Economic and Manufacturing Outlook

Presented by: Dan Meckstroth, Ph.D.Vice President and Chief Economistdmeckstroth@mapi.net

Yuan and Euro Exchange Rates20

1020

1120

1220

1320

14

4185

241

883

4191

341

944

4197

442

005

4203

642

064

4209

542

125

4215

642

186

4221

942

220

4222

142

222

4222

342

226

4222

742

228

4222

942

230

4223

342

234

4223

542

236

4223

7

90

95

100

105

110

115

120

125

130

Chinese Yuan to One U.S. Dollar Euro to One U.S. Dollar

Ind

ex 2

010=

100

U.S

. D

oll

ar A

pp

reci

ates

Rel

ativ

e to

Cu

rren

cy

Source(s): U.S Bureau of Labor Statistics and MAPI

Euro Appreciation Has More Impact on the U.S. Than The Yuan

Jan

-08

Jul-

08Ja

n-0

9Ju

l-09

Jan

-10

Jul-

10Ja

n-1

1Ju

l-11

Jan

-12

Jul-

12Ja

n-1

3Ju

l-13

Jan

-14

Jul-

14Ja

n-1

5Ju

l-15

-20

-10

0

10

20

30

40

50

Power Production Industrial Value-addedSteel Production

Per

cen

t C

han

ge

(Yea

r/Y

ear)

Jan

-08

Jul-

08Ja

n-0

9Ju

l-09

Jan

-10

Jul-

10Ja

n-1

1Ju

l-11

Jan

-12

Jul-

12Ja

n-1

3Ju

l-13

Jan

-14

Jul-

14Ja

n-1

5Ju

l-15

35

40

45

50

55

60

65

70

PMI, HSBC

Per

cen

t

Manufacturing PMI

Source(s): Left – China’s Bureau of Statistics Right - China Federation of Logistics and Purchasing and HSBC

China Manufacturing Production Weaker Than Reported

Power and Steel Production and Industrial Value-added

2010

2011

2012

2013

2014

4185

241

883

4191

341

944

4197

442

005

4203

642

064

4209

542

125

4215

642

186

-30

-20

-10

0

10

20

30

40

50

60

Nonferrous Metals Food and Beverages

Per

cen

t C

han

ge

in a

3-M

on

th M

ovi

ng

Ave

rag

e (Y

ear/

Yea

r)

Change in Prices by Commodity

*U.S. Hot Rolled Sheet and StripSource(s): Left – IMF, Right – IMF and U.S. Bureau of Labor Statistics

Deflation in Commodity Prices

Change in Commodity Prices

Metal

Percent change in a 3-Month Moving Average

Ending in July

Aluminum -7

Cooper -16

Nickel -34

Lead -13

Zinc -2

Steel* -21

Energy Dollars Per

Brent Oil (Brl) -44

US Gas (MMBtu) -36

2010

Q1

2010

Q2

2010

Q3

2010

Q4

2011

Q1

2011

Q2

2011

Q3

2011

Q4

2012

Q1

2012

Q2

2012

Q3

2012

Q4

2013

Q1

2013

Q2

2013

Q3

2013

Q4

2014

Q1

2014

Q2

2014

Q3

2014

Q4

2015

Q1

2015

Q2

(F)

2015

Q3

(F)

2015

Q4

(F)

2016

Q1

(F)

2016

Q2

(F)

2016

Q3

(F)

2016

Q4

(F)

2017

Q1

(F)

2017

Q2

(F)

2017

Q3

(F)

2017

Q4

(F)

20

30

40

50

60

70

80

90

100

110

120

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

Henry Hub Natural Gas Acquisition Price of Imported Crude Oil

Do

llar

s p

er B

arre

lD

ollars p

er Millio

n B

tuSupply Induced “Good” Deflation

Price of Oil and Gas

Source(s): U.S. EIA and MAPI

Jan

-10

Mar

-10

May

-10

Jul-

10S

ep-1

0N

ov-

10Ja

n-1

1M

ar-1

1M

ay-1

1Ju

l-11

Sep

-11

No

v-11

Jan

-12

Mar

-12

May

-12

Jul-

12S

ep-1

2N

ov-

12Ja

n-1

3M

ar-1

3M

ay-1

3Ju

l-13

Sep

-13

No

v-13

Jan

-14

Mar

-14

May

-14

Jul-

14S

ep-1

4N

ov-

14Ja

n-1

5M

ar-1

5M

ay-1

5Ju

l-15

2015

Q3

(F)

2016

Q1

(F)

2016

Q3

(F)

2017

Q1

(F)

2017

Q3

(F)

90

95

100

105

110

115

120

125

130

135

140

Major Currency Trade Weighted Dollar Other Important Trading Partner

Ind

ex 2

010=

100

A Sudden, Rapid Appreciation of the Dollar

Trade Weighted Currency Index

Source(s): Federal Reserve Board

U.S. Foreign Trade Prices20

12

2013

2014

4185

2

4188

3

4191

3

4194

4

4197

4

4200

5

4203

6

4206

4

4209

5

4212

5

4215

6

4218

6

4221

7

4224

8

4227

8

4230

9

4233

9

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Exports Except Food and Fuel Imports Except Food and Fuel

Per

cen

t C

han

ge

(Yea

r/Y

ear)

Source(s): U.S Bureau of Labor Statistics and MAPI

Deflation in U.S. Foreign Trade Prices

2014 2015 (F) 2016 (F) 2017 (F)-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Consumption Nonresidential Investment Residential InvestmentChange in Private Inventories Net Exports Government

Per

cen

tag

e P

oin

t C

on

trib

uti

on

2.9%-0.6%=2.3%2.7%-0.3%=2.4%

3.3%-0.4%=2.9% 3.2%-0.5%=2.7%

Consumers Drive Growth

Contribution to GDP Growth

F=ForecastSource(s): U.S. Bureau of Economic Analysis and MAPI

2008

Q1

2008

Q2

2008

Q3

2008

Q4

2009

Q1

2009

Q2

2009

Q3

2009

Q4

2010

Q1

2010

Q2

2010

Q3

2010

Q4

2011

Q1

2011

Q2

2011

Q3

2011

Q4

2012

Q1

2012

Q2

2012

Q3

2012

Q4

2013

Q1

2013

Q2

2013

Q3

2013

Q4

2014

Q1

2014

Q2

2014

Q3

2014

Q4

2015

Q1

2015

Q2

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

Consumption Spending Total Employment

Per

cen

t C

han

ge

at A

nn

ual

Rat

eConsumer Spending Growth Driven By Jobs

Inflation-Adjusted Consumer Spending and Job Growth

Source(s): U.S. Bureau of Economic Analysis and U.S. Bureau of Labor Statistics

Inventory Levels Rose In the First Quarter Ja

n-1

0M

ar-1

0M

ay-1

0Ju

l-10

Sep

-10

No

v-10

Jan

-11

Mar

-11

May

-11

Jul-

11S

ep-1

1N

ov-

11Ja

n-1

2M

ar-1

2M

ay-1

2Ju

l-12

Sep

-12

No

v-12

Jan

-13

Mar

-13

May

-13

Jul-

13S

ep-1

3N

ov-

13Ja

n-1

4M

ar-1

4M

ay-1

4Ju

l-14

Sep

-14

No

v-14

Jan

-15

Mar

-15

May

-15

Jul-

15S

ep-1

5N

ov-

15

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35

1.40

Manufacturing Inventory to salesWholesales Trade Inventory to Sales

Inve

nto

ry T

o S

ales

Rat

io

Source(s): U.S. Census Bureau

An Inventory Correction Likely in 2015 Q2

Federal Reserve Senior Lending Officer Survey and Capital Investment Growth19

90 Q

219

91 Q

119

91 Q

419

92 Q

319

93 Q

219

94 Q

119

94 Q

419

95 Q

319

96 Q

219

97 Q

119

97 Q

419

98 Q

319

99 Q

220

00 Q

120

00 Q

420

01 Q

320

02 Q

220

03 Q

120

03 Q

420

04 Q

320

05 Q

220

06 Q

120

06 Q

420

07 Q

320

08 Q

220

09 Q

120

09 Q

420

10 Q

320

11 Q

220

12 Q

120

12 Q

420

13 Q

320

14 Q

220

15 Q

120

15 Q

4

-40

-20

0

20

40

60

80

100 -20

-15

-10

-5

0

5

10

15

Banks Tightening C&I Loans to Large Firms (inverted) Private non-residential fixed investment

Net

Per

cen

tag

e o

f B

anks

Tig

hte

nin

gP

ercent C

han

ge (Y

ear/Year)

Source(s): Federal Reserve Board and Bureau of Economic Analysis and MAPI

Lending Survey Signals Decelerating Investment Growth

2015 H1 2015 H1

$Billions Percent Change

Manufacturing 82.1 56

Food/beverage/tobacco 6.6 8

Chemical 41.9 125

Plastic/rubber 3.2 66

Nonmetallic mineral 1.4 59

Fabricated metal 0.6 -29

Computer/electronic/electrical 3.1 -50

Transportation equipment 11.6 167

Other manufacturing 6.1 -56

Manufacturing Construction Put-in-Place, at Annual Rate

Major Comment About the Slide

Source(s): U.S. Census Bureau

GDP Growth Manufacturing Production Growth

Impact of Change Revision Previous

Impact of Change Revision Previous

2011 -0.4 2.7 3.1

2012 -0.1 2.2 2.3 -1.9 1.5 3.4

2013 -0.7 1.5 2.2 -1.7 1.3 3.0

2014 0.0 2.4 2.4 -0.7 3.4 4.1

May 2015 0.1 0.4 0.3

Source(s): Bureau of Economic Analysis and the Federal Reserve Board

GDP and Manufacturing Production Revisions

Key Economic Statistics Revised Down

Manufacturing Industrial ProductionD

ec-0

6M

ar-0

7Ju

n-0

7S

ep-0

7D

ec-0

7M

ar-0

8Ju

n-0

8S

ep-0

8D

ec-0

8M

ar-0

9Ju

n-0

9S

ep-0

9D

ec-0

9M

ar-1

0Ju

n-1

0S

ep-1

0D

ec-1

0M

ar-1

1Ju

n-1

1S

ep-1

1D

ec-1

1M

ar-1

2Ju

n-1

2S

ep-1

2D

ec-1

2M

ar-1

3Ju

n-1

3S

ep-1

3D

ec-1

3M

ar-1

4Ju

n-1

4S

ep-1

4D

ec-1

4M

ar-1

5Ju

n-1

5S

ep-1

5D

ec-1

5

85

90

95

100

105

110

115

Total Manufacturing Non-High Tech Manufacturing

Ind

ex 2

012=

100

Source(s): Federal Reserve Board and MAPI

U.S. Manufacturing Is Recovered

GDP Expenditure Categories

Inflation-Adjusted Percent Change

2014 2015(F) 2016(F) 2017(F)Gross Domestic Product 2.4 2.3 2.9 2.7Total Consumption 2.7 3.1 3.3 3.0 Durables 5.9 6.1 7.3 6.7 Nondurables 2.1 2.7 3.2 2.7 Services 2.4 2.8 2.7 2.5Nonresidential Fixed Investment 6.2 3.3 6.8 5.5 Equipment 5.8 3.1 7.9 5.9 Information Processing Equipment 3.8 1.7 10.2 9.6 Industrial Equipment 7.3 6.1 13.0 8.5 Transportation Equipment 11.8 6.8 1.2 -1.1 Intellectual Property Products 5.2 6.6 6.1 5.0 Structures 8.1 -0.9 5.5 5.4Residential Fixed Investment 1.8 8.3 9.5 8.2Exports 3.4 1.7 4.1 4.1Imports 3.8 5.9 6.0 6.8Federal Government -2.4 -0.5 0.0 0.1State & Local Government 0.6 1.0 1.3 1.4

MAPI Economic Forecast

F=ForecastSource(s): MAPI Foundation, August 2015

Economic Indicators

Percent Change or Level as Specified

2014 2015(F) 2016(F) 2017(F)Prices (% change)Consumer Prices 1.6 0.0 1.7 2.4 Excl. Food & Energy 1.7 1.8 1.9 1.9Producer Prices, Finished Goods 1.9 -3.7 1.2 2.8

Energy ($)Imported Crude Oil ($ per barrel) $89.6 $45.6 $48.5 $63.1Natural Gas Henry Hub Price ($mmbtu) $4.4 $2.9 $3.4 $3.9

Other Key MeasuresNonfarm Inventory Change (Billion 2009$) $65 $87 $44 $42Light Vehicle Sales (Million units) 16.4 17.1 17.5 17.8Housing Starts (Million units) 1.001 1.116 1.315 1.447Federal Surplus (NIPA, Billion $) -$632 -$583 -$576 -$589Current Account Balance (Billion $) -$390 -$426 -$383 -$445

LaborUnemployment Rate (%) 6.2 5.4 5.1 5.1Payroll Employment (% change) 1.9 2.1 1.6 1.5

Production (% change) Manufacturing (SIC Basis) 2.5 2.1 3.4 3.1 Computers & Electronic Products 2.9 1.5 6.1 5.9 Non-High Tech Manufacturing 2.5 2.3 3.3 2.9

MAPI Economic Forecast

F=ForecastSource(s): MAPI Foundation, August 2015

Industry

Inflation-Adjusted Percent Change

2014 2015(F) 2016(F) 2017(F)

Manufacturing - SIC Basis 2.5 2.1 3.4 3.1Food 1.3 2.4 2.7 2.1Textile Mills -0.5 5.6 -1.0 -2.3Textile Product Mills 3.4 -1.3 -0.9 -3.4Apparel -2.0 -0.3 -2.1 -3.3Wood Products 3.7 0.7 5.2 3.0Furniture & Related Products 6.5 4.2 6.0 4.0Paper & Products -2.7 0.3 0.8 0.1Printing Support Activities 1.1 1.3 0.5 0.0Petroleum & Coal Products 1.4 3.0 3.2 0.8Chemicals 1.8 3.5 3.8 4.5Rubber & Plastics Products 7.4 4.9 3.8 4.5Nonmetallic Mineral Products 3.9 3.7 6.1 5.7Primary Metals 2.6 -4.0 2.9 2.0Fabricated Metal Products 2.8 1.3 3.1 2.9Machinery 4.7 -0.1 2.7 4.5Computers & Electronic Products 2.9 1.5 6.1 5.9Elec. Eq., Appliances, & Components 2.1 3.8 4.2 2.6Aerospace Products & Parts -1.2 4.1 6.5 7.2Motor Vehicles & Parts 10.4 9.0 6.7 0.4Miscellaneous 5.2 2.5 3.2 2.9All Less Comp., Commun., & Chips 2.5 2.3 3.3 2.9

MAPI Manufacturing Production Forecast

F=ForecastSource(s): MAPI Foundation, August 2015

Manufacturing Growth Slows Due to Strong Dollar and Less Drilling