December 2011 / Volume 63 / Issue 12|
Are the Stars Aligned?
By George Weimer
|Manufacturing was a star in 2011 and looks to shine brightly in 2012. |
Many questions remain about what 2012 will be like for U.S. manufacturing, for business in general and for profits and losses. A crystal ball is all we need. Unfortunately, they are notoriously unreliable. So we have to rely on humans and their best statistical guesses.
Judging from recent statements from economists about third quarter results from the country’s leading manufacturers, the Great Recession isn’t just over, it’s history. Large manufacturers like Eaton Corp. and Ford Motor Co., as well as hundreds of others, reported record third quarter earnings. This could mean 2012 is going to be another banner year for U.S. manufacturers.
This year saw a major disaster in Japan as a tsunami destroyed thousands of lives and billions in property. The disruption in the supply chain from Japan to the rest of the world was major and continues. Further bad news came as the United States’ credit rating was downgraded by a major rating agency. Another agency is expected to do the same. The credit crisis in Greece and perhaps other European countries is a constant worry for U.S. bankers and industry. The federal government is continuing to wrestle with enormous deficits and debts.
These situations seem to offer nothing but pessimism about the near-term future. Yet industrial companies, in particular, continue to do well. Many research firms, private companies and trade groups note the robustness of the manufacturing sector and suggest it may continue well into 2012.
“The economy accelerated 2.5 percent in Q3,” reported Bank of America Merrill Lynch in early November. “An improvement in domestic demand and inventory rebuilding has led us to revise Q4 GDP growth to 3.0 percent from 2.3 percent. In our view, the recent improvement is not a fluke and the chance of a near-term recession is low.” But, while growth may be firming, it sees “a softening to just 1 percent annualized at the end of 2012” for the entire economy.
Others predict a growth rate above 2 percent next year for the economy as a whole. It will depend on many of the same factors that shaped 2010 and this year and how one interprets the numbers.
Aerospace Still Flying
Looking at the aerospace industry, data from the U.S. Census Bureau indicates that new orders for the second quarter of 2011 were down slightly compared to the first quarter. However, looking at the first half of 2011, total orders and aircraft and parts orders were up from 2010, 6.6 percent and 10.1 percent, respectively (see Figure 1 in the online version of this article on www.ctemag.com). Even more optimistic numbers can be found, the Aerospace Industries Association reported, in the aircraft backlog, which stood at $451 billion, up 4.3 percent from 2010 (see Figure 2, online version).
Quarterly reports from large aerospace manufacturers provide a more recent and positive indicator of market conditions, according to the AIA. “For example, Boeing represents virtually the entire U.S. market for large commercial aircraft,” said Bill Chadwick, AIA director of research. “At the end of the third quarter of 2011, Boeing’s net orders were up nearly 15 percent compared to the same year-to-date period in 2010. Orders rose sharply—nearly 300 percent—in the third quarter of 2011 compared to the second quarter. Boeing’s total sales were up 8 percent for the quarter and up about 1 percent year-to-date 2011 compared to the same period in 2010.”
So what does the aerospace industry expect in 2012? “On the one hand,” Chadwick said, “the market for new, large civil aircraft is very healthy over the long term. Boeing’s global forecast reports that global air traffic is projected to grow at above the historical rate through the middle of the next decade, requiring some 33,500 new aircraft by 2030. However, oil prices, the largest single cost for air carriers, along with a weak economy are clouds over the short term.”
On the military side of the industry, “there’s a lot of uncertainty over the future of the Department of Defense budget,” said Fred Downey, AIA vice president of national security. “The defense budget has already been cut and defense will likely have another $460 billion in cuts over the next 10 years, a combination of Budget Deficit Reduction Act-mandated reductions and Pentagon efficiency initiatives,” he said. “What is unclear at this point is whether even more cuts loom. We do not know what the super committee final report will recommend, how Congress will respond and how longer term efforts to balance our fiscal house will affect the industry.”
Manufacturing Risks Ahead
A recent survey from The Manufacturers’ Alliance/MAPI noted that its September composite index fell “only slightly,” to 67 percent from 68 percent in June (see Figure 3, online version). Like other such surveys, above 50 percent indicates expansion in plant utilization. “This quarter’s (the third) survey results point to continued growth, but at a slower rate,” said Donald A. Norman, MAPI economist and survey coordinator. “The forward-looking indexes came in at relatively high levels. Despite the fact that a number of indexes fell, taken together, the results of this quarter’s survey contradict the view that the manufacturing sector is sputtering.”
Other surveys reflect both less and more optimistic descriptions of manufacturing activity. The ISM Manufacturing Index from the Institute for Supply Management improved to 51.6 in September from 50.6 in August, indicating expansion.
“Production and employment both improved,” said Nigel Gault, chief U.S. economist for IHS Global Insight, Northville, Mich. “The orders index was unchanged, but was below 50 (indicating a decline) for the third month in a row. Order backlogs fell sharply. However, price pressures were little changed, remaining far less severe than earlier in the year.”
The plant utilization numbers remaining in the expansion category are good news, but the softness in orders is a concern. “We would have greeted this report with enthusiasm if the headline index had been driven higher by a bounce in new orders,” Gault said. “But the good news was concentrated in production and employment, which are more backward-looking indicators. The most forward-looking component, new orders, remained below breakeven, and order backlogs fell sharply. This suggests future production will be at risk if orders do not pick up.”
So, while manufacturing in general seems to have some sluggish growth issues, some sectors are as robust as they have been in years. Similar to aerospace, solid economic growth was expected for the rest of 2011 and 2012 by participants at the Federal Reserve Bank of Chicago’s annual Automotive Outlook Symposium in June.
The symposium participants, including representatives from the auto industry and analysts, produced a forecast for the rest of 2011 and next year. Their prediction for this year was a slightly lower growth rate by the end of the year compared to 2010, while 2012 will “edge higher, with inflation easing and the unemployment rate continuing to head lower. Real GDP, after having increased 2.8 percent last year, is forecast to rise by 2.6 percent this year and 2.9 percent in 2012.”Production’s Strong Pace
Perhaps most encouragingly, the Automotive Outlook Symposium report stated industrial production is forecast to increase at a strong pace by the end of 2011 and in 2012. Specifically in the automotive sector, the report indicated that car and light truck sales are projected to improve in 2011, with sales of 13.2 million units; and they are expected to improve to 14.4 million units in 2012.
In a later report, the bank noted that the manufacturing sector, for which the level of production fell by more than 20 percent during the Great Recession, “has been increasing rapidly since the end of the recession. From June 2009 through May 2011, manufacturing output grew at an annualized rate of 6.6 percent, recovering just over half of the loss experienced during the downturn.”
Further, the bank pointed out, “The two industries that fell by the largest percentages—automotive production and primary metals—are the two industries that have shown the strongest growth since the end of the recession, with annualized growth rates of 29.2 percent and 21.2 percent, respectively.”
In addition, heavy-duty truck orders have risen. “Truck sales are expected to reach 256,000 units in 2011 and 330,000 units in 2012, up from 118,000 units in 2009,” said Kenny Vieth, partner, America’s Commercial Transportation Research Co. LLC, Columbus, Ind.
And, of interest to all manufacturers and consumers, the price of oil, according to the bank is expected to average $103 per barrel by the end of 2011 and then remain at that level through the end of 2012.
Other industries expect 2012 to be at least as robust as 2011 and perhaps significantly better. The medical instruments industry, for example, “is looking much better than a couple of years ago,” said Venkat Rajan, industry manager—medical devices for Frost & Sullivan, Mountain View, Calif. During the recession, hospitals didn’t have the money to invest in new technology and the cost of manufacturing was going up as well in terms of resins for plastic products, for example.
“It’s a quite different landscape today,” Rajan said. “Margins are tighter in the medical device industry.” But the industry has “rebounded and is now on stable ground. Also, more and more large companies are becoming involved in the industry. We can expect more of the same next year; it will be a fairly strong 2012.”Cutting Tool Optimism
“Globally, markets are busy from North America to much of Europe and most of Asia,” Steve Morency, president of the United States Cutting Tool Institute told CTE. Having recently returned from EMO, the large European machine tool show, Morency noted, “Attendees seemed to be looking for solutions to production problems, not just casual shopping. Machine tool builders were overheard to have very strong ‘on floor’ sales. All sectors are providing good opportunities—aerospace, especially commercial, automotive, medical and energy are all gaining momentum.”
Sales reported by USCTI member-companies have “recovered very nicely since the second quarter of 2009, which was their low point,” Morency said. “While 2010 sales remained somewhat stagnant during the first few months of the year, overall it was a very good recovery, with sales up 24 percent in 2010. 2011 appears to be even stronger, with sales through August up over 31 percent, to $1.134 billion.”
Still, there are issues and concerns that temper all this optimism. One is the “slow economic recovery in the U.S. and high unemployment,” Morency said. Also, raw material prices are rising as availability tightens. “Carbide prices have increased 40 to 50 percent over the past 12 to 18 months, and there is concern that even more increases may be on the horizon.”
The future, however, looks bright. “The outlook for next year is very positive. (Cutting tool) sales growth should be double digit and, barring any significant setbacks, could be in the mid-to-upper teens,” Morency predicted.Machine Tool Optimism
The machine tool industry is fairly optimistic another recession is not in the immediate future. “There is about a 20 percent chance,” according to Patrick W. McGibbon, vice president, strategic information and research for AMT—The Association for Manufacturing Technology. “Our products are now the most competitively priced in the world except for China. Even there, the cost of labor is rising so fast that American-made machine tools, indeed all of the country’s manufactured goods, will be very competitive with China soon.”
McGibbon added that the recovery among machine builders has been stronger than expected. Certain machine tool markets have been particularly robust.
“Our big three markets are automotive, off-road and aerospace. Off-road construction is showing fast growth. The auto industry is making money, boat loads of it, on 12 million units annually compared to recent years when they made little on 17 million. Of course, reduced labor rates helped.”
McGibbon added that 2012 “might be a bit weaker than 2011 simply because this year has been so good. We are close to our peak year of 2007 now.”
Questions about 2012 that are often asked and can never be answered until they’re history include some of the same issues that plagued business in general throughout 2011. Will Greece experience a disorderly default? Will there be a further credit crisis in Europe and the U.S.? In an election year, can anyone be certain of anything?
Mark Twain’s famous comment comes to mind when dealing with predictions and statistics. “There are lies, damn lies and then there are statistics.” Yet, we have to rely upon the numbers we have and the facts we know. The numbers suggest a 2012 that is comparable to 2011 in many industries—but not all.
Present business conditions for metalworking companies may hold well into the New Year. The pessimists come into play as the year goes on. If there is no acceptable solution to the various sovereign debt issues hanging over the world economy, then the current manufacturing boom may morph into far slower growth and a U.S. credit crisis.
Perhaps the most optimistic point of view, however, is this. Many economists as well as top managers and shop chiefs would probably say the economic and political situation for metalworking, with a low U.S. dollar and competitive labor costs, is better in the United States than it is for most countries. That alone might make it a little easier for U.S. manufacturing to stay the star in 2012. CTEAbout the Author: George Weimer is a freelance writer based in Lakewood, Ohio, with an extensive background in the metalworking industry’s business press. Contact him at firstname.lastname@example.org.
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