MAPI’s Outlook on the Manufacturing Economy

byThomas J. Duesterberg

President and Chief Executive OfficerManufacturers Alliance/MAPI

to theSteel Manufacturers Association

Annual Board of Directors MeetingLongboat Key Club

Longboat Key, FloridaFebruary 13, 2004

Celebrating our 70th anniversary

Over 450 member companies representing well over $2 trillion in annual sales

Leading economic research organization for manufacturers

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Member-driven research, including benchmarking surveys, management studies, leading indicators for manufacturing sector, and policy analysis

Just-released book—U.S. Manufacturing: The Engine for Growth in a Global Economy

About the

U.S. Exports and Imports, 1960-2003(Percent of GDP)

Source: U.S. Department of Commerce

0

2

4

6

8

10

12

14

1619

60

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

Imports

Exports

Exports Imports 1990 2002 1990 2002 Canada 21.1 24.6 18.1 19.1 European Union 26.3 22.0 20.0 20.6 Japan 12.3 7.9 18.2 11.1 Other Advanced Economies 3.4 3.2 2.4 2.0 Total Advanced 63.1 57.6 58.7 52.7 Mexico 7.2 14.9 6.0 12.3 China 1.2 3.4 3.1 11.4 Southeast Asia 9.4 11.1 15.8 13.8 Other Developing Economies 12.0 7.6 11.3 4.3 Total Developing 29.9 37.0 36.1 41.7 Unclassified 7 5.4 5.2 5.6

Geographic Distribution of U.S. Exportsand Imports, 1990 and 2002

(Percent of total)

Source: World Trade Organization (1990) and U.S. Bureau of the Census (2002)Note: Southeast Asia includes Taiwan, South Korea, Hong Kong, Singapore, Malaysia, Philippines, Thailand, and Indonesia.

U.S. Productivity Growth, 1992-2003(Percent growth per year)

0

1

2

3

4

5

6

7

8

9

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Source: U.S. Department of Labor

Durable Goods

Manufacturing

Overall Business

Average Annual ManufacturingProductivity Growth, 1990-2002

(Thousands of employees)

Sources: Estevão and Lach, U.S. Bureau of Labor Statistics, U.S. Bureau of Economic Analysis, and author’s calculations

Dollars Per HourAverage Annual Percent Change

1990 2002 1990-2002

Reported 31.40 49.90 3.8

Corrected for outsourcing 31.10 47.20 3.5

1990 1995 1997 1999 2001 2002

U.S. 100.0 100.0 100.0 100.0 100.0 100.0

European Union 84.8 90.4 89.7 88.1 88.9 86.9

Japan 70.7 73.0 74.3 74.3 74.0 72.5

East Asia (4)

35.6

43.1

45.7

46.4

48.9

SE Asia (4) 11.7 14.7 14.6 12.8 13.1

China 6.3 8.2 8.8 9.4 9.0

South Asia 6.1 6.8 7.0 7.1 7.3

Productivity in Developing and Developed Economies

Levels of GDP per hour worked, 1990-2002, U.S. = 100

East Asia: Korea, Taiwan, Hong Kong, SingaporeSoutheast Asia: Malaysia, Indonesia, Thailand, PhilippinesSouth Asia: India, Bangladesh, Sri Lanka, Pakistan

Source: The Conference Board

60

70

80

90

100

110

120

130

140

150

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Index (1990 = 100)

Export Price Index

Consumer Price Index

Producer Price Index

Producer Price Index for Manufacturing Industries and Export Price Index for

Industrial Supplies, 1990-2003

Source: U.S. Bureau of Labor Statistics Note: 2003 reflects data through September.

In millions of

dollars

As percent of total corporate

cash flow

As percent of manufacturing

output 1990 169,469 37.2 16.3 1991 152,544 32.2 14.6 1992 156,937 30.7 14.5 1993 166,462 30.9 14.7 1994 205,249 33.8 16.8 1995 234,362 34.7 18.2 1996 241,834 33.9 18.4 1997 257,725 33.3 18.7 1998 225,528 30.9 15.8 1999 245,950 30.4 16.6 2000 231,573 30.0 15.2 2001 198,239 25.3 13.9

U.S. Manufacturing Cash Flow, 1990-2001

Source: U.S. Bureau of Economic Analysis, U.S. Department of CommerceNote: Cash flow is defined as the sum of undistributed profits and depreciation allowances.

0

10

20

30

40

50

60

70

UnitedStates

Canada Mexico Japan China Germany UnitedKingdom

SouthKorea

Taiw an France

1997 2003

Percent

Statutory Corporate Tax Rates for the United States and Its Nine Largest

Trading Partners, 1997 and 2003

Source: KPMG Corporate Tax Rate Survey

Statutory corporate tax rate

(percent)

Difference from U.S.

(percentage points)

United States 40.0 — Canada 36.6 -3.4 Mexico 34.0 -6.0 Japan 42.0 2.0 China 25.0 -15.0 Germany 39.6 -0.4 United Kingdom 30.0 -10.0 South Korea 29.7 -10.3 Taiwan 25.0 -15.0 France 34.3 -5.7 Trade-weighted average of above countries -5.6

Burden of the Corporate Tax Rates on U.S. Manufacturing’s Raw Cost Competitiveness Relative

to the Nine Largest U.S. Trading Partners, 2003

Source: Chart 6 and author’s calculations

Employment Cost Index, Manufacturing Workers, 1993-2003

0

1

2

3

4

5

6

7

8

9

10

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Wages & Salaries

Benefits

Percent change, quarter to year ago

Source: U.S. Department of Labor, Bureau of Labor Statistics

Benefits as a Percentage of Total Compensation for Manufacturing Production Workers, United

States and Its Nine Largest Trading Partners, 2001

Sources: U.S. Bureau of Labor Statistics and “The Labor Market Dynamic in Post-Reform China: History, Evidence, and Implications,” Manufacturers Alliance/MAPI, ER-561e, September 2003Note: China data include health benefits only.

Benefits as

percent of total compensation

Percentage point

difference from U.S.

United States 20.6 Canada 15.8 -4.8 Mexico 11.2 -9.4 Japan 11.2 -9.4 China 8.0 -12.6 Germany 24.2 3.6 United Kingdom 15.5 -5.1 South Korea 29.6 9.0 Taiwan 9.1 -11.5 France 31.3 10.7 Trade-weighted average of above countries -5.5

0

2

4

6

8

10

12

14

16

UnitedStates

Canada Mexico Japan China Germany UnitedKingdom

SouthKorea

Taiw an France

publicly-funded privately-funded

Percent of GDP

Publicly and Privately Funded Health Care Expenditures in the United States and Its Nine

Largest Trading Partners, 2001

Source: Organization for Economic Cooperation and Development and World BankNotes: Data for China reflects total health expenditure; no public-private disaggregation is available. Data for Taiwan date from 1996 and are taken from Eva Liu and Joseph Lee, “Health Care Expenditure and Financing in Taiwan,” Hong Kong Provisional Legislative Council Secretariat report, June 1998.

Cost of Tort Litigation, United States andIts Nine Largest Trading Partners, 2000

Tort costs as percent

of GDP

Manufacturing tort costs as percent of

manufacturing output

Percentage

point difference from U.S.

United States 2.0 4.5* —

Canada 0.8 1.4* -3.1* Mexico N/A 0.6* -3.9* Japan 0.8 1.2* -3.3* China N/A 0.6* -3.9* Germany 1.3 3.8* -0.7* United Kingdom 0.6 1.1* -3.4* South Korea N/A 0.6* -3.9* Taiwan N/A 0.6* -3.9* France 0.8 3.2* -1.3* Trade-weighted average of above countries -3.2

Source: Tillinghast-Towers Perrin and author’s calculations* For countries lacking data (Mexico, China, South Korea, and Taiwan), this analysis conservatively assumes that their relative manufacturing tort costs are equal to half that of the United Kingdom, the lowest of all countries with available data.

U.S. Federal Budget Outlays for RegulatoryActivities, 1990-2003

Millions of Dollars 1990 2003

Percent change

Social regulation Consumer safety 2,205 4,324 96.1 Transportation 1,996 9,034 352.6 TSA 0 4,756 N/A Transportation excluding TSA 1,996 4,278 114.3 Workplace safety 1,158 1,471 27.0 Environment 4,812 6,493 34.9 Energy 560 677 20.9

Economic regulation Finance and banking 1,574 1,792 13.9 Industry-specific regulation 574 813 41.6 General business 859 2,260 163.1

TOTAL 13,739 26,864 95.5 TOTAL excluding TSA 13,739 22,108 60.9

Source: Mercatus Center and Weidenbaum Center

Manufacturing Compliance Costs Associated With U.S. Regulations Compliance Activities,

1992 and 1997(Expressed in constant 2000 dollars)

Source: W. Mark Crain and Thomas D. Hopkins, “The Impact of Regulatory Costs on Small Firms,” Office of Advocacy, Small Business Administration, October 2001, Table 9A.

Total cost, 1997

($billions) Per-employee

cost, 1997

Environmental 69 3,691

Economic 48 2,553

Workplace 16 838

Tax compliance 15 822

Total 147 7,904

Cost of Pollution Abatement, United States and Its Nine Largest Trading Partners, Late 1990s

Pollution

abatement costs as

percent of GDP

Manufacturing pollution

abatement costs as percent of

manufacturing output

Percentage point difference

from U.S.

United States 1.6 7.6* — Canada 1.1 4.8* -2.8* Mexico 0.8 3.1* -4.5* Japan 1.4 5.3* -2.3* China N/A 1.6* 6.1* Germany 1.5 5.2* -2.4* United Kingdom 1.0 4.7* -3.0* South Korea 1.7 4.3* -3.3* Taiwan N/A 1.6* 6.1* France 1.4 6.1* -1.5* Trade-weighted average of above countries -3.5*

Source: Organization for Economic Cooperation and DevelopmentNote: As in Table 9, the analysis conservatively assumes that countries with missing data (China and Taiwan) bear a pollution abatement burden equal to half the lowest value of other trading partners (in this case, Mexico).

Natural Gas Prices in the United States and Its NineLargest Trading Partners, 1994–2001

(Dollars per million British thermal units)

1994 2001 Percent change

United States $2.87 $4.83 68.3 Canada 1.98 2.74 38.4 Mexico 2.01 4.12 105.0 Japan 11.75 10.24 -12.8 China N/A N/A N/A Germany 4.65 4.74 1.9 United Kingdom 3.57 3.37 -5.6 South Korea N/A N/A N/A Taiwan 7.11 7.27 2.3 France 3.57 4.71 31.9

Source: U.S. Energy Information Administration

United States

Average of nine partners Canada Mexico Japan China Germany

United Kingdom

South Korea Taiwan France

Raw cost index 24.30 19.30

27.57 8.11

16.92

5.34 29.60

28.30

23.96

16.41

26.50

Difference relative to U.S. costs in percent

Corporate tax rate – -5.6% -3.4% -6.0% 2.0%

-15.0% -0.4% -10.0%

-10.3% -15.0% -5.7%

Employee benefits – -5.5% -4.8% -9.4% -9.4%

-12.6% 3.6% -5.1% 9.0% -11.5% 10.7%

Tort costs – -3.2% -3.1% N/A -3.3% N/A -0.7% -3.4% N/A N/A -1.3% Natural

gas costs – -0.5% -6.0% -2.3% 12.5% -2.3% 0.6% 2.1% 4.1% 15.3% -4.2% Pollution

abatement – -3.5% -2.8% N/A -2.3% N/A -2.4% -3.0% N/A N/A -1.5%

Manufacturing production costs relative to the United States accounting for differences in overhead costs (dollars per hour)

Effective cost index 24.30 16.02

22.46 6.19

16.64

3.50 29.77

23.14

22.67

12.85

25.77

Source: Author’s calculations based on data in subsequent tables and chartsNote: Data for tort costs and regulatory compliance costs are limited to the industrialized partners. Conservative assumptions have been made in estimating the missing values, as described in later sections. Thus, the absence of these data likely understates the overall cost advantage of U.S. trading partners.

Effect of Key “Overhead Costs” on Raw Cost Indexof Nine Largest U.S. Trading Partners, 2002

(U.S. dollars per hour)

Economic Growth is More Balanced

-20

-15

-10

-5

0

5

10

15

20

25

00-I

00-I

I

00-I

II

00-I

V

01-I

01-I

I

01-I

II

01-I

V

02-I

02-I

I

02-I

II

02-I

V

03-I

03-I

I

03-I

II

03-I

V

ConsumptionNon-Residential InvestmentExportsGovernment

Growth in Major Spending Categories of GDP(Percent change at annual rate)

-10

-8

-6

-4

-2

0

2

4

6

8

10

90 I

90 I

II91

I91

III

92 I

92 I

II93

I93

III

94 I

94 I

II95

I95

III

96 I

96 I

II97

I97

III

98 I

98 I

II99

I99

III

00 I

00 I

II01

I01

III

02 I

02 I

II03

I03

III

04 I

04 I

II05

I05

III

Source: U.S. Department of Commerce-BEA, Federal Reserve Board

Manufacturing Production

GDP

Total Economy and Manufacturing Growth(Quarter-to-quarter percentage change at annual rate)

Job Growth Returns

-800

-600

-400

-200

0

200

400

600

800

1000

1200

89-I

90-I

91-I

92-I

93-I

94-I

95-I

96-I

97-I

98-I

99-I

00-I

01-I

02-I

03-I

04-I

05-I

Source: U.S. Department of Labor

Net Change in Non-Farm Jobs(Thousands of jobs)

Oil Price Rise This Year, Fall in 2005

0

5

10

15

20

25

30

35

89-I

90-I

91-I

92-I

93-I

94-I

95-I

96-I

97-I

98-I

99-I

00-I

01-I

02-I

03-I

04-I

05-I

Average Refiner Acquisition Cost of Crude Oil(Dollars per barrel)

Manufacturers Alliance Business Outlook Index(Percent)

Sentiment Indicators are Signaling Growth

20

30

40

50

60

70

80

Sep

-91

Mar

-92

Sep

-92

Mar

-93

Sep

-93

Mar

-94

Sep

-94

Mar

-95

Sep

-95

Mar

-96

Sep

-96

Mar

-97

Sep

-97

Mar

-98

Sep

-98

Mar

-99

Sep

-99

Mar

-00

Sep

-00

Mar

-01

Sep

-01

Mar

-02

Sep

-02

Mar

-03

Sep

-03

After-Tax Corporate Profits(Four-quarter percent change)

Improved profitability promote businessinvestment growth

-30

-20

-10

0

10

20

30

40

89-I

90-I

91-I

92-I

93-I

94-I

95-I

96-I

97-I

98-I

99-I

00-I

01-I

02-I

03-I

04-I

05-I

-15

-10

-5

0

5

10

15

20

93

-I

94

-I

95

-I

96

-I

97

-I

98

-I

99

-I

00

-I

01

-I

02

-I

03

-I

04

-I

05

-I

Imports

ExportsSource: U.S. Department of Commerce-Census

Inflation-Adjusted U.S. Trade(Year to year percent change)

0.4

0.5

0.6

0.7

0.8

0.9

1

1.1

1.2

93

-I

94

-I

95

-I

96

-I

97

-I

98

-I

99

-I

00

-I

01

-I

02

-I

03

-I0

4-I

05

-I

Value of the DollarWeighted Currencies 2000=100

Source: Federal Reserve Board

Trade Balance Worsens Despite Dollar Decline

Industrial countries

Developing countries

0

2

4

6

8

%oya

JPMorgan global real GDP

70 75 80 85 90 95 00

Global Growth Surpassing 1990s Average

Source: JPMorgan

Actual Forecast

Inflation Adjusted--(% Chg.) 2003 2004 2005

GDP 3.1 4.9 3.4 Consumption 3.1 3.8 3.5 Durables 7.4 6.7 2.6 Nondurables 3.7 4.1 4.0 Services 2.0 3.1 3.4 Equipment & Software 5.2 13.0 8.4 Information Processing Equipment 13.7 14.1 8.0 Industrial Equipment -3.9 6.3 9.3 Transportation equipment -10.0 15.8 12.8 Structures -4.7 2.8 11.3 Residential 7.6 3.8 -5.6 Exports 1.9 11.6 13.2 Imports 3.7 7.7 6.8 Federal Government 8.7 5.2 1.0 State & Local Government 0.6 1.0 2.0

Source: Manufacturers Alliance/MAPI simulation of the Global Insight model, Jan. 30

Economic Forecast

Actual Forecast

Prices--(% Chg.) 2003 2004 2005 Consumer Prices 2.3 1.6 1.4 Core CPI (Excl. Food & Energy) 1.5 1.6 1.9 Producer Prices, Finished Goods 3.2 1.3 0.0 Business Activity Nonfarm Inven. Chg. (Bil. 2000 $) $4.8 $78.8 $76.7 Light Vehicle Sales (Mil. units, saar) 16.7 17.2 17.0 Housing Starts (Mil. units, saar) 1.850 1.849 1.669 Current Account Balance (Bil. $) -$550 -$591 -$598 Federal Surplus (Unified, FY, bil. $) -$426 -$508 -$413

Labor Unemployment Rate (%) 6.0 5.5 5.2

Industrial Activity--(% Chg.) Manufacturing Production – SIC Based 0.4 6.1 6.0 Computers & Electronic Products 14.1 20.4 16.3 All Less Computers, Communications Equipment, & Semiconductors -0.9 3.4 3.3 Factory Operating Rate – SIC Based 73.4 77.1 78.3

Source: Manufacturers Alliance/MAPI simulation of the Global Insight model, Jan. 30

Economic Forecast

Manufacturers Alliance/MAPI Industrial Production Forecast

2004-2005 2003 2004 2005 Total 0.4 5.5 5.3 Mining 0.4 1.6 0.6 Utilities 5.7 2.6 -3.8 All Manufacturing – NAICS 0.2 6.3 6.1 Durable Goods 2.1 9.0 7.8 Nondurable Goods -2.1 2.3 3.1 All Less Comp., Commun., & Chips -0.9 3.4 3.3 Food -1.0 1.2 2.5 Textile Mills -11.1 -1.5 -2.4 Textile Product Mills -2.0 2.2 -1.1 Apparel -11.8 -2.3 -1.4 Logging -8.8 -5.6 -5.0 Wood Products -1.8 -0.3 -4.3 Furniture & Related Products -2.1 2.6 1.4 Paper & Products -1.2 2.3 2.6 Petroleum & Coal Products 0.6 2.3 3.1 Chemicals 0.3 4.9 4.6 Rubber & Plastics Products -1.0 3.4 3.7 Tires -4.3 2.7 2.3 Glass & Glass Products -0.3 1.9 5.5 Cement 3.1 4.1 5.8

2003 2004 2005 Primary Metals -1.8 6.7 4.4 Iron & Steel Products 0.3 7.0 3.8 Nonferrous Metals -4.2 4.5 3.9 Fabricated Metal Products -2.7 3.5 4.2 Machinery 0.0 7.2 5.2 Engines & Turbines -6.7 3.6 7.1 Agricultural & Construction Equip. 2.3 7.0 4.0 Metalworking Machinery -2.8 4.0 4.0 Industrial Machinery 0.4 10.2 6.2 HVAC Equipment 2.5 3.0 4.3 Computers & Electronic Products 14.1 20.4 16.3 Computer & Peripheral Equip. 17.4 22.9 21.1 Communications Equipment 6.3 6.5 14.6 Semicond. & Other Components 28.8 39.4 19.7 Nav., Measuring, Control Eq. 5.0 4.9 4.1 Elec. Eq., Appliances, & Component -2.8 4.6 3.6 Transportation Equipment 0.3 3.1 1.3 Motor Vehicles & Parts 2.0 3.9 0.9 Automobiles -8.8 3.3 -4.5 Light Truck & Utility Vehicles 9.4 2.9 2.1 Heavy Duty Trucks -1.2 15.4 18.9 Aerospace Products & Parts -5.4 -1.1 1.8 Rrd. Eq., Ships, Boats & Other 4.5 8.1 2.8

Manufacturers Alliance/MAPI Industrial Production Forecast

2004-2005