Trouble in the Manufacturing Sector?

     Over the past three or four years there has been but one consistently bright spot in the US economy and it is one that still takes people by surprise. This is a nation that most assume no longer has a manufacturing base after all. The myth has been persistent as pundit after pundit has declared the US manufacturer dead since the 1980s. The fact is that the manufacturing sector was never dead but it has changed radically in the last twenty years. The recession was originally centered in the financial community and took its toll on traditionally robust sectors like housing and consumer spending. The manufacturers looked good in comparison but that hardly means that there were no issues in that diverse sector.The growth of manufacturing was the sole sign of progress through much of the recession and the subsequent slow recovery and it is still the sector that shows the most promise for the coming year. The problem is that the endemic issues that have always been there are playing a bigger role now and that has started to compromise the role that manufacturers have played in the recovery thus far. This is coming at a time when the politicians have suddenly rediscovered the manufacturer. That is both good news and bad. It is certainly rewarding to be acknowledge but real appreciation of the manufacturer’s world is in short supply and there are already some very unrealistic expectation being placed on the industrial sector. The issues that most concern the manufacturing sector are not the ones being dealt with and that will create more tensions later.

Analysis:   The current data is   not all that encouraging but neither does it signal a sharp decline. It would   seem that some of those endemic issues are starting to rear their ugly head   and they are contributing to a slowdown in the sector sufficient to take some   of the steam out of the economic recovery.

The numbers as far as industrial production do not suggest a steep   decline but a stall. This is not great news but it could certainly be worse   especially as some of the key sectors are still progressing pretty well.   Overall manufacturing activity fell by 0.2% after scoring a slight rise in   February to 0.8%. This is essentially flat. The capacity utilization numbers   slipped slightly – from 78.7% to 78.6%. This is certainly not an occasion to   panic but the normal level of capacity utilization is 80% and it is not   encouraging that the numbers are trending ever so slightly in the wrong   direction. It is when one gets into the details that one sees some continued signs   of growth and encouragement.

The growth in the auto sector continues. It is not the blistering pace   that was seen at the end of last year but this is not generally the time that   car sales take off – even in the best of times. The growth in auto related   production was 0.6% and that is on top of a 0.8% gain in the previous month.   There is more to this number than meets the eye as well. The numbers last   year were very impressive and some expected to see those production gains   continue but that was an unrealistic assessment. The surge in production last   year was not really matched by consumer demand as the majority of that growth   was connected to recovering from the supply chain interruptions created by   the disaster in Japan. For some months after the earthquake and tsunami, the   car dealers in the US were struggling to get cars on their lots. This mostly   affected the Japanese cars but it turned out that many makes and models had   parts that originated in Japan. It took several months for the dealers to get   their inventory back to where they wanted it and most were somewhat less   concerned about sales. Now that the lots are full the sales are again key and   consumers are responding slowly.

Mining and energy went up by 0.2% after a fall of 0.4% in the previous   month. The fact is that energy related manufacturing will be streaky and   reliant on bigger shifts in the production process. Right now the low price   of natural gas has slowed development of that sector and reduced demand for   equipment. The oil sector is still booming but these developments tend to   follow something of a boom and bust cycle.

The part of manufacturing that is now showing some strain is that   which is pointed at overseas markets. It is hard to tell whether this is a   long term situation or a temporary hitch. The US remains a highly competitive   exporter due to the continued weakness of the dollar and the improved export   skills possessed by more US manufacturers. The problem is that many of the   nations the US traditionally sells to are in trouble to one degree or another   and that affects their demand for imports. The most pronounced drop in demand   for US output has been in Europe and that is a region that has traditionally   accounted for 25% of US export and import activity. The good news for the US   is that most of that trade has been with Germany, the UK and France but the   bad news is that France is in nearly as bad shape as the Italians and Spanish   and the British have been struggling to stay out of recession. Only Germany   has been able to maintain its usual levels of economic activity. There has   also been a decline in demand from some of the Asian markets as China has   slowed its economy to around 8.5%. It is not that the US sells that much to   China but we sell to countries that sell to China and if there is reduced   demand from the Chinese these nations reduce their demands from the US. The   Latin states are also seeing some economic strain that affects their demand   from the US. The only states that have not significantly reduced their imports   from the US would be Mexico and Canada and that is generally good news given   that these nations are almost always the top two markets for US goods.

The manufacturers in the US continue to be anchors for the recovery but in the end there have to be consumers for the goods produced. The US consumer is more active than they have been in a while but they are by no means back to their old patterns and may not be for the bulk of the year. The overseas markets are not gone but they are not as robust as they have been and that also affects output decisions for the time being.

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