August 14, 2003
This article was inspired by a reader's reaction to Part IIof David Goodreau's two-part series about the state of manufacturing, The Perfect Economic Storm and the 100-year Flood in Manufacturing. The reader asked, "Can you find ANY good news out there for the industry?" While you may have to look hard to find it, there is good news for manufacturing. Looking for it may be as frustrating as looking for the proverbial needle in the haystack. It helps if you don a pair of rose-colored glasses with wide-angle lenses that can help you see the big picture.
Good news for U.S. manufacturing can be found in the solid rise in orders for the month of June and in the July Institute for Supply Management (ISM) Report on Business®. The economic growth tax relief bill that should increase capital spending is good news as are the various initiatives launched by manufacturing associations, members of Congress and the Senate, and the U.S. Commerce Department to improve conditions for U.S. manufacturing.
The U.S. Commerce Department reported that the demand for manufactured goods rose 1.7 percent in June, slightly higher than Wall Street estimates of 1.5 percent. Orders for non-durable goods—items expected to last less than three years—gained 0.7 percent. Orders for durable goods, such as cars and refrigerators, rose 2.6 percent, the biggest gain since July of 2002.
The Institute for Supply Management (ISM) Index for July 2003 reported that economic activity in the manufacturing sector grew in July, while the overall economy grew for the 21st consecutive month. Fabricated metals was among the industries reporting increases in new orders, production, and new export orders.
Norbert J. Ore, C.P.M., chair of the ISM Manufacturing Business Survey Committee, said, "While the overall economy continues to improve, the manufacturing sector reversed its recent trend of contraction and grew during July for the first time in five months. The improvement in new orders continues to be very encouraging, and reinforces the possibility that the economy will continue to improve during the second half of the year."
In a statement issued August 1, Daniel J. Meckstroth, Ph.D., chief economist for the Manufacturers Alliance/MAPI, commented on the ISM report: "The July ISM report confirms that manufacturing production is finally on the mend again. Of particular importance is the fact that orders have risen for the last three months. With the tax cut to stimulate consumer spending, increased availability of credit as the Fed tries to stem deflation, and a falling dollar that will increase exports, prospects for a sustained recovery look good. Unfortunately, the recovery in manufacturing output is not yet fast enough to stem the unrelenting job loss in the sector."
Cutting and delaying capital spending are reflexive, understandable reactions to a depressed economy. Why should a company spend money it may need to see it through until the economy improves when it can get bywith its current equipment and technology—no matter how outdated or inefficient?
There are at least three reasons why companies should continue to invest in capital equipment:
Capital spending appears to be increasing. The jobs and economic growth tax relief bill passed in May 2003 includes several incentives for capital equipment spending, including a 50 percent expensing allowance for new equipment through 2004 and a $100,000 small business expensing allowance (Sec. 179) through 2005.
In an interview with Lou Dobbs on CNN, Treasury Secretary Snow said that the tax cut is a catalyst that will spur economic growth—companies have finally shaken off the effects of the technology bubble and are ready to spend money again.
Snow said, "We have a corporate structure that's leaned out—inventories are tight as a drum, corporate America is very productive, and they've taken a lot of costs out. So when the economy comes back, I think we're going to see a nice pick-up in profitability and cash flows—and that's always the precursor of expansions in capital spending."
The Gross Domestic Product (GDP) for the second quarter 2003 increased at an annual rate of 2.4 percent according to advance estimates released by the Bureau of Economic Analysis Agency of the U.S. Department of Commerce. In the first quarter, real GDP increased 1.4 percent. The acceleration in real GDP growth in the second quarter primarily reflected upturns in federal spending and in nonresidential fixed investment. Real nonresidential fixed investment increased 6.9 percent in the second quarter, in contrast to a decrease of 4.4 percent in the first—a sign that capital spending is increasing.
A recent survey of thefabricator.com readers showed that the tax bill incentives are having an effect. Almost 60 percent of the respondents said that the expense allowance increase has changed their companies' plans for capital purchases. Of those buying, 25 percent plan to replace equipment, 50 percent will add additional capacity, and 25 percent will expand and offer a new product or service.
Various groups, including trade associations, members of Congress and the Senate, and the Department of Commerce are spearheading initiatives to improve the state of manufacturing. If passed, these initiatives could be the shot in the arm U.S. manufacturing needs to get back on the fast track to profitability and make for a more stable future for the industry.
Here's a brief summary of some of these initiatives. Readers are encouraged to show their support for those in which they believe by contacting the appropriate individuals or accessing information on association Web sites. There truly is power in numbers.
The U.S. Senate is considering the House-approved 2004 Defense Authorization Billthat increases the existing requirement that complete defense systems, such as aircraft and tanks, be at least 50.1 percent made in Americato 65 percent.
Rep. Donald A. Manzullo, R-Ill., chairman of the House Committee on Small Business, is asking manufacturers to contact members of the U.S. Senate Armed Services Committee, who are reviewing the Bill, and urge them to support the Buy-American provisions.
Rep. Manzullo has organized more than two dozen of his House colleagues into a special caucus to preserve manufacturing jobs in America. The Congressional Manufacturing Caucus, headed by Manzullo and co-chair Rep. Tim Ryan (D-OH), is discussing ways to preserve U.S. manufacturing jobs. The United States has lost more than 2.6 million manufacturing jobs the past three years.
Manzullo said Congress and the Administration should take several steps immediately to make American manufacturers more competitive internationally. First, the Administration must get tough with China, Japan, Taiwan, and Korea concerning their continued actions to keep their currencies lower against the U.S. dollar. The actions of these governments have severely undervalued their nations' currencies, making it more expensive to sell American goods in their countries and cheaper for their products to come into our country. Manzullo believes the actions violate the World Trade Organization (WTO) and International Monetary Fund, and these countries should be held accountable.
Congress also needs to do its part and pass legislation to give U.S. manufacturers a fighting chance to survive, Manzullo said. The Job Protection Act of 2003(H.R. 1769), which Manzullo coauthored with Rep. Phil Crane, R-Ill., and Rep. Charles Rangel, D-N.Y., would provide tax incentives to companies who keep our jobs in America. The initiative, also called American Jobs First, would cut a U.S.-based manufacturer's corporate income tax rate from 35 percent to 31.5 percent if its products are produced solely in the U.S.
"We are hemorrhaging manufacturing jobs in this country, and not enough of our political leaders understand the ramifications of losing our industrial base," Manzullo said. "We formed this caucus to not only educate Washington on the importance of manufacturing in America but to enact policies to stem the job loss and put our people back to work."
To find out how you can help this initiative, contact Manzullo(This link takes you to a contact page. Scroll to the bottom and you'll find a link to electronic mail for Manzullo and your Congressional Representative).
The National Association of Manufacturers (NAM) is working to see that the playing field between China and U.S. manufacturing is leveled. The organization is addressing a number of issues. They have started a China WTO Compliance Programto work with the U.S. government to pursue vigorous enforcement of China's WTO obligations.
According to NAM, Chinese currency is undervalued by 15 to 40 percent, making Chinese goods that much cheaper. Manzullo asserts that South Korea, Taiwan, and Japan also are guilty of unfair currency manipulation. NAM founded and leads the Sound Dollar Coalition, which has been very successful in making this an important issue with Congress and the Administration.
NAM also is addressing subsidies and dumping. To quote the organization's July 29 Washington NewsLine: "When the price of a Chinese product is less than the cost of raw materials, there is something wrong." NAM is working with the head of China enforcement at the Commerce Department to gather data they can use to investigate the situation. They have worked with Congress for additional funding and called for a comprehensive study of possible Chinese dumping and subsidization.
You can find out more about NAM's efforts to help manufacturers by visiting www.nam.org.
The Department of Commerce (DOC) has held a series of roundtables throughout the U.S. to meet with manufacturers and brainstorm ideas for policies that could strengthen manufacturing. The DOC also is asking manufacturers across the nation to answer several questions. The answers to these questions and the information gleaned from the roundtables will be compiled into a report that will include recommendations for reenergizing manufacturing. This report will be delivered to President Bush.
NAM has made it easy for you to contact the DOCand assist in this effort.
The Central States Chapter of the Metals Service Center Institute (MSCI) will conduct a town hall meeting on the decline of North American manufacturing and what can be done to counter it on Thursday, August 21, in Oakbrook Terrace, Ill. This is the first of as many as a half-dozen town hall meetings the organization has planned for the U.S. and Canada between now ant the end of the year. "The meetings will bring together experienced business executives from all parts of the manufacturing production chain, political leaders, and others in a critically important forum to support our manufacturing base," said M. Robert Weidner, III, MSCI's president and CEO.
For more information about the meetings, visit www.msci.org.
There are signs of a recovery, albeit painstakingly slow and stuttering. Tremendous amounts of effort, money, and brainpower are being pored into solving manufacturing's problems—both immediate and long-term. The industry stands to be stronger than ever once the clouds part. Even now there's a glimmer of hope as reported in an August 11 article on Fortune.com:
Hope springs eternal.