Don’t Overlook the Positive News in Manufacturing

Don’t Overlook the Positive News in Manufacturing

Alleviate the U.S. tax and regulatory burden Address the skeptics Resurgent auto industry Industrial Production, PMI, USMTO Reshoring, onshoring, etc. Manufacturing's multiplier effect

Among the economic experts lately weighing in on the state of U.S. manufacturing, most are aligned on what needs to be fixed in order to make the industrial sector stronger. The common thread between us is a call for action to alleviate the U.S. tax and regulatory burden, increase the pace of innovation, and address the skilled labor shortage. While we can agree on this broad agenda, we don’t always agree on the road map to get us there – or even where manufacturing currently stands relative to our economic recovery and competitiveness.

At AMT, we take the “glass half-full” approach. Does that make us blind optimists? No.  But every day, I see the significant progress our members are making in growing and building their businesses. They are taking their operations global and expanding into new markets. They are coming up with innovative, groundbreaking technologies that are expanding possibilities beyond what was imaginable just a few years ago.

Others, though, don’t see the picture quite as positively. They insist that manufacturing is stuck in the doldrums. Some skeptics point to limited output in certain industrial segments as an indicator that manufacturing isn’t at a strong point. Others say that manufacturing is only partially recovered from the 2009 recession, or that its comeback is “muted.”

These opinions come from respected and knowledgeable voices in manufacturing, and although I respect their viewpoints or expertise I believe many of them are overlooking some of what’s really happening in manufacturing.

They point to low output in certain industrial segments, or question manufacturing’s “success” as an economic driver because of unemployment figures. It’s true some sectors have not bounced back as quickly as others have done, and that manufacturing jobs have been lost. But, it’s also true that American manufacturing has led our economic recovery and is vital to strong, sustainable economic growth and national secuity.

Important to Recognize

From our viewpoint, this is what is important to know: Profitability in manufacturing is the highest it’s been since the 1960s. Take a look at what’s happening in the auto industry. Motor vehicle manufacturers, who had been posting losses since 2006, lost nearly $65 billion dollars in the last quarter before the Great Recession.

Just two years later, the sector began turning a profit. Q4 2012 was the sixth consecutive quarter that the industry was profitable, matching the previous streak from 2004.

Although some auto industry segments have not surpassed pre-recession levels, consistent profitability suggests this core manufacturing industry is far better off than it was at any point in the past 10 years. Recently, the Detroit Free Press reported reported that auto suppliers are “scrambling” to keep up with demand, and pointed to a survey by the Original Equipment Suppliers Association that found 25% of suppliers are running at 100% capacity.

You really don’t have to dig deep to find plenty of good news for manufacturing. Take, for example, the Federal Reserve’s Industrial Production Index for Durable Goods. This index is published each month and measures output in major industrial sectors. The series for durable goods (products that last over three years) peaked in June 2013. Coming out of such a recession, it is important to compare the level of output to both the 2009 trough and the 2007 pre-recession peak. In neither comparison has durable goods output underperformed relative to the economy overall.

Additionally, the Purchasing Managers' Index continues to suggest expansion in manufacturing rather than contraction. That index has risen above 50 for all but two months since August 2009, and the three-month average has not dropped below 50 during all that time. The July 2013 reading, issued August 1, showed the PMI sitting at 55.4, its highest reading of the year so far. A new Goldman Sachs report suggests that the PMI is one of the best predictors of the economy’s strength and momentum.

Machine tool orders are a great metric for measuring the overall health of the manufacturing economy because they reveal the true level of capital investment by manufacturers in their plants. Recent data measured by AMT’s monthly USMTO survey showed new orders lag the pace set in 2012, but they are easily back to levels they reached in 2007 – the last boom year for the industry. This is true for the unit count as well as total order value. Moreover, the 12-month moving average for machine tool orders has been very consistent since the beginning of 2012, and more important, it has remained consistently well above the 2003-2007 level when things were “normal” in the machine tool segment.

The New American Workforce

Some economic skeptics point to a lack of job creation as proof that manufacturing doesn’t add enough value to the economy. It’s important to understand why we don’t see the same level of manufacturing employment as in previous decades.

While many low-skilled manufacturing jobs moved overseas during the last decade, today reshoring and onshoring are trending upward as offshoring becomes less economical. And, the jobs that are “moving back” pay more and require higher skills than the jobs that were lost.

Yes, automation has ushered in higher levels of productivity and reduced the need for lower-skilled assembly line jobs, but it has also created new opportunities for workers with sophisticated skill sets and advanced training.

Nationally, we must recognize that currently there are more jobs than workers to fill them, and then increase our efforts to promote STEM education and technical training.

The manufacturing sector is a different today than it was in the recent past, but its value to the economy goes far beyond simple jobs numbers. According to research by MAPI, U.S. manufacturing stands alone as the world’s tenth-largest economy. Manufacturing’s multiplier effect is stronger than that of any other industry. Foreign direct investment in U.S. manufacturing sits at $899 billion – much higher than pre-recession levels.

Additionally, U.S. manufacturers’ investment abroad is valued around $580 billion, indicating that U.S. companies are expanding their global reach and finding their place in emerging markets worldwide.

I think that all of us with an interest and passion for manufacturing agree that this is an industry with value beyond compare. Most of us agree that we need a government framework that allows us to meet our greatest potential – a strong national manufacturing strategy focused on making the U.S. the best place in the world to make things.

Enacting comprehensive tax and regulatory reform is a start, but only a start. There is a lot of work that can be done to strengthen U.S. manufacturing, but to devalue the importance of its recovery from the recession only encourages the public to believe that the industrial economy is no longer relevant.

I want to focus on changing that message, and to show all the reasons that U.S. manufacturing is strong and getting stronger. I think that’s a message that all of us can endorse.

Douglas K. Woods is president of AMT – The Association for Manufacturing Technology. AMT represents U.S.-based designers, manufacturers, and distributors of machine tools and related technology. Contact at tel. 703-893-2900, or visit www.AMTonline.org

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