End of Factory Slump May Be on the Horizon
The nation’s disastrous slide in manufacturing--the critical economic sector that has bled 1 million jobs since mid-2000--may finally be coming to an end.
An index of manufacturing activity released Wednesday showed a continued decline, but at the slowest rate in 14 months. Moreover, the new orders component of the index rose to its best reading since April 2000.
“After a long bout of decline, things are starting to stabilize,” said Mickey D. Levy, chief economist at Bank of America.
Still, most analysts said they expect few manufacturers to add workers to their payrolls any time soon, and that the nation’s unemployment rate should continue to climb for at least several more months.
In all, it was moderately encouraging news for manufacturing workers, a swath of the work force including well-paid unionized auto workers along with minimum-wage laborers in garment-sewing shops. The manufacturing sector, whose collapse led the nation into its current recession in March, has accounted for a shrinking portion of U.S. employment for years but remains an important engine for the economy.
Wednesday’s report from the Institute for Supply Management said its purchasing managers index rose to 48.2 last month, up from 44.5 in November and 39.8 in October. December’s level was the highest for the gauge since October 2000, although it suggests that manufacturing still is declining, albeit more slowly.
More encouraging, the component of the index focusing on new business orders was at 54.9, up from 48.8 in November, largely because of improvement in high-tech fields, a key part of the California economy.
In the overall index, a reading above 50 indicates growth and anything below 50 reflects decline. The findings were based on responses by 260 to 270 purchasing executives across the country to a monthly poll by the institute.
The institute’s report came exactly one year after Federal Reserve Chairman Alan Greenspan began a series of 11 interest rate cuts that, together with low energy prices and increasingly tight inventories, are widely expected to spur recovery.
The report from the institute, previously known as the National Assn. of Purchasing Management, squared in some respects with other recent upbeat economic indicators.
A batch of reports released Friday showed a gain in orders for nondefense durable goods, along with increases in consumer confidence and home sales.
To a large extent, the latest reports reflect an economy that has shaken off the effects of the Sept.11 terrorist attacks, but that also remains stuck in a recession. For instance, the Institute for Supply Management’s overall purchasing index was at 48.2 in December, up only slightly from August’s 47.9.
“The economy has proven to be quite resilient after the Sept. 11 event, and it’s pretty much back, in terms of the indexes, to the levels where we were prior to Sept. 11,” said Norbert J. Ore, who chairs the institute’s manufacturing business survey committee.
“Some industries are showing signs of recovery,” Ore added. “We have to remember that as the economy starts to recover, it doesn’t do it with every industry all at once.”
The main cause for hope came in the new orders component of the institute’s index, a forward-looking indicator that in December reached a level suggesting significant economic growth ahead. The new orders component had plunged from 50.3 in September to 38.3 in October, when the full effect of the Sept. 11 attacks was registered.
Those new orders came largely in high-technology industries, which drove the U.S. and California economic booms in recent years and then helped lead the national and state economies into their downturns.
Further evidence of a possible high-tech pickup came Wednesday from the Semiconductor Industry Assn., which reported that worldwide sales in November rose to $10.6 billion, an increase of 1.6% from October.
The trade group said it was the second straight month of increases and predicted that December would show further gains, moving the industry off the bottom it hit in the third quarter.
“It’s more of a trend, not just a blip,” said SIA spokeswoman Molly Tuttle. “Hopefully, we’ll stay on this path of slow but steady growth.”
The association forecasts that 2002 sales will increase 6% to $150 billion, and that by 2004 volume will exceed the record of $200 billion set in 2000.
Computer chip makers said increased sales of personal computers, wireless telephones and automotive components are leading the way up. Last month, Intel Corp. and rival Advanced Micro Devices both raised their revenue projections for the quarter that ended last week.
In addition, Dell Computer Corp., the biggest seller of PCs, said the Windows XP operating system and new chips from Intel helped increase demand. Analysts said that companies that bought computers in the late 1990s because of the Y2K scare are due to upgrade their systems soon.
For semiconductor companies, “half the problem has been solved,” said S.G. Cowen analyst Drew Peck.
Peck added, however, that even though stock prices of chip companies reflect investors’ expectations of a swift recovery, “the bad news is the real consumer recovery is probably going to be long and arduous.”
In the auto industry, strong sales in recent months spurred by zero-interest financing have depleted manufacturers’ inventories. Still, industry officials don’t appear confident that sales will continue to be brisk enough to warrant calling back laid-off workers.
“I don’t think anybody around here is declaring victory, because many of the indicators are still at levels that are below last year,” said George Pipas, Ford Motor Co.’s director of sales analysis.
Likewise, temporary help agencies, which supply workers to many manufacturing plants during peak production periods and in the early stages of economic recovery, have not yet seen an increase in demand, said Darin Meadows, Los Angeles manager for Manpower Inc.
“We think we’re still bouncing along the bottom in this,” he said. “We, and many others, are not forecasting any real growth until the third or fourth quarter.”
Although Meadows expects a slow start to 2002, the current mood is far better than last year, when manufacturers were focused on laying off workers, he said. “It’s a new year, a new budget and some renewed optimism,” he said.
Still, Ore said he didn’t expect recovery until the second half of the year. “Where is the growth really going to come from?” Ore asked.
“We know we’ve got excess capacity in a lot of industries, so capital investment is not going to be there. We know information technology spending has dropped tremendously, so that’s not going to fuel the economy the way it did in the late ‘90s. We know our [foreign] trading partners are soft. Their economies are like ours or worse in most cases, so the demand is not going to come from there. So, it’s really up to the American consumer.”
