- 09 May 2007 -
Economist Offers Cloudy Forecast for Industry
By Greg Valero, Publisher, g.valero@elsevier.com

I recently attended the Washington Forum, the annual legislative conference held in D.C. and the first organized by NASF. The event offered informative sessions on everything from regulatory updates, policy measures, and panel discussions to technical presentations.

One of my favorite sessions was conducted by Jeremy Leonard, an economic consultant at the Manufacturers Alliance/MAPI. The economist cited various statistics that indicate the industry is smaller but yielding higher profit margins. A quick snapshot of 2006 vs. 2000 found that U.S. manufacturing sales are up 18.3% and profits increased by 4.2%. The downside is plant openings are down nearly 24% and investment expenses shrunk by 17.4%, an indication the U.S. manufacturing base is shrinking.

Other findings: Sales and productivity increased by 21% and 29.6%, respectively. However, materials costs outpaced sales increases, escalating by 26.4%, while payroll and fringe benefit expenses posted single-digit spikes. Furthermore, Leonard found, the U.S. corporate tax rate is higher than all major trading partners except Japan. “Why is this important?” he asked. “Taxes offset costs in capital, which affects how much we invest.”

Some more tidbits: Health and pension costs skyrocket by double-digits annually and now account for 15% of manufacturer compensation. At the same time, vendors spent $162 billion in 2004 in regulatory compliance costs, half of which was related to environmental issues. Meanwhile, class action reform passed in February 2005 is starting to pay dividends, as the pendulum is starting to swing back to the middle after years of favoring plaintiffs.

So, what can be done? “Most cost pressures facing manufacturers are due to inappropriate or outdated government policies,” Leonard said. Among other things, “industry can redouble its efforts to increase productivity.” The economist also suggested companies could focus on enhancing just-in-time and logistical operations.

Another plus, according to Leonard: “Abstracting from structural costs, U.S. manufacturers are fundamentally competitive,” he said. “Production costs are lower than other industrial countries. And the U.S. offers advantages that can offset labor costs and advantages enjoyed by China.”

(For more on the Forum, see the June issue of Metal Finishing.)