Layoffs. Plant closings. Chants of “it's the slowest month we've ever had.”
Now one of the most followed industry indicators, the Institute for Supply Management index for manufacturing, has tanked.
Sometimes it seems like manufacturing's darkest days are here to stay.
But it's likely the ISM index has bottomed out and will begin to grow in the first six months of this year signaling the start of some kind of rebound, says Chris Kuehl, economic analyst for the Fabricators and Manufacturers Association.
“Much depends on some proposed government actions and the reaction of the financial community, but assuming that some kind of construction oriented stimulus plan is developed in the next 30 to 40 days and assuming that the credit crisis continues to diminish there will be some recovery in certain sectors,” Kuehl said. “The most immediate impact will be in those business areas that will supply construction material and machinery but there will also be growth in those sectors oriented to energy development.”
With the majority of the bad news concentrated in automotive and construction, the sheer size of those sectors managed to drag down manufacturing as a whole. But some sectors have held up well such as medical manufacturing, which has continued to expand through the recession, and aerospace which has managed to hold its own to some extent, according to Kuehl.
Indiana, a state rich with small to medium sized parts suppliers, is really feeling the heat from the auto sector downturn. But the state still could see a turnaround this summer and the start of a full recovery late this year or early in 2010, says Michael Hicks, director of the Center for Business and Economic Research at Ball State University in Muncie, Indiana.
“Indiana's manufacturers are a bit better positioned to weather the storm,” Hicks said. “The business tax climate has been more favorable and we have a bigger presence of foreign transplants – such as Toyota, Honda and Subaru – than surrounding states.”
National Association of Manufacturers Chief Economist David Huether said right now the industry is probably going through the worst part of downturn. Production likely fell at an annual rate in the double digits in the 4th quarter of 2008 and NAM's forecast calls for the manufacturing sector to continue declining over the first three quarters of 2009.
On the upside, Huether expects the rate of declines will drop each quarter (-5.3% seasonally adjusted annual rate in Q1, -2.4% in Q2, -0.8% in Q3) then turn positive in the fourth quarter, rising by 1.4%.
Other observers, such as Ken Mayland, president of ClearView Economics based near Cleveland, think October and November of 2008 could turn out to be the worst months of the current recession as many suppliers reported that buyers de-stocked, letting sales go out while slashing orders. “Such declines in inventories in the face of such large sales declines are fantastic; no doubt aided by great management information systems, company managers were quick to pull the trigger on this one,” Mayland said.
The good news, according to Mayland, at some point companies will have to start ordering again to keep inventories from depleting to nothing.
An important choice: do we treat this as a disaster or opportunity?
Norbert J. Ore, Chair of the Institute for Supply Management's Manufacturing Business Survey Committee says a recovery will be relatively slow as manufacturers adjust to new demand levels for their products. While recent data is less than encouraging, Ore thinks the business cycle appears to be performing typically and that includes high degrees of pain and uncertainty.
“The challenge for all of us is to determine if this is a “disaster” or an “opportunity,” he said. “ If we choose disaster, we will be paralyzed during a period of great change, and we will assume that there is little hope of prosperity for ourselves and our organizations. If we choose opportunity, we can view this as the time to face challenges head on and find more productive ways to create value for ourselves and society. In every economic scenario, there is a winner and a loser; the media always points out the losers, but there are winners and they don't get the same level of attention.”
Once past this correction, Ore believes we will recognize that many random factors (high oil prices, Hurricane Ike, failure of rating agencies, consumer credit, etc.) , in addition to sub-prime came together to cause this downturn. Now that we are in the recession, the positives will be new levels of productivity growth, better recognition of the impact that major producing and consuming nations have as global trading partners, and better management of risk and credit by lenders and borrowers.
The major signs of recovery will be improved consumer confidence, a level of stability in the auto industry, an increase in housing construction, and improvement in the number of service sector jobs.
“As long as overall unemployment remains relatively low from a macro perspective – say below 8.5% - the economy will solve its own problems by eliminating marginal businesses and jobs,” Ore said. “Keep in mind that many EU countries live with unemployment in the 9-10% range, so high unemployment alone is not a driver for economic collapse.”
The upcoming fiscal stimulus will have an impact, but it's hard to tell how long that will take to reach manufacturing, says Thomas Traynor, an economics professor at Wright State University near Dayton, Ohio. Big unknowns include how long it will take Congress to act and what the stimulus will include.
“Some measures will work more quickly than others,” Traynor said. “But it will take a while.” The good news, he said, is that eventually there will be pent up demand for durable and discretionary manufactured goods which will aide any recovery.
Half of NTMA's members report they're busy
While the auto sector has been hit hard, some say manufacturing is undeservedly getting a bad rap.
“We still have over 50 percent of our members reporting they're busy to very busy,” said James Grosmann, marketing director for the National Tooling and Machining Association. “Anyone working in DoD work is getting RFQ's on a daily basis.”
According to Grossmann, some members have moved into nuclear work - a sector which remains strong and will stay that way for at least another decade as parts are made for new plants outside of the U.S. - and wind energy which hasn't stopped growing just because the price of oil has dropped.
Another indication that some companies are staying busy is the demand for qualified workers. “We still have members reporting they don't have enough trained employees to take care of business now and into the future,” Grossmann said.
ClearView's Mayland says one of the best real-time indicators to whether or not the economy is on the mend is weekly initial claims for unemployment compensation, which are currently running about 550,000. While any drop would be an improvement, Mayland thinks once this stat falls below 400,000 a recovery has probably begun.
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