Economic headlines this month announced that the rejuvenation of the United States manufacturing sector is on the skids. But is manufacturing declining, or is this merely a blip on the radar?
According to the latest research by the Institute for Supply Management, factory activity in February fell from 53.5 in January to 52.9 — its lowest point since January 2014, a 13-month low.However, any index number above 50 is an indicator of an expanding manufacturing sector.
In a recent column in Industry Week, Chad Moutray cites a number of reasons for the February drop, including:
Lower energy costs
Actually, this is a two-edged sword. Manufacturers who use petroleum products in their manufacturing process, especially consumer goods, actually gain from lower oil prices. But manufacturers of large and expensive earth drilling and moving equipment predict slower growth as do producers of energy-related products, such as pipelines.
Based on a December survey conducted by the Manufacturers Alliance for Productivity and Innovation (MAPI), manufacturing is expected to grow 3.4 percent in 2015. The original estimate in November was for 3.8 percent growth. The reason for this lower estimate is based on a projected price of $63.50 per barrel instead of the $80 used in the November projections. The price of oil currently sits below $50 per barrel.
Nevertheless, Don Miller, MAPI’s director of economic studies, said, “I’m dubious whether oil prices will remain extremely low for the entire year. I expect some bounce back.”
Sluggish growth in overseas markets
When the U.S. dollar is strong, exports are more expensive, and sales overseas slow. The big reason the dollar has gained against other currencies abroad is that the pace of recovery from the global recession for those continues to lag behind that of the U.S.
Struggling economies cannot afford many U.S. exports, especially those targeted toward consumers.
Port labor strike on West Coast
First a slowdown, then a strike and finally a contract. During the slowdown and strike, manufacturers from automakers to toy manufacturers slowed or temporarily closed production lines due to lack of parts that were sitting on ships waiting to have containers offloaded.
The strike, which began in 2014, ended Feb. 20, and things are finally getting back to normal. However, the agreement is tentative until the International Longshore and Warehouse Union and Pacific Maritime Association (ILWU) votes on the five-year contract.
The United States has endured a brutal winter, which has had a negative effect on the economy as a whole. And weather is increasingly becoming a factor in doing business.
“Large weather disasters, or weather events causing more than $1 billion in damages, are becoming more frequent,” according to the United States Environmental Agency (EPA). “The country experienced 20 weather disasters in the 1980s, 47 in the 1990s, and 48 in the 2000s; but in the just the past four years, 36 weather disasters occurred more than double the pace of the two previous decades.”
What does the future hold?
According to a report distributed by the Boston Consulting Group (BCG), the manufacturing sector of the U.S. economy is still poised for growth.
Starting in 2012, BCG began tracking companies that are reshoring (ceasing overseas manufacturing and bringing the work back to the United States). Until now, BCG says somewhere between 300 to 400 have reshored “at least part of their operations.” Since 2003, the number of companies starting new offshore operations has declined by 70 percent. During the same period, reshoring has climbed by 1,500 percent.
“It’s never a good idea to make hasty assumptions,” according to Indramat Products. “One ‘slow’ month of manufacturing doesn’t necessarily say anything about its future. After all, the manufacturing sector still grew, just not as much as people were hoping for. January marked the 27th consecutive month of growth for manufacturing. It would be a reach to say that manufacturing is slowing down because it has grown for 27 months straight.”
That said, predicting the future of manufacturing is not a precise task. Weather, work stoppages, supply chain disruptions and many more factors influence U.S. manufacturing.
Nevertheless, if — and that it is a big if — oil prices stabilize, there is no labor strife in the supply chain, the weather becomes moderate, and overseas economies grow, then 2015 could be a banner year. But it is unlikely that the world will ever be perfect, and manufacturing remains a global process.
The question is: Do you think the glass is half-full or half-empty?
About the Author
Alan Kelsky is a freelance writer with a master’s degree in business administration from Xavier University with a specialty in healthcare management. Alan was formerly a hospital CEO with an active emergency room and was the CEO of an urgent care center in Pompano, Florida. He is also formerly the owner of Electric Control Services. His company worked with manufacturers and commercial building owners by offering energy audits, energy efficiency technology sales, installation and follow-up monitoring.