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Moody's Talks - Inside Economics
Manufacturing and Mark on Fire
Chad Moutray, Chief Economist of National Association of Manufacturers, joins the podcast to discuss manufacturing, supply chains, and labor market shortages. Mark is on a hot streak in the stats game.
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics and I'm joined as per usual by my two co-hosts, Ryan, Ryan Sweet, the director of real-time economics. Hi, Ryan.
Ryan Sweet: Hey, Mark. How are you?
Mark Zandi: Good, good. Ryan's a little perturbed because he couldn't get his mic to work. I'm not sure what that's all about, but we'll make do.
Ryan Sweet: Me and technology just never worked.
Mark Zandi: Yeah. But that's okay. You're coming through fine. I think no big deal, so good to have you. And of course, Cris, Cris deRitis. Cris is the Deputy Chief Economist. Hi, Cris. How are you?
Cris deRitis: Doing well.
Mark Zandi: Good, I understand-
Cris deRitis: Snowing here in Westchester.
Mark Zandi: I heard. How much snow are you going to get?
Cris deRitis: I think the estimate is anywhere from four inches to a foot.
Mark Zandi: Ooh, that's a big range. That sounds like a Ryan's forecast.
Ryan Sweet: Yeah, exactly.
Cris deRitis: You know? Yeah.
Mark Zandi: Only kidding. Ryan nailed it.
Ryan Sweet: No, dude.
Cris deRitis: Yes.
Mark Zandi: He got the Q4 GDP pretty close, I thought. Didn't you?
Ryan Sweet: Mm-hmm (affirmative).
Mark Zandi: You were like at 6.4%. It came in at 6.9, right?
Ryan Sweet: Yeah, that's correct.
Mark Zandi: I'm sure it's going to be revised down to 6.4, so.
Ryan Sweet: That's what I tell everybody.
Mark Zandi: Yeah.
Cris deRitis: Yeah.
Mark Zandi: Yeah. Well, we'll come back to that. I want to understand that report a little bit more. I've got my own views, but I'm curious about how you're thinking about that. And we have a guest, Chad, Chad Moutray. Chad is the chief economist. That's right, Chad. Aren't you? You're the chief economist of the-
Chad Moutray: I am the chief economist.
Mark Zandi: ... National Association of Manufacturers. Yeah. Very good. And how long have you been chief economist?
Chad Moutray: I've been chief economist for almost 11 years. And so, I'm chief economist at the NAM, but I also straddle over into the Manufacturing Institute where I am a center of one. I'm the Center for Manufacturing Research.
Mark Zandi: Oh. I'm sorry, what is the Center for Manufacturing?
Chad Moutray: So, the Manufacturing Institute works on workforce issues. It's more of the thought leader, non advocacy type of stuff. And it really stays in that workforce lane. And so, doing research and thought leadership in that space.
Mark Zandi: Great. Is that part of NAM or is that a totally different thing?
Chad Moutray: It's a separate legal entity, although obviously I have both hats, so I'm on both sides of the shop.
Mark Zandi: Great. And tell us, I'm really curious, how does one become the chief economist of the National Association of Manufacturers? What's your path to fame and glory?
Chad Moutray: So, I have this circuitous route to the current role. I actually started my career almost 20 something years ago as a Dean of business at Robert Morris College. I was business school Dean at 28-years-old.
Mark Zandi: Huh, impressive.
Chad Moutray: Robert Morris, if you are not familiar with it, used to be a secretarial school way back in the day and I was one of the first PhDs hired. So, that was my first job out of getting my PhD at Southern Illinois University in Carbondale. And lo and behold, I became dean after a year and I was dean for five years. And my claim to fame is I created the MBA program.
Fast forward, it is now part of Roosevelt University. So, some M and A happening in Chicago. And then from there, as you know, Mark, I went on to be chief economist at the SBA. So, I was at the U.S Small Business Administration's Office of Advocacy for eight years, from 2002 to 2010.
I think we put out 200 studies during that time and I was a talking head essentially on small business and entrepreneurship. My time came to an end. They had a new person that came in and I was, as it always happens in politics, I said, "You can stay till the end of the year and then you're out of here." And I landed at the NAM, which is where I've been now for 11 years. So, it's been a nice [crosstalk 00:03:56].
Mark Zandi: Well, Chad, just a deep, dark secret, they do the same thing in the private sector too. But you, that's-
Chad Moutray: Change in political wins and that's just what happens.
Mark Zandi: That's just what happens. That's just what happens. So, there is, I think, a pretty good nexus between small business and manufacturing, right? I mean, manufacturing is, you got obviously big multinationals, but you got a lot of small manufacturers as well.
Chad Moutray: Yeah. Over 90% of our members are smaller and medium size manufacturers. So, while you can think of all of the big names that we would have in our membership, many of the smaller ones, you probably haven't. Right? And yet they're the suppliers to those large OEMs. Right? And so, we have to pay attention to those pass-through issues as much as we do the multinational and corporate issues.
Mark Zandi: Yeah. Hey, just while you mention that, I have noticed in the employment data, the ADP employment data, we get this data from the human resource company and we can aggregate it up by company size. And it looks like that small businesses, those defined to be with fewer than 500 employees in terms of jobs, they held up better than the big guys. Is that what you've observed in the manufacturing sector? Is it?
Chad Moutray: That tends to be true. I tend to find it a little bit more for the medium sized manufacturers. They tend to be the most upbeat in my own survey that we do, the smallest ones with less than 50 employees have tended to struggle a little bit more. And you've heard they don't have the scale that some of the larger counterparts do. But yeah, I definitely think it's true for the medium size manufacturers.
Mark Zandi: Yeah, very interesting.
Chad Moutray: Although there was a couple of months there I saw in your study where large manufacturers actually had more job creation than the smaller medium ones. So, that was a bit of an aberration there for a couple of months.
Mark Zandi: Yeah. Interestingly, and it may go back to the Paycheck Protection Program, that's the program that was put in place with the CARES Act early on in the pandemic to help out companies with fewer than 500 employees. They get cash or they get money that turned into a grant if they used it to hold onto their payrolls.
And that seemed to have worked pretty well. And then after that program expired, which I believe was last summer, we did start to see some weakness there in small business employment, relative to the big guys. The big guys started to catch up.
Chad Moutray: Yeah. Yeah.
Mark Zandi: Yeah. Yeah. Anyway, great. I didn't realize you've been at NAM now for 11 years, so you have seen a lot of manufacturing history here. A lot of business cycles.
Chad Moutray: When I began, we were talking a lot about the Manufacturing Renaissance. I think we got tired of using that word, just like we get tired of using the word uncertainty now. Right? I think every year I've been at the NAM, we've talked about uncertainty. And now obviously the skills' gap and all the other uncertainty issues that are out there, the trade war, all right? The 2018 and 2019. And then obviously the supply chain stuff now. Yeah, just lots of change over that time period.
Mark Zandi: Yeah. Well, we'll come back to all of that. Obviously we want to dig deep into what's going on in the manufacturing base and obviously no better person than you to do that with. But before we get there, Chad, and I know you've listened in to a couple of these podcasts, we talk about the statistics. And the way we do this, just to make it a little bit more digestible to the average person, is to play a game.
We each name a statistic, the other folks try to figure out what that is by questioning that person. The best statistic is one that is released recently. For Ryan, Cris and I, it has to be this past week. For you, it can be anything, Chad. And you don't even have to play the game if you don't want to.
Chad Moutray: I have a number.
Mark Zandi: Okay, fantastic.
Chad Moutray: I've been thinking about this.
Mark Zandi: Oh, okay. Great. Yeah, fantastic. I knew I could count on you for a statistic. It also would be nice if the statistic is not too hard that there's no way to get it, but not too easy that it's a slam dunk and bonus if it's relevant to the topic at hand, which is manufacturing, that's even better.
So, I've gotten into the habit of starting with Ryan, because Ryan's so good at this. Let's stay with tradition. Ryan, what's your statistic?
Ryan Sweet: All right. There was a lot.
Mark Zandi: Yeah. This was a very active week. Yeah.
Ryan Sweet: A lot of numbers. This was a great week.
Mark Zandi: Yeah.
Ryan Sweet: But I'm going to go with 10.6% annualized.
Mark Zandi: 10.6% annualized. Is that in the GDP report?
Ryan Sweet: It is.
Mark Zandi: Is it investment/ spending?
Ryan Sweet: It's part of investment, yeah.
Mark Zandi: Is it intellectual property investment?
Ryan Sweet: Yeah. All right.
Mark Zandi: Ting, ting, ting, ting. Okay.
Cris deRitis: Wow, impressive.
Mark Zandi: Come on.
Cris deRitis: That was impressive.
Ryan Sweet: That was good.
Mark Zandi: Come on. That is-
Cris deRitis: Yeah.
Ryan Sweet: Yeah. That's impressive.
Mark Zandi: ... totally impressive.
Ryan Sweet: That was great. All right. Yeah.
Cris deRitis: That is Ryan Sweet.
Mark Zandi: Wait, wait, wait, wait. Chad, what do you think?
Chad Moutray: That was impressive.
Mark Zandi: That's what I'm going for. Impressive.
Chad Moutray: I was thinking it had to be a year over year number. Anyway, you went right to it, Mark. That was great.
Ryan Sweet: That was good.
Mark Zandi: I'm a Ryan Sweet whisperer. I know.
Chad Moutray: You know what's in his head.
Mark Zandi: I'm getting into his mind. Yeah.
Chad Moutray: You are. You're starting to... Yeah.
Mark Zandi: Yeah. He can't get into my mind. I'm going to give him a good shot at that. Okay. Ryan, why did you pick that number? I'm just curious.
Ryan Sweet: Well, first, this is the fourth time in the past five quarters it's been double digit growth in intellectual property. And this relates to future productivity growth, so investment in intellectual property today will affect productivity growth down the road, which we know is the firewall between wages and inflation. So, this above-trend productivity growth that we're seeing is probably here to stay for some time.
Mark Zandi: So, what is in intellectual property investment? What kinds of things go into that?
Ryan Sweet: Yeah. A good chunk of it is R&D. And then I believe there's software, so it's been really, really strong.
Mark Zandi: Right. And do you think it's because businesses are focused on the need to raise labor productivity, that's what's going on here?
Ryan Sweet: Yep.
Mark Zandi: Okay. Anything else driving that train? Is it maybe investments and supply chain, software-related?
Ryan Sweet: Yeah, maybe.
Mark Zandi: Supply chain.
Ryan Sweet: Work from home.
Mark Zandi: Work from home. Okay. That might be in there as well. And is there a strong relationship between investment in IP, intellectual property and future productivity gains?
Ryan Sweet: It's decent. I wouldn't say it's slam dunk, but historically it's been pretty solid.
Mark Zandi: Okay. Well, now that I have you, give us a general sense of that GDP number. So GDP for Q4 2021 came out this week. Big number, 6.9%. For the year, big number 5.7%. So, what's your take on the number and what it's saying about the economy?
Ryan Sweet: Well, Q4 wasn't great. That 6.9% is really distorted because of inventories. And I don't want to give too many numbers because I'm looking at Cris. I think I'm going to steal his number.
Mark Zandi: Okay.
Ryan Sweet: But if you strip out inventories, the economy grew only 1.9%. So, it's a little bit misleading. I mean, 1.9 it's okay, but we weren't booming close to 7% GDP growth as it looks like. We're getting worried for the first quarter because that inventory build was massive and it's unlikely that we're going to be able to duplicate that, so we could get a little bit of a hangover in the first quarter of this year.
But all in all, I mean, consumer spending was solid in the fourth quarter, but other than that, a lot of the details were weak. So, you got this big, grandstanding close to 7% GDP number but when you dig down into the bowels of the report it looked worse and worse than where [inaudible 00:12:12].
Mark Zandi: Yeah. I mean, so you're saying that obviously the top line number was Gangbusters 6.9% annualized, but a big chunk of that, I think it was 4.9 percentage points of the 6.9.
Ryan Sweet: Yes.
Mark Zandi: Was just the swing in inventory. Of course we need inventories because they got depleted. And I think in, Chad, correct me if I'm wrong. In manufacturing, they're still very, very lean in the manufacturing base.
Chad Moutray: Yeah, they are. And the numbers on good spending was not great. So, the consumer spending was great for services, but for durable and nondurable goods, it was pretty weak. Overall, business spending was pretty tepid as well, outside of intellectual property. So, a lot of Omicron and supply chain where it dragged that figure down.
Ryan Sweet: Yeah, we got the monthly details today with the personal consumption data. And real spending is not on a great trajectory heading into the first quarter. So, if you add that inventory is unlikely going to match what we got in fourth quarter. And our forecast, we have 2% GDP growth in the first quarter. I think that might be a little optimistic.
Mark Zandi: Well, let me ask you this, because I was tweeting today... Oh, by the way-
Ryan Sweet: Here we go. There it is.
Mark Zandi: @Markzandi. @Markzandi. Oh, and welcome, Ryan. I think you had your inaugural tweet this week.
Ryan Sweet: I did.
Mark Zandi: Did you not? Yeah.
Ryan Sweet: Yeah.
Mark Zandi: And now you're going to tell us what your tweeter, is it Twitter? Twitter handle is.
Ryan Sweet: Tweeter, Twitter.
Mark Zandi: Twitter, Tweet, Tweeter.
Ryan Sweet: It's @realtime_econ.
Mark Zandi: Oh, okay. @, what is it again?
Ryan Sweet: Realtime, one word.
Mark Zandi: @realtime_econ.
Ryan Sweet: Mm-hmm (affirmative).
Mark Zandi: Okay, great. Hey, Chad, do you have a Twitter handle?
Chad Moutray: I do. It's @ChadMoutray, so pretty simple.
Ryan Sweet: That's much easier to remember.
Mark Zandi: I like that one. I actually like that.
Ryan Sweet: Yeah, that one's better.
Mark Zandi: That's actually a little bit better. Yeah. Do you tweet a lot, Chad?
Chad Moutray: I do tweet a lot. I try to tweet. I do a Monday economic report that goes out every week. It goes to our members, but I also put up pretty widely on social. And during the week, I tend to tweet out some of those blurbs as well, including today. This morning I tweeted out stuff.
Mark Zandi: I don't know if I follow you. I got to follow you. All right.
Chad Moutray: Now I need to follow Ryan though.
Mark Zandi: Yeah. Are you following me, Chad?
Chad Moutray: I do. I do. And I don't know, Cris, I might follow you as well. I don't know, but-
Cris deRitis: Oh, I don't actually tweet.
Chad Moutray: ... are you on?
Mark Zandi: Cris doesn't lead, so I don't know what you're following exactly.
Chad Moutray: Oh, okay.
Mark Zandi: I know. Actually, that is very-
Cris deRitis: On LinkedIn.
Mark Zandi: ... uncharacteristic of me. Yeah.
Cris deRitis: LinkedIn.
Mark Zandi: Oh, LinkedIn. LinkedIn. Cris is like-
Cris deRitis: I'm all over it.
Mark Zandi: He runs the show there on LinkedIn. Yeah. Okay. Well, oh, that's great. So you said you tweeted today. I missed that.
Chad Moutray: I did. I did. The GDP and PCE and all that fun stuff.
Mark Zandi: Oh, right.
Chad Moutray: And Employment Cost Index, et cetera.
Mark Zandi: Yep. Right. Good. Hey. Okay. It feels like to me that Q1 could actually turn out to be negative GDP. I mean, the Omicron is doing some damage. December was a really bad month. Right? All the data seems to suggest it was a bad month.
Retail sales, unemployment insurance claims, the Consumer Spending data we got today, the income data we got today, and it feels like January employment, which we're going to get next week. Friday is jobs day, next Friday. Good chance that's negative. We actually lost jobs in January.
Ryan Sweet: There's a very good chance.
Mark Zandi: Yeah, very good chance. So, what are the odds that we're actually going to get a negative Q1 GDP number do you think, Ryan?
Ryan Sweet: I remember you asked me about Q4 GDP. What are the odds of them falling? And I said zero.
Mark Zandi: Well, that was like three months ago when we had Kevin on.
Ryan Sweet: Q1.
Mark Zandi: Kevin Hassett, former CEA. Oh, it was a great interview and he's such a great guy, but he got that wrong obviously. He was thinking it was going to be a negative Q4.
Ryan Sweet: I think he was off by one quarter, so I think the odds are-
Mark Zandi: I think he was off by one quarter.
Ryan Sweet: Yeah, I think odds are pretty high that we see a decline. Because that 5% or 4.9 percentage point contribution to GDP growth from inventories is among the highest since the early 1980s. That's going to be really, really difficult to... I mean, we need inventories, but with Omicron supply chain issues not really getting resolved too quickly, yeah. I'd say probably better than even odds that it falls.
Mark Zandi: Better than even odds that it falls.
Cris deRitis: Wow.
Mark Zandi: Okay.
Ryan Sweet: Mm-hmm (affirmative).
Mark Zandi: We still got February and March.
Cris deRitis: Yeah. Game's not over.
Mark Zandi: Yeah. It has to bounce back pretty strong though.
Cris deRitis: It does. It does.
Ryan Sweet: I mean, we dug ourselves a deep hole in January though.
Mark Zandi: Yeah.
Cris deRitis: I agree. I agree.
Mark Zandi: Hey, Chad, do you do explicit GDP forecasts in your work? Is that part of what you do?
Cris deRitis: I do. And we subscribe to Moody's Analytics. And so, I'm looking at what you're doing a lot as well, but yes I do. Yeah.
Mark Zandi: And do you have a sense or do you have any views yet? Have you thought about Q1 at all, whether that's going to be possibly negative?
Chad Moutray: I haven't been as negative as Ryan, but you guys are depressing me here. I mean, I suspect that you're starting to see Omicron waning a little bit here. And I think you're going to start seeing a bit of a return in February and March. Whether that's enough to overcome the weakness that you're seeing in January or the weakness in the inventories, I don't know. I actually don't think it's going to be negative for the first quarter, but maybe that's just the cautious optimism in me.
Mark Zandi: Yeah. I mean, the other thing that's-
Ryan Sweet: If not negative, it's going to be weak. It's going to be south of one.
Mark Zandi: Yeah. For sure. Yeah.
Ryan Sweet: Yeah.
Mark Zandi: Yeah. Well, because the other thing that's happening now is financial conditions are tightening. Right? I mean, the equity market decline we're down, I don't know what's going on today, but it feels like we're about down down 10% on the SMP, aren't we? Something like that.
Ryan Sweet: Close to it.
Mark Zandi: Of course, that's after 30% gain last year, so.
Cris deRitis: But still.
Mark Zandi: Bond yields are up. That's hurting refinancing activity and starting to feel it in the housing market. If you're paying attention, the pending home sales, that kind of thing. But I guess what we're saying here is, that's not great. Nobody likes to see a negative print on GDP, but don't get overly concerned. Right? Because as the Omicron prices through we, if history's any guide here, we come right back very quickly.
Ryan Sweet: Mm-hmm (affirmative).
Mark Zandi: Yeah. Okay. Feels like I'm still pretty optimistic about what's going to happen in 2022 in terms of growth.
Ryan Sweet: Yeah. We might get a weak first quarter, but then the second quarter would be very, very strong. So, just like Delta. Crushed us in Q3 and then look at Q4.
Mark Zandi: Okay. All right. Cris, do you want to go next? What's your-
Cris deRitis: Sure.
Mark Zandi: ... statistic?
Cris deRitis: I'm going to give you a twofer or related.
Mark Zandi: One twofer.
Cris deRitis: A twofer for housing. 17% and five days.
Mark Zandi: Ooh. That's interesting. 17%.
Ryan Sweet: Housing related.
Cris deRitis: No. No.
Mark Zandi: Not housing.
Cris deRitis: I follow the rules here. It's related to our topic of the day.
Mark Zandi: Oh, related to manufacturing.
Cris deRitis: Related to manufacturing, absolutely.
Mark Zandi: Okay.
Cris deRitis: Report came out this week.
Mark Zandi: A report that came out this week.
Ryan Sweet: Is it good starting year over year?
Cris deRitis: Nope.
Mark Zandi: Nope.
Ryan Sweet: This is in durable goods?
Cris deRitis: Nope.
Ryan Sweet: Ooh.
Mark Zandi: Is it related-
Cris deRitis: It was a report, so it's not a regular statistic.
Mark Zandi: Oh, it's not a economic statistic?
Cris deRitis: It is a statistic. It is.
Mark Zandi: Yeah, yeah, yeah. Right.
Cris deRitis: It's not a monthly release or anything.
Mark Zandi: Okay. It has something to do with-
Cris deRitis: Department of Commerce report?
Mark Zandi: Chips.
Cris deRitis: Chips. Semi conductors.
Mark Zandi: And it's the number of day supply of chips.
Cris deRitis: Five days is the number of day supply of ships down from 40 days prior to the pandemic. So, we are-
Mark Zandi: Wait, before you explain anything, Ryan, get the cowbell out, my friend.
Cris deRitis: What about the 17%?
Mark Zandi: Oh.
Ryan Sweet: I think you guys are in cahoots because there is no way. How did you know that?
Mark Zandi: I know stuff, Ryan. I just know stuff.
Ryan Sweet: That is outrageous. You guys are in cahoots.
Cris deRitis: What about the 17%? Can you connect the dots there?
Mark Zandi: Well, the 17% is, actually, I don't know what the 17% is.
Cris deRitis: That is the increase in demand of semi conductors from 2019 to today. 2020.
Mark Zandi: No-no. Can I ask, well, I didn't hear the cowbell. Where the hell is the cowbell?
Ryan Sweet: I just did it.
Mark Zandi: Chad, did you hear the cowbell?
Ryan Sweet: Yeah, I'll give it to you again.
Chad Moutray: I heard it [crosstalk 00:20:54].
Mark Zandi: There we go. All right. I am on a roll. I am on a roll, baby.
Cris deRitis: That was very good.
Mark Zandi: Okay. Now, because I didn't read the report, I read of the report, the 17% increase, over what period is that?
Cris deRitis: That is, I have the report right here.
Mark Zandi: Yeah.
Cris deRitis: 2019 to 2021.
Mark Zandi: Calendar year?
Cris deRitis: Well-
Mark Zandi: Is that calendar year 2021? That's only because, you see what I'm saying.
Cris deRitis: Yeah, it doesn't account. I'm sure it came out. I don't know that it fully accounts for the year. It doesn't give you the detail.
Mark Zandi: But it's some 2021 over 2019, so pre-pandemic.
Cris deRitis: Yeah.
Mark Zandi: It's up 17%.
Cris deRitis: Yeah. I don't know if that's an average or.
Mark Zandi: In the five days, as of what point in time? We have five days of chip supply on hand, if I'm stating that correctly.
Cris deRitis: Correct. That's the meeting inventory of semiconductors in 2021. Again, the report doesn't provide that-
Mark Zandi: Okay. In the year.
Cris deRitis: ... in the year.
Mark Zandi: Sometime in the year.
Cris deRitis: Yeah. I'm assuming it's some type of averaging.
Mark Zandi: So, it has nothing to say about like right now what's going on.
Cris deRitis: No, that's my impression. It's not. It's not as of December, it's as of the year. I think it was conducted on a survey basis.
Mark Zandi: Right, right. Hey Chad, does that resonate with you, those statistics, what's going on in manufacturing?
Chad Moutray: Well, definitely. I know you had GM's chief economist on last week. Right? And so-
Mark Zandi: Elaine Buckberg.
Chad Moutray: ... the chip shortage certainly is hitting the auto sector hard, but a lot of products have chips in them, right? Not just autos. So, we're seeing those shortages across the board and that's certainly affecting their ability to produce.
I mean, I think the good news is, to drift into where we might go later, the CHIPS Act and you're seeing a lot of investments. Just last week, I think Intel announced a huge $20 billion investment in Ohio. Right? So, a lot of other companies, Samsung, et cetera, are making similar investment announcements. So hopefully, will help out in 2023 and 2024. Doesn't really help the short term here, but certainly for here and now it's a big issue.
Mark Zandi: Yeah. Do you sense, like when we were talking with Elaine last week, again, the chief economist of GM, she generally was, I thought, upbeat about the chip, about shortages in general, the supply shortages in general. And she was making the point that chip production's up significantly in the fourth quarter globally and it's starting to have an impact on the ability of vehicle manufacturers around the world to produce more cars. And she sounded encouraging to me. Ryan, Cris, did you have the same sense of that conversation, that it was relatively upbeat?
Cris deRitis: Yeah. Yeah. And I think the Japanese manufacturers actually had a pretty good December in terms of their production. So, I think she's right. I think we are starting to see that come back on line, but.
Chad Moutray: We appear to have turned a corner there. Yeah.
Cris deRitis: We're still pretty lean.
Mark Zandi: And you sense the same thing, Chad?
Chad Moutray: Yeah.
Mark Zandi: Do you sense the same thing more broadly in the manufacturing base or just-
Chad Moutray: In general, yeah.
Mark Zandi: In general, yeah.
Chad Moutray: Yeah. Yeah. It's still one-offs there are still big issues.
Mark Zandi: Yeah. And I think Tim cook, I saw the Apple CEO also suggested that some of the supply chain issues seemed to be ironing themselves out and it helped out in terms of their activity in the fourth quarter. So, it feels like we're moving in the right direction. Okay.
Cris deRitis: It does. It certainly highlights our vulnerability though, right? To Chad's point, everything has a chip in it. Right?
Mark Zandi: Yeah.
Cris deRitis: This is a really important issue. And with so many of the hiring ships coming out of Taiwan, it's a key, strategic or geopolitical risk as well.
Chad Moutray: Aside of chips, we just ordered a new set of living room furniture and we were told it will come here sometime in four to seven months. So, it's not just chips.
Mark Zandi: Yeah, it's true.
Chad Moutray: Those supply chain issues are huge outside of other chips and cars.
Mark Zandi: Yeah. Well, let's come back to that. Anything else, Cris, on that report from the commerce department on what's going on in the chip industry [crosstalk 00:25:17]?
Cris deRitis: Oh, it's a really interested report. It's for the general public, right? So, it's a very easy read if anyone wants to take a look at it. But just again, I thought the points about the interconnection and how the chips are designed in the U.S and manufactured in Southeast Asia and just all those things have to go right in order to get the chip production.
So, I thought it was a good report in terms of highlighting the complexities of solving this issues. Why it is something that we can't resolve immediately and may linger for a bit longer.
Mark Zandi: Yeah. Did they do any kind of forecasting in the report?
Cris deRitis: No.
Mark Zandi: Okay.
Cris deRitis: No, they talked about some of the investments that are proposed.
Mark Zandi: Yeah, some of the investments.
Cris deRitis: But still that there would be a lag to get up a new fabrication plant. Right? It's not something you can turn around within a month or two. It's year [crosstalk 00:26:13].
Mark Zandi: It takes some time. Yeah. Well, someone else was making the point, it was Tim Way, one of our economists who tracks the supply chain issues and is really focused on the chip industry that a lot of the shortages are for a lower value-added chips, that that's where the most significant constraints are. Did that come through in the report as well?
Cris deRitis: I didn't see much-
Mark Zandi: Talk about that.
Cris deRitis: ... about that, but yeah.
Mark Zandi: Okay.
Cris deRitis: I wouldn't doubt that though.
Mark Zandi: Yeah. Okay. Hey Chad, you want to play the game?
Chad Moutray: I do. So I have an easy one and a hard one, which would you like?
Ryan Sweet: All right. Give Mark a hard one because I don't think we've had a, we've never had anyone go three for three, I don't think.
Mark Zandi: That's true.
Ryan Sweet: The pressure's on.
Mark Zandi: Let's start with the easy one.
Chad Moutray: So these are both... You want the easy first? Okay.
Mark Zandi: Let's go with the easy one first, because it's probably hard, but go ahead.
Chad Moutray: 4.1%.
Ryan Sweet: Is that year over year?
Chad Moutray: It is a year over year number, yes.
Mark Zandi: And is that-
Chad Moutray: Both of these numbers are manufacturing.
Mark Zandi: Oh, I know. I think I know what it is.
Chad Moutray: What is it?
Mark Zandi: The wage growth for manufacturing in the ECI, Employment Cost Index.
Chad Moutray: Okay. From this morning.
Mark Zandi: Oh my gosh. This is incredible.
Cris deRitis: Oh, wow.
Mark Zandi: What's going on here today?
Chad Moutray: I told you that was an easy one, Mark.
Mark Zandi: What are you talking about? Easy? Ryan had no idea what that statistic was.
Ryan Sweet: I knew that one.
Mark Zandi: Oh, come on.
Ryan Sweet: The Employment Cost Index. Yeah. Oh, it came out today. I was just going to let you have your moment in glory. [crosstalk 00:27:42] in it.
Mark Zandi: Oh, Lordy! Lordy! Lordy! Ring the cowbell. Okay, here we go.
Ryan Sweet: There we go.
Mark Zandi: Cowbell ring. Okay. This is like I am on fire baby.
Cris deRitis: Unprecedented.
Mark Zandi: Okay. Well, before you move on to the hard one, what do you think of that number, that 4.1%? What do you think?
Chad Moutray: Well, that was a record high for the ECI, which has only been around since 2001. And we'll probably get to this a little bit later in our larger conversation. But we continue to hear from manufacturers that the struggle for talent is real, right? In the local communities. And in our survey, it was 3.8 was the average.
And I would present that to some of the CEOs and they'd say, "We wish it was 3.8. It's actually probably 5 or more in some cases for some cities." So, definitely a lot of struggle for workers right now. They're having to compete against the service sector. Right? Which is paying even more than that. Right? In some cases on a year over year basis. So, that's a pretty significant increase.
Mark Zandi: Yeah. And this is a little broader point around the wages that I'm a little confused about and I'm just curious if anyone has a view on. Everyone likes the Employment Cost Index, the ECI. That's the wage number you just put forth. And they like it because it controls for shifts in the composition of the labor force.
So, in terms of industry, in terms of occupation, I think it's even more detailed than that within occupation that controls for mix. So, it's kind of a, apples to apples over time measure of wage growth, which is important, different than other measures.
One other wage statistic that does that in a different way but does it is the Atlanta Fed Wage Tracker based on, I think, CPS data. Hopefully they can continue to do this because I think the BEA is thinking about stopping provisioning of this data, but we can talk about that. But anyway, tracking the same worker and seeing what their wages are doing.
If you look at the ECI, the Employment Cost Index that came out that shows a market acceleration and broad-based acceleration wage growth, Ryan, what was the top line number for all across the board? Was it 5% or something for-
Ryan Sweet: Year over year?
Mark Zandi: Year over year, what was it? I can't remember.
Ryan Sweet: Yeah. I think it was close to five.
Mark Zandi: It was close to five.
Ryan Sweet: Quarter one was one.
Mark Zandi: Yeah. I think it was close to five year over year. But if you look at the Atlanta Fed Wage Tracker, it has accelerated, but not nearly to the same degree, at least through, I think the last data point I saw was for November. Or maybe December's out now and I haven't taken a look.
But Ryan or anybody, any sense of the differences there, why it's such a big difference? Do you know? Do you have any sense of that? No. Ryan, do you have any sense of that?
Ryan Sweet: I remember looking in this a while ago, so I got to remember what I found out. There's a little quirk because we have a wage tracker and basically what we do is we take all the most popular measures of wages. So average hour earnings, ECI, unit labor cost, land fen, and we mash them all up together and create this wage tracker. And we have to make an adjustment. I got to remember why we did make an adjustment to the Atlanta Wage, but I can get back to you next week about it.
Mark Zandi: Yeah. I'm just really curious. I mean, if you look at that Atlanta Fed, and the reason I like the Atlanta Fed data is because it breaks it out by different demographics. You can look across region, you can look across industry, you can look across full-time/part-time job holders versus job switchers. And the thing I really look at is wage growth by where you are in the wage distribution. And you can see all of the acceleration in wage growth is in the folks in the bottom half of the wage distribution. And particularly in the bottom quartile, the bottom 25% of the wage distribution.
The folks in the top half of the wage distribution have not seen any acceleration. And if anything, it feels like it's decelerated a little bit, particularly for the highest wage workers. So, that just seems a bit incongruous with the ECI, which feels like the wage growth's acceleration has been much more broad-based.
So, I'm just curious how, we got to figure out how, I would love to square those differences. What's going on? Because they're telling different stories at this point. Not completely different stories, but certainly in kind, they're very different, but okay. [crosstalk 00:32:35].
Ryan Sweet: Average hourly earnings for production workers is also at a 40 year high, 5.2. So, that also wouldn't necessarily square with accelerating activity from [crosstalk 00:32:48].
Mark Zandi: Right. Because manufacturing wages definitely aren't in the bottom quartile. They're in the middle to high part of the distribution.
Ryan Sweet: 24 bucks an hour. Yeah, yeah.
Mark Zandi: Yeah, 24 bucks an hour.
Ryan Sweet: For product work.
Mark Zandi: Yeah. Yeah, exactly. Okay. So Chad, you said you had a hard one.
Chad Moutray: I put on my old hat. This is a hint 2.2.
Mark Zandi: SPA.
Chad Moutray: Yeah. 2.2%.
Mark Zandi: Two point-
Chad Moutray: A number that came out this week.
Mark Zandi: It came out this week?
Chad Moutray: Yeah.
Ryan Sweet: Is it small business? Something related to small business?
Chad Moutray: Business employment dynamics data.
Mark Zandi: Oh, business employment dynamics data. I did not look at that data.
Ryan Sweet: This is a good one.
Mark Zandi: You said 2.2%.
Chad Moutray: 2.2%.
Mark Zandi: So, you're saying in the business employment dynamics related to small business, up 2.2%. Year over year?
Chad Moutray: Mm-hmm (affirmative).
Mark Zandi: No, quarter to quarter.
Chad Moutray: It's just a percentage of all.
Mark Zandi: Oh, percentage of. Oh.
Ryan Sweet: Is it related to manufacturing?
Chad Moutray: Yes.
Mark Zandi: Do you know, Cris? If I get this, you guys, you got to bow Jenny [inaudible 00:34:00] to me. I think that's a word.
Ryan Sweet: All right. Give a second.
Mark Zandi: Okay. We'll give you a second.
Chad Moutray: I told you this was a hard one. I was trying to think of a hard one and an easy one. And I did that.
Mark Zandi: It's like that jeopardy-
Cris deRitis: That's a hard one.
Mark Zandi: Ti, ti, ti, ti, ti, ti.
Chad Moutray: This is a great dataset to look at, but it's got hirings, layoff.
Mark Zandi: Yeah. Yeah. This is-
Ryan Sweet: Is it startups? Startups?
Chad Moutray: It is startups.
Ryan Sweet: Manufacturing startups.
Chad Moutray: That's right. You are right, Ryan.
Ryan Sweet: What's the two point... Is that as a share of total startups?
Chad Moutray: This is the second quarter, so there's a huge lag in all these data. There were 7,000 manufacturing startups in the second quarter, which is 2.2% of all manufacturing establishments.
Ryan Sweet: Oh, it was all of establishments.
Chad Moutray: That was the highest since the first quarter of 1998.
Mark Zandi: That is a great statistic.
Chad Moutray: Mm-hmm (affirmative). So, much like you're seeing increased entrepreneurship across the board during the pandemic. You're also seeing it in manufacturing. Unfortunately, it doesn't go any more detail to know like where are they starting, but it's a nice, fun statistic.
Mark Zandi: Yeah. So, the business employment dynamics, I'm trying to think of what is the underlying source data? Is it QCW quarterly census of employment wages? I don't know. Is it? Okay.
Chad Moutray: Yeah.
Mark Zandi: So, the unemployment insurance record data. And here in this data, it's quarterly, it's lagged, because there's a lot of processing that goes on. It shows increases in employment and declines in employment and they break it out in terms of new businesses, how much they're hiring, how much hiring is going on in existing business. It gives you a lot of detail. Lot of-
Chad Moutray: For the existing businesses it's whether they're expanding or all that fun stuff.
Mark Zandi: Yeah. So, you can get under the hood and see what's really driving the employment data. Why is it doing what it's doing? This really helps with that. And did you look more broadly, Chad? Did you notice whether business formation is up across the board or was that just pretty much-
Chad Moutray: I didn't in this case. I think in general, business applications were up pretty significantly, although you've seen that pullback a little bit here in the last couple of months, but around October it was a record high or something like that. So, you've seen a pretty significant increase in entrepreneurship over the fall.
Mark Zandi: So, how do you explain it? What's behind this surge in entrepreneurship, new business formation and manufacturing?
Chad Moutray: Well, in general, I'll say in general first.
Mark Zandi: In general, okay.
Chad Moutray: In general, people lose their job, right? Or people are reevaluating their work-life balance in this case with the pandemic and saying, "Hey, rather than working in a factory or whatever else, I'm going to go out and start my own job." And that's why you tend to see, especially in recessions or times of economic unease, more entrepreneurship.
In manufacturing, it's just easy to start up a job. Right? I mean, you're coming up with new innovations, you're coming up with a new, it's easy to start a business. Right? And so, I suspect that you're seeing some kind of tag along, maybe people who used to work in manufacturing who've come up with a new idea, they're going to go out and market it now and maybe become a supplier themselves, I guess.
Technology, I'm sure, is a big part of this conversation. Right? Again, I don't know a lot about those companies necessarily to know who it is. I think that that would be a great study to go in and see who are the new entrepreneurs, but I suspect there's a lot in the pharmaceutical or technology and that kind of space.
Mark Zandi: Do you have a sense that it's broad-based in manufacturing or do you think it is concentrated in pharma and tech?
Chad Moutray: I suspect it's more concentrated.
Mark Zandi: More concentrated. Right.
Chad Moutray: That's just a guess on my part.
Mark Zandi: Yeah. Although you make a great point, which we've talked about in the past on this podcast. If you look at the taxpayer identification data coming from the IRS, which is a good read on business formation, that's been up very strongly over the past year. And that is broad-based. That's across every industry, I think almost every region of the country, so is consistent with that.
Ryan, Cris, do you have any sense as to what could be driving the increase in entrepreneurial activity other than the things that Chad mentioned? Any other views on that?
Cris deRitis: I had a, more of a question or-
Mark Zandi: Yeah. Fire away.
Cris deRitis: ... an observation more on the... I was wondering if you get any sense in terms of who might be starting these businesses? Is it the old? Right? We see that 55 plus age workers are exiting labor force at higher numbers, but if they're going to start businesses, that's actually positive. Maybe we should reevaluate the data somewhat. So, do you think it's more the older worker who's branching out it or is it?
Chad Moutray: I think it's probably a little bit of everything, but there's definitely been increased retirements as you know, Cris.
Cris deRitis: Right. Right.
Chad Moutray: And they can come back and maybe work part-time or come back as a consultant. Right? And that would be an example of, I guess, some manufacturing consultant would still be in that [inaudible 00:39:12].
Mark Zandi: Yeah.
Chad Moutray: It could be [Crosstalk 00:39:14].
Cris deRitis: Or if they're starting businesses then certainly they're creating positions for others.
Chad Moutray: Yeah.
Mark Zandi: I don't think it's like proprietorships. Right? Because the number of people that are self-employed hasn't increased all that much, I don't think. Right? So, these are real companies. I mean, they're incorporating or partnerships. So, it's not like somebody losing their job and just putting out a shingle and say, "Hey, I'm starting a company." It feels more substantive than that. Right? Or do I have that wrong?
Chad Moutray: It probably is, but I think it's also self-reported. Right? You could report that you're 31 to 33, right? If that's who you're supporting. And no one's going to question you on it.
Mark Zandi: Yeah, got it.
Cris deRitis: Yeah.
Mark Zandi: That was a great statistic. Very good one, and I'll point out the only one I did not get, so just [inaudible 00:40:06].
Chad Moutray: That was Ryan. That was Ryan.
Mark Zandi: That was Ryan who got that. Way to go, Ryan. Good job. Good job. All right. I've got-
Ryan Sweet: This is your strongest showing ever.
Cris deRitis: By far. By far.
Mark Zandi: No, I've had a couple of showings over the year.
Ryan Sweet: This had got to be up there.
Mark Zandi: No, definitely up there. I'm very proud of my performance so far today, so I'll have to say.
Cris deRitis: What do you have?
Mark Zandi: Oh, this should not be hard. Just prefacing it that way. So, I'd be a little surprised if we have difficulty with this one. 4.9%. 4.9%. And it is a statistic that came out this week.
Ryan Sweet: Is it related to manufacturing?
Mark Zandi: It is not related directly to manufacturing, no. So, I don't get the bonus points for that.
Chad Moutray: And it's not a year over year number?
Mark Zandi: It is a year over year number. Yes it is indeed. Yeah.
Cris deRitis: GDP report?
Mark Zandi: GDP report, no.
Cris deRitis: No.
Mark Zandi: It has been obviously top of mind kind of like everyone's-
Chad Moutray: So, inflation?
Mark Zandi: Inflation. Very good. Very good. This should be easy. Yeah.
Ryan Sweet: Are you sure it came out this week?
Chad Moutray: Core PCE?
Mark Zandi: Core PCE.
Ryan Sweet: Oh, very good. Yeah.
Mark Zandi: Not this week, are you kidding me? It came out two hours ago, my friend.
Ryan Sweet: I know. I wrote the release on our site.
Mark Zandi: Oh, did you really?
Ryan Sweet: Mm-hmm (affirmative). The highest is 83, I believe.
Mark Zandi: That is right. So PCE, that's the consumer expenditure, deflator and core meaning X food and energy. This is the one inflation measure that the fed focuses on the most in terms of trying to set or think about where interest rates should be in the course of monetary policy. And 4.9% is, they want two, they're back down to two. So, this is obviously well, well above 2%.
My sense is that it's at or near a peak. Although I say that with less confidence as I would have a few weeks ago because the energy prices are up again, which is not a good thing. But it feels like we're at or near a peak. Particularly if the supply chain issues are ironing themselves out, labor market certain iron themselves out after Omicron passes through. But I think that's an important statistic to focus on.
Chad Moutray: So, do I get a cowbell? Did I hear a cowbell?
Mark Zandi: Yeah. Well-
Ryan Sweet: Oh, yeah.
Mark Zandi: Yeah.
Cris deRitis: It's a cowbell.
Chad Moutray: Okay.
Mark Zandi: Yeah. Way to go. Excellent. Great job.
Ryan Sweet: That's very good.
Mark Zandi: Okay. Before we dive in, I have one other question around monetary policy, because this was also the week that the federal reserve met and we got another read on what they're thinking. And Ryan, do you want to give us just a summary of where they landed at the FOMC meeting, the Federal Open Market Committee meeting this week?
Ryan Sweet: Yeah. So, they used the January meetings to tee up a rate hike in March. So, they're very likely going to start normalizing monetary policy with regards to interest rates in March. And they're really going to push back against market pricing, which is betting on four rate hikes this year. That's what's in our forecast. But the general takeaway is that they have these zero tolerance for any upside surprises in inflation.
So, we start to see inflation running hot early this year, four hikes turns into five. But all in all, there wasn't a lot of surprises in the meeting. We knew they were going to tee it up for March. Quantitative tightening is going to start one to two meetings, and quantitative tightening is a reduction in the size of the balance sheet, one or two meetings after the first rate hike.
So, March rise rates, July probably start letting the balance sheet run off. But they're clearly really worried about inflation and that's why they're going to start pushing put their foot on the break this year.
Mark Zandi: I read, and I'm just curious if this is right, that the market, the financial markets, the investors are pricing in nearly five quarter point rate increases this year. Is that right?
Ryan Sweet: Yeah. It's not fully priced in, it's close. And I'd say four is the most likely scenario.
Mark Zandi: But markets seem to have even gone beyond that at this point. They're almost at five.
Ryan Sweet: Mm-hmm (affirmative). Yeah. Yeah, and I think part of it was Powell, fed chair Powell, in his post-meeting pressor was very, very hawkish. They pulled it off with the statement, they got their point across that rates are going to rise soon, markets there was a little bit of a relief rally and then Powell started speaking and he was very, very hawkish. And that clearly rattled markets. And I think that's what's contributing to them penciling in maybe a fifth rate hike.
Mark Zandi: So, it feels weird, doesn't it? I mean, here we were talking about employment declining in January, GDP falling in the first quarter and yet we're on the high alert with regard to short term interest rates. Yeah. Do you think there's a risk that people are getting ahead of themselves here on these rate hikes?
Ryan Sweet: The number, yes. I think they're going in March no matter what. They've already teed that up.
Mark Zandi: Already teed that up.
Ryan Sweet: They'll play off January, even if employment declines in February, which is unlikely, but let's just say it's Omicron, it's temporary, things are going to bounce back. And they're laser-focused on these inflation numbers, and Powell has no tolerance. So, he's going to start clamping down.
Mark Zandi: Yeah.
Chad Moutray: There's a lot of pressure from consumers. You saw consumer confidence fall today to a 10 year low. Certainly in our survey it's the number one issue. I think there's just a lot of pressure right now to deal with inflation. Everyone's talking about it, right? Real wages essentially are negative, right? At this point. Even with those 40 year highs that I just talked about earlier. So, I think there's a lot of pressure for policymakers to do something about this. Yeah, I think March is going to happen as well kind of [crosstalk 00:46:38].
Mark Zandi: Yes. Well, in your forecast, Chad, do you now have four rate increases this year or what do you have?
Chad Moutray: Yes.
Mark Zandi: You do.
Chad Moutray: I have four.
Mark Zandi: You have four. Yeah. One a quarter?
Chad Moutray: Yeah.
Mark Zandi: Going forward?
Chad Moutray: Yeah. Wasn't it Jamie Dimon who came out and said that there's going to be seven over the next year and a half or something like that. So, I think that also is in the back of people's minds as well. But I think, yeah, four for this year.
Mark Zandi: Oh, I missed that. I didn't hear him say that. So seven, that's kind of one a quarter or something like that. Yeah.
Chad Moutray: Mm-hmm (affirmative).
Mark Zandi: Yeah. Okay. Okay. And that's what we think they're going to do. Chad, is that what they should do? Are you on board with that?
Chad Moutray: I think the fed is behind the curve a little bit. Now, granted that's what's happening now is perhaps changing that cactus a little bit. But clearly the inflation right now is to the level that they clearly are behind the curve and they feel like they have to do something. Yeah, I think yes.
Mark Zandi: Yeah. And you, Ryan, you shook your head in the other, you said no, you don't think.
Ryan Sweet: No.
Mark Zandi: What do you think? What do you think?
Ryan Sweet: They should wait.
Mark Zandi: Wait for what?
Ryan Sweet: Wait. There's no rush. Inflation is going to moderate. All right. So, I sympathize with the view that they're behind the curve when you have inflation where it is now, but it's going to moderate this year. So, there's the potential that they tighten too fast, too soon and they undermine the labor markets.
Now, what really rattled financial markets was when Powell said that we could raise rates a lot. And he said a lot before we hurt the labor market. And I don't buy into that. We're at zero, we can get up to two, but I think they got to do this gradually. I'm afraid they're going to slam their foot on the brake.
Mark Zandi: Right. So, your instinct now is that they should know not be raising rates as quickly. That they should wait till, what, May, June, see what?
Ryan Sweet: Yeah, June.
Mark Zandi: June.
Ryan Sweet: Yep.
Mark Zandi: Interesting. Okay.
Ryan Sweet: Because by June, inflation will be moderating a lot.
Mark Zandi: Yeah. Cris, do you have a view?
Cris deRitis: Somewhat sympathetic to Ryan's view. I think they will hike in March because it would be a mistake at this point not to.
Mark Zandi: The pretty much said it. Yeah.
Cris deRitis: If they don't, it's going to be more destructive.
Mark Zandi: Yeah.
Cris deRitis: But then I do believe that inflation is going to roll over here and fade from the, at least that's one of my key assumptions. And I think there are a lot of other risk that are out there, that Ukraine, Taiwan, another wave of the pandemic. I think there are enough factors out there that they're not going to be able to raise as quickly. So, I'm penciling in three personally, but.
Mark Zandi: Oh, you think there'll be three rate increases?
Cris deRitis: Yeah.
Mark Zandi: Yeah.
Cris deRitis: Just because there are so many other factors here. And I think the supply effects are going to, you'll agree.
Mark Zandi: Well, I think chair Powell used the word nimble too. Right? And humble, which I think really applies. I mean, because, I mean, we'll just have to see how this goes.
Cris deRitis: Yeah. Because it's just job owning then.
Mark Zandi: Yeah, exactly.
Cris deRitis: In the presser.
Mark Zandi: Yeah. Right. Okay. Hey, let's turn to the topic at hand in manufacturing. And I want to preface there's a lot to talk about, but one thing I want to start off is a big picture. And I was doing a little bit of preparation before this for our conversation and I noticed industrial production in manufacturing.
So, just focused on output in the manufacturing base. It goes up and down all around with the business cycle. No surprise. And it is back up, it got creamed at the teeth of the pandemic a couple of years ago, but it's made its way back and back to where it was pre-pandemic, maybe a little bit higher. But it really hasn't gone anywhere for almost, I don't know, 20 years.
I mean, if you can go back to the end of the cycle leading into the Y2K bubble bursting, the tech bubble when that burst in 1999/1998, industrial production is just about back to where that was. It really hasn't gone anywhere in 20 years. Is that, Chad, a fair characterization of the reality of what's been going on in the manufacturing base? You mentioned Manufacturing Renaissance, but you just don't see it in that data.
Chad Moutray: I don't think you see it in that data because that's an index. But when you look at the overall data from the BEA, when you look at real value added, right? Real value added actually has been all time highs for much of the last couple of quarters, right?
So, you are seeing more output in general in the manufacturing sector, not just in a nominal way, but also on a real price-adjusted way. And so, I actually think the manufacturing continues to hit on all cylinders. I think what's really hurt it over the last couple of years has been the trade war. And then obviously this pandemic supply chain issues over the last year or so.
What I like to say is manufacturing demand actually is pretty strong right now. Again, let's take the disappointing number we're getting in December and January out of it. In general, manufacturing demand has been pretty strong. I think the challenge for the sector when I talk to them is that being able to meet that demand has been the challenge, right? With some of those capacity issues.
Mark Zandi: Right. Right.
Chad Moutray: But you're seeing overall, I think, in terms of real output, continued growth over that time period.
Mark Zandi: Right. So, the IP, the industrial production numbers index that comes from the fed, which is supposed to be a measure of real output. Right? That's what that's supposed to be. You're saying that that probably is not capturing the reality of what's going on here?
Chad Moutray: That's my view. I mean, again, you can look at different numbers there, but-
Mark Zandi: But if you look at real value added, which is also another measure of output, that's in dollar terms, like 2012 dollars, I didn't look at that. You're saying that is up.
Chad Moutray: And real exports were an all time high before the trade war. We weren't far from that before the pandemic as well, so I think in general when you're looking at other measures like overall output or exports, you clearly see that the manufacturing sector had been, certainly over the longer term, growing and getting bigger, and in my view, getting more productive, right?
We have 12.5, 12.6 million workers right now. We had almost 20 million obviously at its peak. So, we're certainly doing a lot more with less. And so, I think you have that debate quite a bit about, is manufacturing shrinking or not shrinking or staying the same? I still see it as a sector that's growing and growing pretty steadily and reason to be bullish about it.
Mark Zandi: Yeah. So, when you look across the globe, and I don't know if you do this, but is U.S manufacturing holding onto market share, global manufacturing market share or are we still losing? I mean, obviously we lost a boatload of share when China came on the scene with the WTO in 2001, we got creamed in the decade or so that followed, have we stabilized?
Chad Moutray: It stabilized.
Mark Zandi: It has? Okay.
Chad Moutray: This has nothing to do with my performance, but when we came on board, the U.S was the number one manufacturer in the world. Right? That was one of our talking points. We quickly moved away from that stat because it quickly became China. Right? And so, we did lose market share for many years, but that has stabilized a bit.
Mark Zandi: Right. And of course, when I say manufacturing, that encompasses a lot of different activities, right? Everything from, we talk about technology, to the vehicle industry, to furniture, to clothing, to food processing, to petroleum refine. I mean, I can go on and on. In fact, I think I can tell you every single NECs code. I bet you know every, do you know every NECs code? Ryan does.
Chad Moutray: Yeah. I know them in general, but don't quiz me on it right now. Yeah.
Mark Zandi: Ryan, what's 3-1-3?
Ryan Sweet: 3-1-3.
Mark Zandi: See, I tell you. He'll come up with it in five minutes, he'll come back with it. He won't Google, I promise.
Ryan Sweet: It's not electrical equipment, is it?
Mark Zandi: Actually, I have no idea. I don't know. I know 3-1 is manufacturing, but I don't what 3-1-3.
Ryan Sweet: I think it's a nondurable good, but I can't-
Mark Zandi: It's a nondurable good. Okay. If I get this, this would be amazing, right? 3-1-3, I'm going to say-
Ryan Sweet: Hold on. I'm going to look it up to make sure you're right.
Mark Zandi: Wait, wait. And I'm not, look, you can see my hands are right here. I'm not doing anything. 3-1-3. I'd say that is... I would say-
Cris deRitis: I would not [crosstalk 00:55:32].
Mark Zandi: What? Oh, really?
Cris deRitis: Go for it. Go for it.
Mark Zandi: I'm going to get it wrong. I'm going to say that's leather processing.
Cris deRitis: No.
Ryan Sweet: Nope.
Mark Zandi: What is it? Oh, come on.
Cris deRitis: Textile manufacturing.
Mark Zandi: Okay. Leather. Oh, come on now. Leather processing, textile manufacturing.
Chad Moutray: That was pretty close, apparel.
Mark Zandi: Come on.
Chad Moutray: It was close.
Cris deRitis: All right. It was close.
Mark Zandi: It's close. Come on. Chad. Chad.
Chad Moutray: It's pretty close. I like it.
Mark Zandi: Come on. And I bet it is leather manufacturing in the textile industry. Okay. All right. All right. I'm impressing myself this podcast. That's all I'm saying. That's all.
Ryan Sweet: How many trips to Wawa did you make today?
Mark Zandi: Well, I am in Daytona Beach, Florida, home of where my wife grew up with, I'm at my mother-in-law's. Believe this or not, there is a beautiful, big Wawa in Daytona Beach, Ormond Beach. And I went to it this morning, had my hazelnut... Do you have Wawa? You have Wawas in D.C, don't you, Chad?
Chad Moutray: There is one in the city of the District of Columbia. That's it.
Mark Zandi: Oh.
Chad Moutray: They tend to be more of a-
Mark Zandi: We've got to change that. Wawa, come on, man. Chad, do you like Wawa?
Chad Moutray: Sure. Sure.
Mark Zandi: How could he say no. No, fuck I really don't like Wawa.
Chad Moutray: If I'm going to get a coffee, it's probably a Starbucks coffee, but yeah, yeah.
Mark Zandi: Yeah, I'm telling you. I woke up this morning, 6:30, got in my car and drove over the Ormond Beach Bridge to the spanking brand new Wawa, got my coffee. My mother-in-law and my wife, all good. Here you go. This is the devoured Wawa cup of coffee. Yeah, there you go.
Ryan Sweet: I don't know what they put in the coffee, but you're on fire today.
Cris deRitis: On fire today.
Ryan Sweet: You got to keep going to that one.
Mark Zandi: Back to the topic at hand. Sorry, we digress. We digress. So, I guess my question was, is the strength of the nation's manufacturing base broad-based, is it across all industries or some? I guess tech is shining through and pharma, you mentioned. Any others that are shining through?
Chad Moutray: Chemicals obviously. Well, part of chemicals is pharma, right? So, you got to attribute it to that as well. The number one sector actually that has bounced back the most since the pandemic is aerospace, but that has largely to do with the aerospace-
Mark Zandi: Boeing.
Chad Moutray: ... sector being in a different place today than it was a couple of years ago.
Mark Zandi: Well, that's Boeing, right? I mean, that's got to be, they got-
Chad Moutray: A number of companies. Always be careful there, but yes.
Mark Zandi: Oh, sorry. Sorry. Sorry about that. But they're-
Chad Moutray: Yeah, feeling better.
Mark Zandi: ... the largest exporter in the country. I mean, they're a big part of the nation's manufacturing. They're the prowess really, so yeah.
Chad Moutray: I mean, at the other end of the spectrum, paper, textiles tended to lag behind.
Mark Zandi: Right, right.
Chad Moutray: And because of the chip shortage, post-pandemic, the motor vehicle sector really struggled this year. Right? It's down about 6% in terms of industrial production since January. But that's a unique thing. The auto sector actually was the fastest to bounce back to pre-pandemic levels last summer. Right? So, this is all about chips and supply chains more recent.
Mark Zandi: Yeah. Let's go there because that's a great point. I mean, the vehicle industry production is down, but not because there isn't demand. There's a lot of demand, a lot of pent up demand. We talked about that last week with Elaine Buckberg of GM. It's about, I can't produce and the supply chain issues.
So, we've already danced around this a bit, but how would you characterize the supply chain problems today and are they getting better, not getting better? Where are we in this path to normalization in the supply chains?
Chad Moutray: You do get a sense that the ports issue is getting better, right? So, that was the conversation three or four months ago. You still have long waits in the ports, but it's not as bad as it was. Right? My view is a little bit of deja vu all over again. Ryan will love this. Right?
So, certainly, when you're thinking about Omicron and what's happening abroad, right? So, you have cities that are being shut down again in pockets of Asia, that's affecting ports, it's affecting production. And that certainly slows down the supply chain coming into the U.S.
The issue with the ports, in addition to everything, is the volume is also not enough dock workers, right? So, it's a supply chain issue, but it's also a workforce issue. And then once they get it off the boats, there's not enough truck drivers, right?
So, you have all of these things compounding into this larger, slowing of the overall process. At the factories themselves, there are right now, I know you guys cited this number last week from the Household Pulse Survey, 8.8 million, not just manufacturing, but generally 8.8 million people in the last report that said that they were out sick with COVID or taking care of someone's COVID related.
That's also slowed down production. You've seen a couple of stories of that more recently too where that's affected overall employment. So, in general, you get a sense that the supply chain issues are getting better, and yet there are these lingering workforce and ports and Omicron issues that are plaguing overall production.
I did ask on our most recent NAM Outlook Survey, when do you expect... So, this was a December, right? So we'll be asking this question again in the next week when I ask it again. But when do you expect the supply chain issues will abate or get better? And 54% of our members said this year, 2022, but almost all of that was the second half, right? So, I think 38.8 or whatever was the second half of the year.
And that's mostly what I hear from our manufacturers is that there's cautious optimism that supply chain issues will get better in the second half of the year, that some of these port issues and some of the other supply chain issues will start getting better. But you have about, a little bit more than a quarter who just think it won't get better until next year, the 2023 or later, right?
The chip issue that we've talked about several times, it's going to take a while to dig out of that hole, right? Just the volume of chips that you need, electric vehicles, a lot of other... As technology gets more sophisticated, you need more chips, right?
And so, it's going to take a while to dig out of that hole, and the workforce issues aren't going to go away, right? We aren't going to suddenly overnight get more truck drivers. We're not suddenly overnight going to find these workers for manufacturing and of the jobs. And so, I think that's more of a structural issue that's going to continue on throughout this year and into next year. So, I'm optimistic, cautiously optimistic about the supply chain issues, but I think that lingering issue, and why, actually going back to our earlier conversation, I think inflation will be, even though it is going to improve, it's going to stay a little bit more elevated than we would like, is I think those wage pressures are going to continue to hover out there and it's going to take a while for us to get past it.
Mark Zandi: Yeah. When you talked about supply chain issues, you talked about it in the context of the ports, is that the most significant issue here or it's just really getting things through the ports to-
Chad Moutray: That was a huge bottleneck, still is a bottleneck. So, it's one of the larger bottlenecks that's out there. That obviously is getting better. And what I like to say here is that, if you flash forward a year or two, it'll be interesting to see how many companies take advantage of this opportunity. Right? And say, because some companies have seen freight cross go up, not just double or triple. One company told me their freight costs have gone up eight times. Right?
Mark Zandi: Wow.
Chad Moutray: So, you have a lot of small and medium size manufacturers that this is like, how can I make payroll with these huge wage increases I have to pay and then you have to pay for it. So, I actually think this is a unique opportunity for manufacturers to say, "Well, maybe I should make it here." Right?
Mark Zandi: Yeah.
Chad Moutray: Rather than shipping it across. So, this brings up, to me, the whole reshoring conversation again, right?
Mark Zandi: Mm-hmm (affirmative). Yeah.
Chad Moutray: That you're going to have companies that are reevaluating their supply chain and saying, "If not the U.S, at least North America where I don't have to perhaps ship it across the ocean." And so, I do think companies have that opportunity now to do that, right?
You're seeing that a little bit with the chip sack, right? Where we're seeing a lot of increased production in the U.S for chip production, right? To bring some of that back home or to create new opportunities here. But I think every manufacturer tells you the reevaluating of supply chain, but that means different things to different companies.
I think this is a unique opportunity and I think policy makers need to focus on that to say, "Okay, this is an opportunity for more reshoring, what can I do to incentivize that so that we can have more resilient supply chains moving forward, but also have more production here in general." Right? I think that that onus really is on policy makers to not mess it up, I guess.
Mark Zandi: When manufacturers say reshoring, do they mean U.S, or do they mean North America, or they mean not Asia, or what do they mean exactly? Or is it all over the place?
Chad Moutray: It traditionally is us, although I would argue that North America benefits from that in general. Right? So Canada, Mexico. And so, a lot of the reshoring that's taken place probably has come to North America writ large, but you still see foreign direct investment in the U.S in manufacturing hit record highs. Right? So, you're still seeing a lot of investment here that's taking place.
Mark Zandi: So, your sense is because of the supply chain issues that were laid bare by the pandemic, and there are probably issues there that just were never stressed. And now that we stress the system, we see where the bottlenecks are. You're saying because of that, you think that there will be significantly more investment in manufacturing in the United States going forward?
Chad Moutray: Yes. Yes.
Mark Zandi: Yeah.
Chad Moutray: Now, companies were reevaluating a supply chain anyway. Right? There's just been a whole host of events over the last 5 to 10 years. Right? Whether it's [crosstalk 01:05:41].
Mark Zandi: Going back to the Japanese earthquake and-
Chad Moutray: Then the trade war, right?
Mark Zandi: Trade war.
Chad Moutray: Everyone was talking about. But I think this unique opportunity here, especially given where freight costs have gone, I think companies are going to look at that in a different way.
Mark Zandi: Yeah. Right. I guess the one other constraint though, coming home is labor, right? I mean, manufacturing had a very severe labor shortage even before the pandemic, because you had a lot of older workers, boomers that are retiring taking a lot of skills with them. Younger workers had not been going into manufacturing and that was before the pandemic. And of course, the pandemic has exacerbated all that. So, did I characterize that correctly? Is that-
Chad Moutray: That is very accurate.
Mark Zandi: That's very accurate.
Chad Moutray: Manufacturers are really worried about where that next generation of workers is going to come from. Right? We've got to identify according to Deloitte and the Manufacturing Institute, more than 2 million workers over the next decade. Right? To fill those jobs the people who are leaving and retiring, where are those new people going to come from? Right?
And so, we've been trying to encourage more women to go into manufacturing, to more military veterans, right. To encourage more diversity in general. And as it relates to older workers, manufacturers tell us they don't want their people who are nearing retirement to leave. Right? Because they don't want to see that talent walk out the door, but they also don't have someone necessarily there to take that place. Right?
And so, we've done a lot lately on retention. And we did a study with AARP on multi-generational teams that came out a couple of months ago where if you can try to incorporate different generations to try to increase productivity there. But this is a huge issue.
Mark Zandi: It doesn't seem like there's an obvious solution here. Right? Because you got labor shortages all across the board. Again, pre-pandemic, this was happening and post-pandemic very much obvious. The only way out it feels like is-
Chad Moutray: Part of it is perceptions challenge. Right?
Mark Zandi: Perceptions. Okay.
Chad Moutray: People, when you think about manufacturing, you have this perception out there that manufacturing is dark, dirty or dangerous or whatever, or you just think, well, it's not cool, or I want to go work for Google or Meta, or one of those other companies.
Mark Zandi: Well, they're becoming manufacturers to some degree too. Right?
Chad Moutray: Yeah. And I think what you have to recognize is that manufacturing has also become very high tech. Right? Very advanced. In many ways, there's a blurring of the line. Some of those companies, Microsoft is a member, right? Some of those companies make more money from services than they do from goods. Right?
And so, there is this blurring of the lines between what is a manufacturer and what isn't, and we're competing for talent with some of those folks. Right? And so, I think just recognizing that there are some very unique opportunities there, it's a high paying job, it can be a fun job, I think that's part of the challenge that we need to overcome.
We have an initiative called Creators Wanted, which is a bus that goes around the country. It's our got milk campaign where they invite kids in and see how cool manufacturing is. We do Manufacturing Day where manufacturers open their doors for young adults and kids in school. And I think all of those things are really just try to change perceptions about just how cool manufacturing could be, I guess.
Mark Zandi: Yeah. Yeah. Well, there's also so much technological innovation going on in manufacturing that is really critical to our long term competitive advantage and just the nation's overall health. I mean, I just was looking at some of the advances in robotics that's going on. It's just incredibly amazing.
Chad Moutray: That goes back to Ryan's number from the game, right?
Mark Zandi: Yeah, exactly.
Chad Moutray: All the investments in R&D, and productivity, and automation. I read, I think it was a story in The Wall Street Journal about a month ago, more robots were sold last year than in any other year. Right? If you take the first three quarters and annualize that, we sold more robots than ever, right? Automation is clearly the key.
And it means that manufacturers are trying to fill those gaps wherever they can, but it also exacerbates the skills gap problem, right? Because if you are using some of these newer technologies, whether that's 5G, or Augmented Reality, or whatever it might be, it means you need a different type of worker, right? Means a more high paying worker. But it also means you're competing now against with all those tech guys, right?
So, that struggle for talent is one that is probably exacerbated by the automation that's going into the plants right now.
Mark Zandi: Well, so my takeaway here is you're optimistic about manufacturing, particularly in the context of the pandemic and the supply chain issues manufacturing is coming home. Obviously lawmakers, policy makers are focused on this and are working to try to incent bringing that home and making our supply chains more resilient.
And the issue here, and the near term obviously is working through the supply chain issues globally, but longer run, it's about the labor supply. Where do we get the folks that are going to have the skills and the talents necessary to work in this sector? Did I get that roughly right?
Chad Moutray: That is exact. I couldn't have said it better.
Mark Zandi: Okay. Ryan, did you hear that? This is my show. I nailed everything throughout this show. You got it? Ryan, do you agree? He's shaking his head, no.
Ryan Sweet: No. No, this was your best podcast.
Mark Zandi: Best podcast, I have to say.
Ryan Sweet: Just don't let it go to your head.
Mark Zandi: Okay. That's fair. It already has. But you know.
Ryan Sweet: I know. I know. Cris and I are here. This is what we're here for, to help-
Cris deRitis: Bring it down.
Mark Zandi: Well, now that you say that, before we let Chad go, are there any questions or things that you would like to bring up to Chad? Any particular issues that we didn't cover that you'd like to cover?
Cris deRitis: I guess from my perspective, it sounds like manufacturing is going to return, but it's certainly going to return to the U.S in a different form than it left. Right? So, very high tech. So, as you talked about that reshoring, it sounds like, yeah, we'll get all of the highest high tech firms coming to the U.S, but then perhaps the ones that are still more labor intensive, they may still go to Mexico. Right?
Mark Zandi: Or other neighboring countries, if there is some type of reshoring, is that your sense of things or?
Chad Moutray: In general. In general, but I think even in the apparel and textile sector, you're seeing production return to the U.S because of automation. Right? And so, I think that there are certainly opportunities here in the U.S even in those sectors which we might have, in the past, back were studying economics in grad school or whatever, said, "Yeah, those are going to go away." Right?
I think that there are unique opportunities for some of those industries which are more labor intensive to come back because of technology, because they perhaps need less labor than they used to.
Mark Zandi: Ryan, anything? You got the world's biggest brain on manufacturing sitting here right at this podcast, anything you'd like to know?
Ryan Sweet: I thought the biggest hurdle for reshoring was the age of the capital stock for manufacturing, which in the U.S, it's pretty old. So, that'd be a big, upfront investment for manufacturers. Do you think that's a big hurdle or there's ways around it?
Chad Moutray: It can be a hurdle, but keep in mind, certainly you can incentivize that through tax policy, right? We've done a lot to encourage more investments, certainly accelerating those investments that has helped. Right?
Ryan Sweet: Mm-hmm (affirmative).
Chad Moutray: I think the other thing to watch, and we didn't really talk about it here is the regulatory environment over the next few years has clearly shifted as well and companies are looking at sustainability in ways that they might not have looked at it five years ago. Right? [inaudible 01:13:45] and being net zero between now and 2050.
So, all of that really is going to need modernization and newer equipment. Right? And so, I think already you're seeing, companies have already done a lot in that space as it relates to climate, but I think you're going to see them, there's a pivot here where companies are really going to be looking at their facilities and wanting to get to net zero, wanting to be sustainable, wanting to be climate friendly. And I think that will also shift and has shifted this conversation in a way that, again, we wouldn't have described it say 5, 10 years ago.
Mark Zandi: It really feels like there's got to be a lot of investment here. Right?
Chad Moutray: Mm-hmm (affirmative).
Mark Zandi: I mean, a lot of just reshoring because of all the issues, the need to focus on labor productivity given the labor supply issues, the need to focus on lowering the manufacturing carbon footprint, given all the scrutiny on climate change. This feels like there's going to be a lot of investment, so that number that Ryan called out on intellectual property, which is more than just manufacturing, obviously, but manufacturing's a big chunk of it, that feels like that's going to be a big number for a while to come.
Chad Moutray: I think manufacturing accounts for about 58% of R&D in the private sector.
Mark Zandi: Yeah, exactly.
Chad Moutray: Yeah. So, it definitely has a big impact.
Mark Zandi: Yep. Great. Well, Chad, this was a wonderful conversation. We really appreciate it. Thank you for taking time out of your day and helping us out here. Very kind of you. And to the listener, please, if you have suggestions for future podcast, go to economy.com and you'll see a place there to give us your view and let us know.
We love to hear from you. If you have a review of the podcast, any suggestions, I constantly get suggestions from people. Someone told me that we should begin with the game before we start talking, going deep into the statistics because it messes up the game but I hear all kinds of suggestions. So, please fire away. We're very interested in hearing your comments. So with that, we'll call it a podcast. Thank you very much.
