4.23 billion, or $4.09 per share.
Ball Corp. Will Close Town of Wallkill Plant
The Ball Corp. aluminum can manufacturing plant on Ballard Road in the Town of Wallkill will be permanently closed down before the end of the year. A letter from John Campbell, vice president for government relations said the facility, built in 1972, does not have the room to add new equipment while at the same time, replace current machinery. “After careful consideration of these realities and discussions with the union in accordance with the collective bargaining agreement, the decision has been made to permanently cease operations at Ball’s Wallkill plant in Q3 or early Q4 of this year, subject to customer demand.”
The Wallkill Ball plant employs approximately 200 workers.
Climate Experts Are Split Over How Much CO2 Can be Cut With EPA’s Rule
When Congress passed $369 billion in clean energy subsidies last year, many energy modelers said more action would be needed to hit President Joe Biden’s climate targets. It arrived Thursday when EPA proposed to curb carbon dioxide emissions from power plants. Yet experts are split over whether the agency’s plan will deliver on the president’s promise to cut carbon emissions in half by 2030. Some said it could allow existing fossil fuel plants to avoid emission reductions this decade, and they expressed concern about provisions that seem to allow gas plants that serve peak power demand to avoid regulation altogether.
But others said the rule would reinforce existing market trends, which favor the adoption of wind, solar and battery technology, while providing an incentive for utilities to develop clean technologies like natural gas equipped with carbon capture and sequestration and geothermal, both of which can back up renewable sources of energy. The debate reflects the challenges facing a president who has pledged to reduce power sector emissions 80 percent by 2030, but is confronted by a conservative Supreme Court that has cast a skeptical eye on past EPA proposals to regulate CO2 from power plants.
When Is It Best to Insource Production?
To meet demand, U.S. manufacturers with a global footprint have typically depended on suppliers from low-cost countries or those with specific manufacturing or process expertise. But the rapid shift in consumer demand patterns and numerous supply chain disruptions over the past three years have forced a dramatic change in strategic sourcing initiatives. In the United States, recent government incentives under the Inflation Reduction Act and Chips and Science Act for developing and manufacturing EV components and semiconductors domestically have accelerated this move.
So when is insourcing a viable option? In many cases, cost is not a primary consideration. More important are improving supply chain resiliency and having more control over the value stream to better manage the inbound material flow and traceability, especially for custom part designs and complex assembly operations.