Nation’s Factories Starting to Hum Again
With the U.S. economy sending out mixed signals, even the experts can’t agree on what recovery looks like. But Gerardo Cruz can tell you how it sounds.
It’s the rhythmic pounding of stamping machines inside his family’s Chatsworth manufacturing plant churning out tiny metal parts for everything from trucks and computers to medical devices.
“Hear that? That’s a symphony to me,” said a smiling Cruz recently over the din at Colbrit Manufacturing. “There were times last year when nothing was running.”
Hit first and worst by the economic downturn, the nation’s factories are showing some sign of recovery. Orders for big-ticket items from refrigerators to turbines are on the rise, with government figures released Tuesday showing new orders for durable goods increasing 1.7% in December. Manufacturing work hours are edging up. The glut of inventory is easing.
Even the technology sector, the black hole of California’s job losses, is starting to emit flickers of light. Global semiconductor sales have perked up in recent months. So have orders for some high-tech equipment.
Bad news still abounds for the nation’s manufacturers. Industrial production continues to slump, and thousands of factory workers swell the unemployment rolls. Demand for information technology equipment, machine tools and other key capital goods remains weak, while a strong dollar has made U.S.-manufactured products less competitive abroad. Some economists warn of a dreaded “double-dip” recession that could squelch any hint of a turnaround.
But the good news, others say, is that though some indicators continue to slide, the rate of decline has slowed. That suggests the manufacturing sector has hit bottom or is close to it, setting the stage for recovery this year.
“It looks like the worst is over,” said Dan Meckstroth, an economist with the Manufacturers Alliance in Arlington, Va. “More and more forward-looking indicators are pointing to a rebound.”
Recovery can’t come too soon for the nation’s factories, which have borne the brunt of the economy’s fallout. In contrast to previous consumer-led recessions, this one started when businesses slashed spending on information technology tools and other capital equipment after the tech bubble burst. The collapse in business investment hit the manufacturing sector early and hard, pushing it into recession in autumn 2000, well ahead of the rest of the economy.
While other sectors were still experiencing the so-called Goldilocks economy--not too hot, not too cold, but just right--manufacturing tumbled like Alice in Wonderland into an unexpectedly deep hole.
“A lot of people didn’t notice, because other parts of the economy kept plugging,” said David Huether, an economist with the Washington-based National Assn. of Manufacturers. “But for manufacturers, the downturn was severe.”
The toll can be measured in pink slips. Manufacturers have shed more than 1.5 million workers since July 2000, with 1 million of those coming since the start of the U.S. recession last March. That represents 80% of all U.S. jobs lost so far in this downturn, even though factory workers represent just 13% of the domestic labor force. Nearly 45% of those losses have come in just three categories--electronics, transportation and industrial machinery, reflecting the double whammy of the tech meltdown and the terrorist attacks that grounded the nation’s aviation industry.
Business Inventories Fell at Record Pace Last Year
Factory production has plunged 7.8% from its peak in June 2000, a larger decline than the 6.2% drop seen during the early-’90s recession. At present, more than one-quarter of the nation’s factories have idle capacity. The situation is particularly grim in high-tech manufacturing, where capacity utilization recently hit an all-time low of 60.2%.
Philadelphia-based Stockwell Rubber Co. is among those feeling the pain. The family-owned firm expanded its plant in late 2000 to meet surging demand for silicone rubber seals and gaskets used in wireless devices, only to watch those orders dry up almost overnight.
“We cut the ribbon just in time for the spigot to get turned off,” said company President Bill Stockwell. “It was very sudden.”
But after a 2001 marked by red ink and layoffs, Stockwell said, his phones now are ringing with customers requesting preliminary designs and bids. Some of that early interest already has resulted in orders. Even clients in the beleaguered telecom sector are calling again.
“At some point, these companies have got to make some new products,” said Stockwell, who is anticipating double-digit revenue growth in 2002. Inventories “have been ground down about as tight as they can go.”
In fact, business inventories have fallen at a record pace over the last year as companies wary of getting stuck with unsold goods cleaned out their warehouses and used up spare parts without reordering. Business inventories fell a further 1% in November, the 10th straight month of contraction, with stockpiles dropping to nearly two-year lows.
Economists say skeletal inventories mean that even a slight increase in new orders will lead to more activity in the nation’s factories this year.
“Any upturn in demand should translate into improved production,” said Michael Burt, an economist with West Chester, Pa.-based Economy.com.
Don Scott, whose Ohio company makes hydraulic cylinders for heavy trucks and other industrial equipment, is expecting such a bounce. He said his automotive customers have drawn down their parts stockpiles dramatically and are soliciting quotes in anticipation of stronger sales in 2002.
“When [that business] comes back it won’t be nice and gradual,” said Scott, general manager of the hydraulic cylinder division of Waltco Truck Equipment Co. in Tallmadge, Ohio. “They’re going to want everything in a week . . . because they’re so lean on the inventory.”
Rise in New Orders Bigger Than Expected
Despite the massive liquidation, manufacturing output has continued to decline, but at a slowing rate. December’s 0.1% contraction represents the third straight month of improvement and the smallest monthly decline since July.
Meanwhile, December’s 1.7% rise in new orders for durable goods was a bigger increase than analysts had projected. Strong defense orders helped. But a close reading of the numbers shows strengthening across a broad spectrum of industries. Orders for big-ticket non-defense goods posted their third consecutive month of growth, helped by gains in everything from motor vehicles and home appliances to construction machinery and semiconductors.
The nation’s factories continue to shed jobs, but at a slower pace. Last month manufacturing employment fell by 89,000 jobs, compared with average losses of 137,000 a month in the fourth quarter of 2001. Despite the continued job losses, the factory workweek rose by 0.4 hour to 40.7 hours in December, while factory overtime rose 0.2 hour to 3.9 hours.
Other indicators hold promise as well. The Institute for Supply Management’s latest purchasing manager’s index--a much-watched barometer of what’s doing in the manufacturing trenches--rose to 49.9 in January, its highest level since August 2000. A reading above 50 indicates that the manufacturing economy is generally expanding.
The index’s new-orders component was particularly strong for the second straight month, helped by increases in orders for a variety of manufactured products, from computers and industrial equipment to electronic components and wood products. A recent forecast by the Manufacturers Alliance also is projecting higher factory orders this year.
Still, economists say the manufacturing recovery will be uneven, with some capital goods makers not seeing a true rebound until the second half of 2002 and many high-tech manufacturers not until 2003 at the earliest. But some makers of consumer-related goods already are on the upswing.
Backyard Adventures Inc., an Amarillo, Texas-based maker of redwood swing sets and other home playground equipment, expects sales to grow 10% to 15% this year after a sluggish 2001. Orders for the company’s playscapes, which retail for $2,500 to $10,000, swooned along with the stock market in early 2001, according to company President Charles Sammann.
“A lot of my customers are connected to Wall Street,” Sammann said.
But a recent contract with a major retailer, a healthy housing market and rising consumer confidence have Sammann upbeat about 2002.
“I’m adding another shift next week,” he said recently. “We are extremely busy.”
Machines also are humming at Colbrit Manufacturing, where operations manager Cruz is likewise seeing early signs of a rebound.
After watching the stamping plant’s automotive business drop significantly in 2001, Cruz said, he’s getting calls to ramp up production for a metal part used in the exhaust systems of sport-utility vehicles and light trucks. He credited the Big Three auto makers’ popular no-interest financing offer for thinning the glut of vehicles on dealers’ lots.
Founded in 1979 by Cruz’s father, Jerry, a Colombian immigrant, Colbrit got its start punching out low-margin, commodity electronics parts. When that business began migrating overseas, Colbrit diversified its customer base and changed its focus to compete on the basis of design expertise and rapid turnaround instead of just price.
Today the company employs 30 workers and has attracted a second generation: 34-year-old Cruz and brother Lee Cruz, 31, who heads the company’s quality assurance. Cruz said the company’s metamorphosis has been critical to weathering the downturn.
“We wouldn’t be here today if we hadn’t made the changes,” Cruz said. “Some of our competitors aren’t going to make it.”
Indeed, the downturn has only accelerated an ongoing shakeout in low-margin industries such as apparel and textiles that already were unraveling under the weight of cheap imports.
Southern California’s aerospace industry also has been hammered by plummeting commercial aircraft construction since the Sept. 11 terrorist attacks. Though government data shows that orders for non-defense aircraft and parts posted solid growth in December, those gains have yet to trickle down to manufacturers such as John Schoolland.
The owner of Camarillo-based Omega Technologies Inc., a maker of aircraft tools, has seen his company’s sales shrink from a peak of $10 million annually in the late 1990s to $3.5 million in 2001. This year looks to be even worse.
“I’m not seeing any signs of a turnaround,” Schoolland said. “Call me in six months.”
Industry watchers say a sizable number of ailing firms won’t survive this recession, and it will take years for the manufacturing sector to recover its recent job losses. But some manufacturers are getting serious about staying competitive in the face of this wrenching downturn.
Geoff Masters, a Cleveland-based expert on Japanese-style production practices, was hoping to attract 100 manufacturing companies for a recent seminar in Ohio. He figured even that number was too optimistic given the troubled economy. To his amazement, nearly 300 signed up to learn how to make their plants more efficient.
“They’re looking toward the future,” Masters said. “That’s a positive sign.”
