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Short-Term U.S. Manufacturing Outlook

Moderate industry analysts and observers offer counterpoints to more dire economic forecasts.

To hear some analysts tell it, there’s not much upside on the horizon for the U.S. economy—or, by extension, the manufacturing sector. Among the challenges cited: high unemployment, stagnant wage growth, lukewarm consumer confidence, and an ailing housing sector.

For others, however, the outlook isn’t as hopeless as many would have you believe. While those who view the glass as half full do acknowledge there are real concerns facing the nation and the economy, they stress the importance of keeping all that’s happened (and still happening) in the proper perspective—particularly in this fragile, post-recession economy.

On such observer is Dr. Chris Kuehl, economic analyst for the Fabricators & Manufacturers Association, International (FMA). Despite the impending “doom” many analysts have forecast, he believes the slowdown is only temporary and not the start of another breakdown in the economy.

“Admittedly, some of this reaction is justifiable when one looks at the numbers released lately,” Dr. Kuehl explained. “The housing market is still skidding, the consumer has retreated in the face of more inflation threats, and the jobless rate has worsened. The manufacturing sector in particular seemed to lose its position as the engine of the recovery.”

Dr. Kuehl asserts this downturn is just a blip, citing several reasons why he believes it won’t last:

The impact of inflation and commodity pricing. The unexpected surge in inflation that occurred at the sart of the year does not represent “an increase in the all-important core rate that motivates the Fed to make decisions, but when the real rate of inflation spikes there is an almost instant consumer reaction, when the inflation comes from hikes in commodity prices,” Dr. Kuehl said. Within days of the start of the “Arab Spring,” the price per barrel of oil had thrust ahead by almost $20, and the price of gas jumped by $0.70, he noted. “The consumer was fresh off the memory of 2008 and assumed that it was only going to get worse, and the talking heads reinforced that perception. The result was a rapid withdrawal of consumer confidence, which took a big chunk out of overall demand.”

According to Kuehl, the price of oil may be heading down soon, with gas prices already easing a bit. More importantly, the inflation threat is not yet manifesting itself in a way that will shift consumer behavior permanently, he said. After all, only the first of the three factors that beget inflation (hikes in commodity prices, shifts in the wage structure, and an overall abundance of money in the system) has actually become a factor. “In other words, the inflation pressure felt by the consumer is coming from fuel and food, and there may be some modest relief on the way for both of these sectors,” Dr. Kuehl stated. “If the consumer thinks that the threat of much higher pricing is not so immediate, they will likely relax and get back to their old patterns.”

A quicker-than-anticipated “global recovery” from the crisis in Japan. While the flow of parts and supplies from Japan was interrupted for many weeks, Kuehl reports that many Japanese companies that were impacted are already starting to recover. “Most of those parts will be flowing soon, and by the end of the year there will be a return to some semblance of normal,” Dr. Kuehl stated.

A return to pre-recession lending. Several conditions that led to the expansion of the recession—i.e., tighter credit, aversion to capital investment—are fading, Dr. Kuehl noted. These improvements, he believes, will start to show up in the months ahead.

“Observers are a little baffled that banks and corporations have more money on hand than they have had in years, but that cash is not going anywhere,” Kuehl notes. “The banks are sitting on it, in part, to contend with the wave of rule changes that stemmed from the Dodd Frank legislation, and partly because they have returned to their old-school ways. Slowly but surely, the new system is getting in place, and banks are interested again in expanding their business through loans. Credit is still far from loose, but it isn’t as tight as it has been.”

At the same time, the business community is hoarding cash as well, Dr. Kuehl notes, with companies uncertain about what they can count on from the banks and partly because they are just more cautious. “The need to spend that money is not pressing as yet, but if the competition starts to move, or there appears to be more demand, they will start to let loose that cash, and the economy will be stimulated again.”

As for the industrial sector, which has been pulling the economy along on the strength of expanded exports, Dr. Kuehl offers this assessment: “It is likely the export demand will return, although in fact it has not declined all that much in the past few months. The big drop has been in inventory build, and until the consumer gets more aggressive there will not be a drawdown sufficient to provide much impetus for the manufacturer. As in most other recoveries, the consumer will hold the key.”

REGIONAL PULSE
While it’s tempting to paint the overall manufacturing economy with a broad brush, it’s important that we not overlook what’s going on at the “micro” level, particularly those regions of the country with a strong production base (historically speaking). Take Southern California, for example. While the state of California as a whole has had its fair share of difficulties (11.8% unemployment, state budget woes), some cities are in the midst of a turnaround.

Just ask Michelle Nash-Hoff, president of ElectroFab Sales and manufacturing industry consultant, who not only has a finger on the pulse of the Southern California market but also a solid grasp of the primary issues and challenges facing manufacturers. She notes that the majority of companies in San Diego are seeing a modest upturn this year, although not quite as good in the second quarter as the first quarter. due to normal “seasonal slowdowns.” Nash-Hoff highlighted several major (and minor) industry clusters, providing a snapshot of how they are faring these days:

Biotech/Biomedical. San Diego is home to more than 550 biomedical companies, and local universities and research institutions have spun off nearly 200 biotech firms. The state remains the player to watch in such fields as genomic medicine and photosynthetic-algae technology, which experts say could produce far more fuel than corn, soy or sugarcane can in the same space. San Diego’s biotech cluster employs an estimated 40,000 people with a $9.1 billion annual impact on the local economy.

Information Technology. San Diego is home to more than 1,400 software and computer services companies, employing 13,963 people. Steady growth makes the region a leader in software development, programming, systems integration, and data processing.

Defense. The San Diego region is home to the largest military concentration in the country. The annual and indirect economic impact of defense spending is $18.3 billion, including more than $4.5 billion in manufacturing.

Communications. More than 850 communications firms thrive in the San Diego region’s established network of support industries, professional trade organizations, and educational institutions.

Clean-tech. World-renown research centers and biotechnical innovation position San Diego as a leader in clean technology research and development. There are currently more than 150 “clean-tech” companies in San Diego. The city will also be home to the West Coast’s first desalinization plant, which, when finished, will provide 50 million gallons of drinking water to 300,000 San Diegans.

Maritime. The maritime industry in San Diego County is represented by nearly 1,000 companies and organizations. “The industry continues to trend upward despite the recession, as the number of companies and organizations within the maritime sector continue to increase,” Nash-Hoff said.

The only minor industry that is still “in the tank,” she notes, is the off-road vehicle sector. This industry, Nash-Hoff observes, has never really recovered from the recession because the primary customers for these vehicles worked in the real estate and building industry—markets that are still “upside down.”

Overall, Nash-Hoff reports the State of San Diego has lost 90,000 manufacturing jobs in the last 10 years, adding that it will take years to recoup those positions. But from her perch on the steering committee of the San Diego Inventors Forum, there is a bright spot. “The good news is that the number of start-up-technology-based companies has greatly increased this year,” she noted. “Each month the meetings are filled to capacity with inventors and entrepreneurs.”

For more on this story, see the July/August issue of Metal Finishing.

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Aerospace  •  Automotive  •  Defense & Military  •  Electronics  •  Industry Trends & Happenings

 

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