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2012 U.S. Manufacturing Update

2012 U.S. Manufacturing Update

Can U.S. manufacturing maintain its momentum and continue to lead the recovery?  

Recently, the Institute for Supply Management (ISM), Tempe, Ariz., reported its June Purchasing Managers Index (PMI), based on a survey of approximately 350 of the nation’s supply executives, had fallen below 50 — the number that signals a contraction in the manufacturing sector — for the first time in three years (Table). The index of manufacturing activity fell to 49.7 from 53.5 in May, which marks the lowest reading since July 2009, one month after the recession officially ended. According to the “June 2012 Manufacturing ISM Report On Business,” respondents were divided on their answers. “Comments from the panel range from continued optimism to concern that demand may be softening because of uncertainties in the economies in Europe and China,” wrote Bradley J. Holcomb, chair of the ISM Manufacturing Business Survey Committee and author of the report.

Despite reports of decreased regional manufacturing activity released two weeks previously (see Regional Manufacturing Reports Reveal Mixed Activity), the ISM index fell almost a full point below the lowest forecast for it in a survey of 70 economists conducted by Bloomberg, New York. Predictions in the Bloomberg survey ranged from 50.5 to 53.5, with the median totaling 52. As a result, some industry economists have reacted to the lower-than-expected ISM index number as an indication that U.S. manufacturing is faltering.

For instance, Nigel Gault, the chief U.S. economist for IHS Global Insight, Lexington, Mass., wrote to clients that the report suggests that — for the moment — the manufacturing recovery is “out of steam.” Additionally, according to Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York, “Manufacturing is gearing down.”

RDQ Economics, New York, points out that the drop in new orders in the ISM index is the biggest decline since October 2001 — and the second-largest slide since December 1980. The firm calls it “an event that occurs in roughly one in 100 reports.” The important issue now, RDQ says, is whether this represents “volatility reflecting fears over Europe — the export order index fell six points — and will orders bounce back or is it a slide into something more worrying?” According to RDQ, the uncertainty about the market sector that has been driving the economic recovery “just got ratcheted up a notch with this report.”

Comeback Kid

Though the ISM report revealed a contraction in manufacturing activity, only a sustained reading below 43 actually signals a lack of growth in the sector. Even at the lower number, the manufacturing figures were consistent with growth at an annual rate of 1.5%. “This is not good. Not good at all,” said Dan Greenhaus, chief economic strategist at BTIG, an institutional brokerage. However, Greenhausgoes on to say that although it is a “terribly weak number,” it “does not mean recession for the broader economy.”

Accounting for about 12% of the overall U.S. economy, manufacturing has led the recovery that began June 2009. Until the ISM released the report on its June index, manufacturing had been reported as climbing at a steady pace, giving industry experts reason to be optimistic about its long-term prospects.

Recently, the National Electrical Manufacturers Association (NEMA), Rosslyn, Va., reported the manufacturing sector experienced a surge of activity in the first quarter of 2012, reaching a 10.4% annualized increase in industrial production for manufactured goods. For this surge, the organization credits unseasonably warm weather in January and February. Its forecast for manufacturing activity for the whole of this year and next is more tempered, expecting it to decelerate from its robust post-recession pace to a more sustainable level closer in line with long-run industry output trends. NEMA is expecting output growth to remain at an average of 3.4% in 2012 and 2013.

In addition, according to the Association for Manufacturing Technology (AMT), May U.S. manufacturing technology orders totaled $473.92 million, as reported by companies participating in the U.S. Manufacturing Technology Orders (USMTO) program. Analysis of manufacturing technology orders provides a reliable leading economic indicator as manufacturing industries invest in capital metalworking equipment to increase capacity and improve productivity, according to the organization. This marked a 14.5% increase from April and a 19% jump when compared with the total of $398.10 million reported for May 2011. With a year-to-date total of $2,235.37 million, 2012 is up 12.1% compared with 2011.

“The latest USMTO figures indicate both sound health and continued expansion in durable goods manufacturing,” said AMT President Douglas K. Woods. “This is backed up by other key economic indicators, including an upward revision in housing starts and a strong showing in durable goods orders. Overall, indications are that manufacturing will continue to lead the way in the general economy.”

Additionally, in its Nonresidential Construction Index (NRCI) Second Quarter 2012, FMI, Raleigh, N.C., calls manufacturing construction the “comeback kid” because of its steady improvement since the worst of the recession. “It looks like it’s doing better than it has for a long time,” says Phil Warner, FMI research consultant. “Our panelists are seeing more activity in that area, so they are more bullish and less pessimistic about it.”

FMI is forecasting manufacturing to grow at a rate that just outpaces the GDP (see Figure at right). “That’s not what you’d call a major boom, but we expect it to continue to increase right through 2015,” says Warner. “It’s nothing radical, but we expect steady growth.”

Maximum Capacity

As a result of increased activity in the manufacturing sector, capacity utilization is improving. “It’s not real high yet, but it’s getting to the normal levels,” says Warner, further explaining that once capacity reaches 80% to 85%, companies begin considering expansion. “It’s not quite there yet, but it’s better than it has been,” he concludes.

In April, manufacturing capacity reached 79.2%, according to the Federal Reserve Bank of Chicago. Although 
it hasn’t yet reached the numbers indicated by Warner, there have been both retrofit and new construction projects since the end of the recession.

For Faith Technologies, Inc., Menasha, Wis., the recession brought about a sharp decrease in its contracts in the manufacturing sector. “As with the rest of the construction industry, we did see a downturn in the manufacturing sector,” says Tom Clark, chief revenue officer. “For a period of time, there was a significant drop off in not only construction, but even the ongoing maintenance done for many of our clients.”

However, by late 2010, the firm was starting to see gradual increases in its backlog. “There does appear to be a resurgence in manufacturing in the United States,” says Clark. “Some of the projects we have looked at are manufacturing products to export — which wasn’t the case a few years ago.” Clark estimates his firm’s current backlog in manufacturing/industrial projects to be up more than 100% compared to this time last year, making up about 25% of the total backlog. “It has been a mix of retrofits and new construction, although many of the opportunities we have been looking at in 2012 have been new construction,” concludes Clark.

In the last nine months, Stephen J. Frantz, executive VP for the industrial, utilities, and service divisions of Detroit-based Motor City Electric Co., has seen a definite increase in the number of manufacturing projects up for bid. “The business activity that we’ve had with industrial companies — automotive, steel, and utility as well — has seen a minimum 50% increase. That’s in the amount of available work for us to go after and bid. We’re finally starting to see a significant change.”

According to Frantz, the uptick in activity is economy driven. “For the automotive industry, it’s all about sales and market share, and they’re doing really well right now. As long as something doesn’t happen in the economy — or we have some financial meltdown of some sort — I would say we’ll probably continue to see that growth. It all hinges on could there be another terrorist attack, could there be an issue with the financial situation in our country? If those things don’t change, I would say it’s going to continue.”

Gas and Steel

Overall, according to the Brookings Institute, Washington, D.C., the U.S. economy remains strongest in advanced manufacturing sectors with high technological and skills requirements, such as aerospace, industrial and energy equipment, automobiles, and medical devices. “We have seen a number of opportunities in the manufacturing/industrial market segments,” says Clark. “But I can’t say there is a certain segment that is better than another. It really is dependent on what is driving the project — i.e., fracking, outdated infrastructure, sustainability, etc.”

According to Grady Saucier, VP marketing for electrical instrumentation contractors MMR Group, Baton Rouge, La., the energy and fracking sectors are big parts of his firm’s business right now. “That’s helped our industry and our company tremendously,” Saucier says. “The feedstock of the chemical industry is getting cheaper, so it makes us more competitive than the international world. When natural gas comes down, you get long-term contracts, so there’s a stability there in the energy that we haven’t seen in a long time. You can get 15- to 20-year gas contracts, so you can really determine what your energy use is going to be — and your energy costs — so they can calculate what they can sell their products for.”

MMR Group is also performing work for other manufacturing sectors as well. “The automotive industry is doing fairly well,” Saucier says. “The metal business is doing well.”

Contracts have come from Mercedes, ThyssenKrupp (TK) Steel Mill, and Nucor Steel. “TK built a $4 billion new sheet metal plant, which is largely for the automotive industry,” Saucier explains. “It goes hand in hand there.”

Motor City Electric Co. has also provided services for both automotive and steel industries. “Obviously, the automotives are doing a lot of retrofitting to their existing facilities, changing out their assembly lines and their assembly systems,” Frantz says. “They’re doing a lot of upgrading of existing systems and their existing facilities.” His firm recently worked with Chrysler, building a new paint shop for one of its facilities, along with a new body shop.

Steel producers are also retrofitting facilities as well as expanding, according to Frantz. “I talk about automotive because I’m from Detroit, but we’re starting to see a resurgence in certain other areas,” says Frantz, who estimates an increase of 50% or more in the automotive, steel, and utility sectors. “Steel production is the same way,” he continues. “Severstal Steel put a whole brand new facility in for a pickle line and cold mill line last year. We did that job for them.”

Southern Hospitality

Detroit benefited greatly from the revival of the auto industry after the federal rescue of General Motors and Chrysler in 2009, and it has added jobs rapidly over the past year. Firms in the Cleveland and Charlotte areas have ramped up production to take advantage of the shale-gas boom sweeping much of the country. However, much of the recent upsurge in manufacturing activity seems to be located in the South.

One of Severstal’s recently expanded plants is located in Columbus, Miss., in the state’s “Golden Triangle,” close to major North American automotive customers and the expanding Southern manufacturing region of the United States. The location offers access to rail, truck, and water routes for economical delivery throughout the region, Mexico, and the world.

Airbus recently unveiled plans for a $600 million factory to manufacture narrowbody aircraft in Mobile, Ala., its first U.S. factory to make passenger aircraft. It expects to employ 1,000 workers there.Fabrice Brégier, Airbus’ chief executive, said the company had chosen a “competitive environment” for its factory, meaning Alabama is a “right to work” state where workers cannot be forced to join a trade union as part of their contracts. In addition, he described Airbus’ U.S. investment as a geographically strategic move, bringing the assembly line closer to the firm’s customers.

“They’re coming down to the South — Alabama, Mississippi, and Georgia,” says Saucier, whose firm’s location in Baton Rouge, La., is due to the petrochemical industry. “We cut our teeth on oil refineries and chemical plants. That’s why we’re in Baton Rouge.”

However, MMR Group boasts offices across the country and in international locations. Plus, the firm goes where the work is located. “We travel quite a bit,” he explains. “We’ve got 19 offices around the country, and those small offices are geared to do the smaller projects. But from the Baton Rouge office, we can do the larger projects. So it’s a good place to be. It’s a good background of projects, staff and craftsmen here, and we ship them all over the world.”

Faith Technologies is seeing an increase in projects throughout the United States, but Clark finds the highest percentage is found either in the Midwest or Southeast. However, when it comes to complex manufacturing or industrial projects, he feels location doesn’t come into play as strongly as with a commercial or municipal project. “About 75% of the projects we are currently working on in this market are outside of geographies served by our branch locations,” he says.

Frantz at Motor City Electric sees the resurgence occurring in different areas throughout the country. In Florida, the firm performs utility work. It has also worked on projects in Kentucky. “It’s been pretty good so far,” he says. In addition, the firm is starting to see new projects in Las Vegas, one of the places where construction was hardest hit by the recession. “You can start to see where Las Vegas is starting to come back a little bit,” he says. Furthermore, international work, particularly north of the border in Canada, is strong. “It seems to be steady pretty much everywhere,” Frantz concludes.


SIDEBAR: Regional Manufacturing Reports Reveal Mixed Activity

Several regional reports forecasted the decline in new orders in manufacturing in June. The New York Federal Reserve Bank’s Empire State June report indicated new orders fell to 2.18 from 8.32, while new orders for June in the Philadelphia region tumbled to -18.8 from -1.2. New orders for June in the Richmond, Va.-based Federal Reserve’s report fell to -12 from 1, and orders in the Kansas City region decreased to -7 from 10 in May. One anomaly, the Dallas Federal Reserve’s survey, showed an increase in orders after three months of contraction.

The United States Manufacturing Technology Orders (USMTO) report, compiled by the Association for Manufacturing Technology (AMT), the trade association representing the production and distribution of manufacturing technology, provides regional and national U.S. orders data of domestic and imported machine tools and related equipment. The May U.S. manufacturing technology orders on a regional basis for five geographic breakdowns of the United States are as follows:

Northeast Region: Manufacturing technology orders in the Northeast in May totaled $63.68 million, down 6% from April’s $67.72 million and down 0.6% when compared with the May 2011 figure. At $313.37 million, 2012 year-to-date is up 2.4% when compared with 2011 at the same time.

Southern Region: Southern Region manufacturing technology orders totaled $77.67 million in May, a 60.3% increase from the $48.44 million total for April and 40.0% more than the total for May 2011. The year-to-date total of $293.28 million is 14.3% more than the comparable figure for 2011.

Midwest Region: At $153.17 million, May manufacturing technology orders in the Midwest were up 19.8% when compared with the $127.87 million total for April and up 4.9% when compared with May a year ago. With a year-to-date total of $738.08 million, 2012 is up 7.9% when compared with 2011 at the same time.

Central Region: May manufacturing technology orders in the Central Region totaled $134.85 million, 2.3% more than April’s $131.76 million and up 40.7% when compared with the May 2011 figure. At $675.93 million, the 2012 year-to-date total was 22.7% more than the comparable figure for 2011.

Western Region: Western manufacturing technology orders in May stood at $44.54 million, 17% more than the April total of $38.07 million and 21.6% higher than the figure for May 2011. The $214.70 million year-to-date total was 9.4% above the total for the same period in 2011.

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