OUR THOUGHTS ON:

Manufacturing Update: Then and Now

Manufacturing

By Mary Richter

One day about 3 years ago, I sat in a roomful of executives, accountants and economists–we were all pondering what would happen to the economy–as housing was booming, oil prices were climbing, China was swallowing resources, the trade deficit continued to grow, and everyone was waiting for something to happen.  And it did.  Real estate prices plummeted.  Wall Street had a meltdown.  The business community reacted by slashing expenses and operating very cautiously.  Consumers reduced their spending, too.  The economists who spoke that day told us that there would be a deep recession, unemployment rates would be about 10-11% (a little less locally), and recovery would be slow.

Some industries were greatly impacted, others less so.  A year later we heard the same predictions: same unemployment rate, same recovery pattern.  And yet, the public wondered if we would delve into an economic depression.  What was happening to the US economy?  Those of us who experienced the decline of manufacturing in the Rust Belt were somewhat prepared.  Maybe we had already faced these issues and “retooled”.  But, with more activity being outsourced to other countries, what would drive economic growth?  And when?

Fast forward another two years to 2011 and the economy seems to be on the mend.  Experts anticipate modest 3% GDP growth in 2011.  The US unemployment rate has declined to about 9% for March.  But now, there’s another series of bumps in the road: the tsunami in Japan, rapidly rising oil prices, and a persistently high level of home foreclosures.  Around the world, the disruption of the supply chain is causing delayed production cycles in some industries, but it is also providing an opportunity for vertically-integrated manufacturers to grab additional market share.  Companies are starting to spend their cash, and mergers are on the rise.  Although slow and steady may win the race, today’s successes are coming from agile companies.  So what’s next?

Controlled growth (either by choice or due to various constraints) coupled with lean manufacturing should bring higher margins in the short- and mid-term.  Increases in orders and backlog, a worldwide increase in energy consumption, and a growing consumer base in Asia will also absorb global manufacturing capacity.  And, at least in the US, there will be continued growth in the medical/pharmaceutical industries as companies develop more drugs to treat the baby boomers.  If you believe in a free market economy, US exports will rise as growth in other regions (particularly Asia) outpaces US growth.

There are a lot of continuing uncertainties, but those economists 3 years ago were right: there was a recession; unemployment rates were and continue to be high; and we are recovering slowly.  It may be 2014 until the unemployment rate returns to a “reasonable” level (5% or so), but hopefully, the fundamental shift in the US economy during this time will help US businesses to eliminate excess capacity, improve operations efficiency, and regain market share.

For further information, please contact Mary Richter.

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