When Does the Industrial Recovery Stumble?

When Does the Industrial Recovery Stumble?

By Dr. Chris Kuehl, Economic Analyst, Fabricators & Manufacturers Association, International

The industrial sector remains the star of the U.S. economy, although it is obvious that it cannot pull the economy along on its own for much longer. It has always been assumed that manufacturers were starting the process of exiting the recession, but at some point the consumer was going to have to get engaged.

The fact that industrial growth continues at the pace it has for the last several months really surprised many people as the period of inventory build was slated to be much shorter. It was feared that at some point the build would be completed and, in the absence of renewed demand, the industrial sector would slow again. There is evidence this is starting to take place as capacity utilization has stopped growing at the pace previously set and industrial activity has ebbed.

The good news is growth – some of it substantial – continues in some areas. But the bad news is that industrial activity in general has slowed as the consumer remains on the sidelines.

There is a bigger issue at work here, however. The U.S. consumer still sleeps and that’s not the case for consumers in China, India, Brazil and elsewhere. Export-centric nations like China and Germany are exploiting that growth, but the U.S. is slow to get on board. The trick now is to shift attention from the shell-shocked U.S. consumer to the emerging markets. That is not something the U.S. is all that adept at, but the demands for that transition are getting more insistent.

Part of what has baffled analysts over the last few months is what has been driving the manufacturing sector when the consumer as a whole seems to be asleep at the switch. Many answers exist depending on the industrial sector involved, but in general it seems to focus on three factors.

The first and most consistent is the process of rebuilding inventory. The fact is many manufacturers began to see demand start to slump as early as 2007. That the recession started to manifest that early was noted by the recent report from the National Bureau of Economic Research, which just declared the recession ended in June 2009 but started in January 2007. Given that manufacturers started to pull back on production as early as 2007 meant that by the time 2009 rolled around there were some big gaps in the availability of many items.

The surge that started in mid-2009 accelerated through the rest of that year and into 2010 as inventory was replaced by companies expecting to see some recovery sooner than later. This inventory build is nearly at an end and that is one reason that the industrial production numbers are starting to ebb.

The second reason for the growth is export demand, and this is a factor expected to gain in importance. The markets in the rest of the world are not as closely linked to the U.S. during this recession as in the past. In some cases their recovery is slower but in many cases the rebound has been more rapid. Many U.S. companies have discovered demand exists for their output in India, China, Brazil and other nations.  This is reflected in the improved export numbers coming from the U.S. Nothing suggests this motivation for industrial expansion is going to end soon, which is good news.

The third reason for growth in industrial production is an emerging trend in near-shoring related to the recession. The longer the supply chain the more unwieldy it becomes and harder to manage. The emphasis for the last couple of years is keeping a select group of customers happy with high quality and high levels of responsiveness. There have been many operations closed in overseas locations so that production can shift back to the U.S. – closer to the consumer.

There also has been a reduction in production costs in the U.S. driven by the impact of high unemployment and low inflation. It simply meant that domestic output is slightly more competitive than in the past. That advantage will erode as the economy recovers, jobless rates decline and wages increase.

It is unusual for the manufacturing community to be at the forefront of an economic recovery and there are suggestions that its moment in the sun will end soon. In the meantime there are opportunities to take advantage of the emphasis. The long-term lesson: Foreign sales will nicely complement domestic sales in times of economic turbulence.

The most distressing aspect of this development is the lack of appreciation on the part of the politicians of the manufacturers’ contributions to the economic recovery. The emphasis with most of the stimulus efforts was directed at the service sector and at the consumer. At the same time both new regulations and factors that inhibit growth have been visited on the manufacturers.

Given the role that the industrial sector has played in the recovery it would have been nice to see a bit more attention paid to what will help this sector expand further.

Dr. Chris Kuehl is economic analyst for the Fabricators & Manufacturers Association, International (FMA) and managing partner of Armada Corporate Intelligence.  Dr. Kuehl is the author of Fabrinomics™, a biweekly economic analysis e-newsletter for members of the FMA.  For more information go to fmanet.org/fabrinomics.
Based in Rockford, Ill., FMA is a professional organization with more than 2,100 members working together to improve the metal forming and fabricating industry. Founded in 1970, FMA brings metal fabricators and fabricating equipment manufacturers together through technology councils, educational programs, networking events, and the FABTECH Show. FMA also has a technology affiliate, the Tube & Pipe Association, International (TPA), which focuses on the unique needs of companies engaged in tube and pipe producing and fabricating.