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2010 Manufacturing Outlook: Slow & Steady

As manufacturing goes, so goes metal finishing—that’s a given. What remains somewhat of a mystery, though, is forecasting the precise point in 2010 when we can expect manufacturing employment and output to return to more respectable levels.

While few economists and industry observers will go out on a limb and make a prediction as to when manufacturing will turn the corner (just too many variables at play), experts do agree that positive industrial production is contingent upon three primary factors: a sustained resurgence in demand, chiefly from producers of durable goods such as automobiles, heavy equipment and machinery, appliances, and electronics; loosening of credit lines that suppliers desperately need in order to retool, rehire, and ramp up to keep pace with rising demand; and, more importantly, effective economic stimulus to encourage investment and job growth.

Perhaps no one knows this better than Michigan Governor Jennifer Granholm, whose state leads the nation in unemployment at 15.1%. During a recent segment of the nationally televised NBC program "Meet the Press," Gov. Granholm admitted that manufacturing in Michigan has been disproportionally impacted due to the plight of the domestic automotive industry, but she cited additional roadblocks standing in the way of forward progress.1 “We have so many auto suppliers that want to diversify into areas such as defense and green-clean technology, but they can’t get loans even though they have good credit, have always made payroll, and have paid back loans,” she said. “That is just wrong.”

On the plus side, Gov. Granholm said the restructuring currently under way in Detroit’s storied automotive industry is creating opportunities to either create new jobs or restore cuts previously made to the local work force. As a case in point, she cited General Motor’s decision to invest in plants supporting the production of electrical vehicles such as the Chevrolet Volt and the parts that go into them—particularly the critical battery component. The government’s overall support of these initiatives has also made a big difference.

“The Volt’s manufacturing in the Detroit area would not have happened had it not been for the commitment the Obama Administration made to the automotive industry,” Gov. Granholm told viewers. “As the governor of a state that has been disproportionally impacted by the restructuring of the automotive industry, I know it would have been so much worse if we didn’t have an administration that didn’t care so much about manufacturing. These companies would have been liquidated.”

Gov. Granholm is not the only one in support of the government’s initiatives to shore up manufacturing in this country. The Association for Manufacturing Technology, or AMT, which provides U.S. builders of manufacturing systems with the latest information on technical developments, trade and marketing opportunities, and economic issues, is pleased with the steps proposed by President Obama to create jobs and strengthen manufacturing again.

“It is gratifying to see the President addressing some of the key issues AMT has been aggressively advocating for this past year,” said AMT president Douglas K. Woods. Among them: a one-year extension of enhanced Section 179 expensing for small businesses, and a one-year extension of the 50% bonus depreciation incentive for new capital equipment purchases.2 Both were initially enacted in Congress’ 2008 stimulus bill, and extended through 2009 under the Recovery Act. President Obama’s proposals would extend them for another year, through 2010—a move AMT has urged.

“They are steps that can clearly help spur capital investments, which is sorely needed at the moment,” Woods added. On behalf of the AMT, he is urging Congress to take the next step in acting on these provisions to help this vital industry, as well as other small businesses. The association believes these businesses will be key to economic recovery and, by extension, job growth.

To drive home his sense of urgency for further action, Woods provided some sobering stats. By his count, orders for manufacturing technology were off 66% for the first 10 months of 2009, while capacity utilization bottomed out at 65.1% in June—the lowest level recorded since tracking began in 1948 and only the second time in history that the number has been below 70%. Without ongoing innovations in this field, Woods argues, factories could not be modernized, new sources of energy could not be developed and advanced technology vehicles could not be produced.

“One of the best programs for our members is the enhanced expensing provisions and the bonus depreciation incentives,” Woods said. “They have been very effective in the past and will be a much-needed boost for 2010.”

Others question the efficacy of government programs. Industry observers such as Dr. Chris Kuehl, economic analyst for the Fabricators & Manufacturers Association International, cites the Obama Administration’s $787 billion stimulus program in particular. “The stimulus money that was supposed to have been spent in 2009 was mostly not allocated, and now it looks like fully 50% of it will be spent in 2010,” Kuehl explained. “Thus far the money spent has mostly been directed at relieving the budget crises in various states, but there is an intent to direct more of the money to infrastructure projects in the future. The stimulus plan has not had the impact it was expected to have, but there is still time to make some difference to the economy.”

Kuehl goes on to say that government actions to shore up the financial system—which manufacturers and suppliers rely on to upgrade equipment, hire and train, etc.—might actually further tighten the money supply. “The rush to find ways to correct the mistakes of the banking sector has led to regulations that will restrict lending and make the credit challenges worse,” Kuehl said.

Additionally, Kuehl says there are other plans—these more environmentally related—that stand to have major implications for manufacturers. “Cap and trade legislation could impose severe fines on those companies that have emission issues and could very well make energy more expensive as utilities are faced with compliance issues,” Kuehl explained. “Even if Congress fails to act and pass legislation, the Environmental Protection Agency stands ready to impose these rules unilaterally. The biggest problem for many businesses is the uncertainty around government actions.”

That’s precisely why associations and organizations with the finishing industry’s interests in mind are paying close attention to the various developments. One such entity is The Policy Group—the government relations arm of the National Association for Surface Finishing. In the midst of all the uncertainty surrounding regulations, health care issues, manufacturing, jobs and trade, The Policy Group is focused on “putting out fires in Washington before they start,” according to Christian Richter, the group’s founder and president. This is especially true, he said, with respect to everything from possible changes to unionized labor to impending regulations regarding certain chemicals and metals.

The Policy Group’s role in all of this, Richter said, is ensuring that key decisions impacting the surface finishing community take into account potential repercussions on industry. “We’re not idealogues,” Richter said, noting that the primary objective is making sure the Obama Administration as well as entities such as the EPA are working under the proper assumptions. “We’re just trying to put sound science on the table.”

On the whole, Richter believes the government is trying to push too much change too fast. “I want President Obama to succeed—he is our president and I love my country,” Richter explained. “But I don’t want him to succeed at the expense of my country. We really need to rethink things and scale back the agenda.”
 

ENCOURAGING SIGNS

Looking at the overall manufacturing sector, analysts have identified some very encouraging trends—trends they hope will continue and strengthen throughout 2010 and beyond. Among them: positive movement in the PMI Index, a reliable barometer of new orders and, by extension, supplier confidence; industrial production, which has been increasing, albeit incrementally; and gross domestic product (GDP), arguably the single-most critical component in gauging the economy’s health.

According to the Institute for Supply Management, economic activity in the manufacturing sector expanded in November for the fourth consecutive month as the PMI Index reached 53.7. While this is down slightly (2.1 points) from October, the PMI Index has been steadily on the rise since December 2008—when it was 32.9—and has consistently been over 50 since August 2009. (General rule of thumb: any number over 50 suggests an economic expansion, while figures below 50 signify contraction.)

All this comes as welcome news to Norbert J. Ore, CPSM, C.P.M., chair of the Institute for Supply Management’s Manufacturing Business Survey Committee. “The manufacturing sector grew for the fourth consecutive month in November,” he said. “While the rate of growth slowed when compared to October, the signs are still encouraging for continuing growth, as both new orders and production are still at very positive levels.”

According to Ore, 12 of the 18 manufacturing industries reported growth in November. Among them: apparel, leather, and allied products; printing and related support activities; petroleum and coal products; miscellaneous manufacturing; electrical equipment, appliances & components; transportation equipment; chemical products; computer and electronic products; and fabricated metal products. Some sectors that didn’t fare so well: wood products; furniture and related products; nonmetallic mineral products; primary metals; and plastics and rubber products.

Other encouraging signs come from the Federal Reserve’s industrial production report for November, which showed output increased 0.8% after having been unchanged in October. Manufacturing production advanced 1.1%, with broad-based gains among both durables and nondurables. Among consumer durables, the indexes for automotive products and for appliances, furniture, and carpeting moved up, while the index for home electronics fell for the 10th month in a row. Additionally, capacity utilization for manufacturing, which measures productivity, increased by 0.8 of a %age point to 68.4%.

While all this is certainly music to industry’s ears—at least as far as cyclical trends go—the $64,000 question remains: Is this the beginning of a hot streak? Many respected industry analysts believe it is. “In January 2009 we were losing 700,000 jobs a month; this past November that number was down to 11,000,” Gov. Granholm said. “So we are making progress.”

Dr. Kuehl, from the Fabricators & Manufacturers Association, concurred. “In general terms, 2010 will be better than 2009—GDP growth will be in the range of 2%-3%, and that is far superior to the negative numbers registered last year. Inflation will be down, unemployment should start to stabilize, and the ingredients for a slow and methodical recovery will be in place.”

For sure, many sectors of the economy might not recover all at once. For example: housing construction and associated industries might recover more slowly than, say, automotive, while airline/aerospace orders may bounce back in advance of automotive. Regarding the broader category of employment, particularly manufacturing employment, a return to “normal” pre-recession levels of 5% could take years. The most that industry can hope for or expect, observers say, is incremental growth in manufacturing employment,

On that last point, industry observers believe that manufacturers may have cut too deeply during the height of the recession and are now scrambling to ramp up to meet surging demand as companies seek to rebuild depleted inventories. “At this stage we have a level of unemployment that’s barely adequate to sustain a high level of output,” said former Federal Reserve Chairman Alan Greenspan.3 “It will be virtually inevitable—if nothing else were to happen—that employment could start to come back rather quickly.”


REFERENCES

1., 3. NBC’s Meet the Press with David Gregory, original air date: Sunday, Dec. 13, 2009.
2. Section 179 expensing allows small businesses to immediately expense up to $250,000 of qualified equipment and other business investments. The bonus depreciation tax incentive also allows businesses to immediately depreciate fully 50% of the costs of capital expenditures.

 

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

 

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