Does adversity lead to opportunity in the manufacturing industry?

If you were waiting for an official pronouncement about the state of the economy, it’s here: “Recession in the U.S. ‘has arrived,’” the BBC News reported in early January, based on a study of economic indicators from Merrill Lynch.
 
The economically chilling term crept back into the national consciousness around the time the U.S. mortgage crisis began. Maybe we’re still in denial about it, for it’s not something that’s easy to accept for Americans who have been working harder and longer just to maintain the status quo.

Whether you believe we’re in a recession or not, one axiom certainly remains true: Crisis – especially that of the economic kind – is a powerful motivator for change.

2008 promises to be a year of change on many fronts, including economic, political and, closer to home, manufacturing – and not all of it good. Layoffs, plant closings and outsourcing aren’t news to anyone, but what impact will this latest economic news have on an already hard-hit sector?

William A. Strauss, senior economist and economic adviser in the economic research department at the Federal Reserve Bank of Chicago, is confident that the overall economy will continue to expand. Strauss analyzes the Midwest economy and the manufacturing sector’s performance for use in creating monetary policy. “We’ll still be weighed down by the housing sector, which many expect will moderate through 2008,” he says. “We’re looking for it to improve and be less of a drag on the economy.”

The November 2007 Chicago Fed Midwest Manufacturing Index (CFMMI) report backs up Strauss’ tempered optimism. The CFMMI, which rose 0.5% in November, is a monthly estimate by industry of manufacturing output in the bellwether manufacturing states of lllinois, Indiana, Iowa, Michigan and Wisconsin. The composite index of 15 manufacturing industries uses hours worked data to measure monthly changes in regional activity.

Despite what you might be hearing in the news about the overall economy, there are several bright spots in manufacturing. “Strength is in energy extraction,” Strauss says. The oil sands market in Canada has been a boon to Midwestern manufacturers like Peoria, Ill.-based Caterpillar Inc. Strauss says that as a result of the expanding oil sands extraction business, the company is sold out on its heavy-duty 797B, the largest truck they manufacture. “The companies that are buying these vehicles are able to pay for them in about a month’s time with the return on investment,” he says.

Aviation is another hot field, and Chicago-based Boeing also is a manufacturer that “had a fantastic year and is booked out until the middle of the next decade,” Strauss says. “They’re getting a lot of foreign orders, though, and it’s softer for U.S. business.”

One silver lining to the economy is that the weakness of the dollar has helped U.S. manufacturers. “Now that our currency has dropped about 22% from its peak, it makes domestic goods less expensive,” Strauss says, boosting the market for exports.

“People think we haven’t been effective in creating manufacturing jobs, but growth has been steady at 1%,” he says. “The number of jobs needed has been reduced because we have become more productive.”

U.S. manufacturing continues to show great output gains. Productivity has increased output by 600% on 0% job growth since the post-World War II period, beginning in 1947. “We’ve driven inefficiencies out of production with great technological improvements,” he says.

To put the situation in context, “China has lost more jobs in manufacturing than we have in manufacturing in the United States,” he adds.

Jerry Szatan, founder and principal of Szatan Associates, a business site selection and location strategy consulting firm, says, “Even in a recession, not everyone is a loser. Not every sector is seeing weakened sales. Companies are still investing in new opportunities.”

Maybe recession is too harsh a term for many to swallow when things aren’t as bleak as they seem. How are you feeling about the U.S. economy in general, and manufacturing in particular? Send me your thoughts.
 
E-mail Managing Editor Lisa Towers at [email protected].