Are conditions improving for metal fabricators?
6th annual “Fabricating Update” survey results
The Great Recession officially ended in June 2009, but many metal fabricators were still in the thick of it as that year ended. Did conditions improve for this sector in 2010? How’s business now for fabricators compared to a year ago?
Each December the “Fabricating Update” e-newsletter surveys its 20,000-plus subscribers to find out how their companies are faring and what their main business concerns are as they wrap up one calendar year and begin another. The latest survey results indicate that conditions may be improving for metal fabricators.
In 2008 the economy edged out steel prices as the No. 1 concern. In 2009 the economy overwhelmed all other concerns, as 75 percent of survey respondents cited it as No. 1; steel prices garnered a mere 5 percent of No. 1 votes in the 2009 survey.
Sept. 20, 2010, the National Bureau of Economic Research (NBER) declared that the U.S. economy hit bottom in June 2009 and began a long, sluggish rebound from the 18-month recession that began in December 2007—the longest and deepest downturn for the U.S. economy since the Great Depression. The NBER did not conclude that economic conditions since June 2009 had been favorable, nor had the economy returned to operating at normal capacity.
While the economy is plodding toward recovery, recent statistics have been mildly encouraging for manufacturing:
- The Department of Commerce reported that businesses ordered more factory goods in November 2010 to meet stronger consumer demand for household appliances, computers, and furniture. Total orders increased 0.7 percent following a 0.7 percent drop in October. Excluding aircraft and autos, orders rose 2.4 percent—the largest increase for durable goods in eight months.
- In its latest Manufacturing ISM Report On Business®, the Institute for Supply Management™ reported that economic activity in the manufacturing sector expanded in December for the 17th consecutive month, and the overall economy grew for the 20th consecutive month.
- According to outplacement consulting firm Challenger, Gray & Christmas, 2010 had the fewest job cuts in 13 years—a sign interpreted by some as the weak job market bottoming out. Employers announced plans to cut nearly 530,000 jobs in 2010, a 59 percent drop from 2009, when job cuts reached a seven-year high.
Are metal fabricators seeing these signs of hope in their businesses? How are their companies faring at this time, and what keeps them up at night?
Economy Still No. 1
The economy remains the No. 1 concern among 58 percent of respondents (Figure 1) compared to 75 percent who cited it as No. 1 a year ago. The skilled-labor shortage is a distant second at 14 percent, followed by steel prices (8 percent), health care costs (7 percent), materials availability (4 percent), foreign competition (4 percent), unfair trade and tax policies (3 percent), and other (2 percent).
Health Care Takes Over No. 2
In a separate question, subscribers were asked to choose their No. 2 concern (Figure 2). This year, health care costs overtook the economy—which ranked both Nos. 1 and 2 in 2009—as the No. 2 concern. Last year’s ranking that saw the economy capture the top two spots reinforced the magnitude of the effect it had on businesses.
Both last year and this year, some respondents chose the economy for both spots. Several of those who did so in the latest survey work for companies that build nondiscretionary-spending items, such as boats and machines for casinos. Among this group is a subscriber who said, “Everyone is cash strapped. Net 30 has turned into net 120. Nobody is liquid, and credit is topped out.”
Commenting on the current No. 2 concern, one respondent noted that the last quote his 25-man shop received for health care coverage for the coming year was up 32 percent over the previous year’s costs.
Premiums for employer-sponsored family health insurance reportedly increased an average of 41 percent across states from 2003 to 2009, more than three times faster than median incomes. Employers were expected to pay nearly 9 percent more for health care costs for their workers in 2011, while asking workers to cough up 12 percent more of these costs out of pocket.
Overall, the responses for the No. 2 concerns were more evenly distributed: health care costs (19 percent); economy (17 percent); steel prices (16 percent); foreign competition (11 percent); skilled-labor shortage (10 percent); materials availability (7 percent); unfair trade and tax policies (6 percent); overvalued dollar/undervalued foreign currencies (7 percent); interest rates (2 percent); energy prices (2 percent); and other (3 percent).
Bottomed Out and Picking Up
Fifty percent of respondents to the 2010 “Fabricating Update” survey reported that business has bottomed out and is picking up (Figure 3) compared to 41 percent who said this statement described their businesses in 2009. One subscriber among this group works for a New York-based fabricating shop that’s been in business for almost 25 years. He chose the economy as his No. 1 concern and foreign competition as No. 2, and said, “I believe that the federal government is trying to do too much too fast! I have seen a lot of government-sponsored projects (windmills, for example) being manufactured offshore. Let’s do something about that!”
Suffered Minimally or Not at All
Twenty-six percent of respondents reported that their businesses have suffered minimally or not at all from the recession compared to the 15 percent of companies that said the same last year.
This could be interpreted as further proof that the recession has ended and conditions are improving for fabricators. However, as noted last year, many of the companies in this group are relatively recessionproof because of the markets they serve: aerospace, defense, energy, medical, and infrastructure.
A subscriber who works for a company that supplies equipment to the water and wastewater industries said, “Our company last year had one of its best years in a long while.”
Another from a Michigan-based fabricating shop that reportedly has suffered minimally or not at all cited the skilled-labor shortage and health care costs as his No. 1 and 2 concerns, respectively. He said, “We are busy and looks like we will continue to be busy. Finding skilled press operators, welders, laser operators, and machinists is very hard. We need [workers with] high math skills, programming skills, and an understanding of drawings.”
A respondent from a 110-year-old Connecticut-based company said, “Sales are down 25 percent since November 2008, but [the downturn] forced us to cut costs. We are more profitable now than prerecession.”
Bottomed out and Barely Hanging On
Thirteen percent of respondents reported that their businesses have bottomed out and are barely hanging on; 15 percent chose this statement to describe their business conditions a year ago.
A subscriber who works in metal stamping—a sector that has been hit especially hard by the troubled automotive industry—chose the economy and skilled-labor shortage as his two main concerns and said, “If we cannot fix the two items I have marked, the others really do not matter. If we cannot borrow from the bank, we will not be in business, and [without skilled workers] we will not have the labor to do the work.”
Another from a company that manufactures forged iron hardware cited the economy and health care costs and touched on an issue that concerns many: “The greed of CEOs must be stopped.” Two McCombs School of Business professors offer two different perspectives on the line between fair pay and greed, but they agree that the structure of CEO pay might have helped to bring on the Great Recession.
Declining but Expecting Conditions to Improve
Six percent of respondents reported that business continues to decline, but they expect conditions to improve soon. Last year, 16 percent of respondents found themselves in this category. Hopefully, the change means that more companies have moved into the bottomed out and picking up category that saw a 9 percent increase this year.
Most respondents in this category simply checked survey boxes and declined to comment. However, one who works for a fabricator with plants in several states said, “We had to close one of our businesses, but 2011 should be a profitable year.”
No Improvement in Sight
Five percent of respondents reported that business continues to decline and no improvement is in sight. A year ago, 13 percent fell in this category—once again, a marked improvement over the previous year and possible cause for optimism. However, 2 percent reported their companies have closed up shop compared to the 1 percent who did so last year.
A survey respondent who believes his Virginia-based fabricating company’s business continues to decline with no improvement in sight said, “Our focus has been on reducing cost structure and changing internal processes to win more work in this new economy while maintaining our existing skilled work force and talented staff. What doesn’t kill you makes you stronger. We’re looking to focus on developing new markets and ways of going deeper with existing customers.”
A longtime “Fabricating Update” reader who also chose this category said, “While some sectors of the economy are not only picking up, they are growing. But for many more, such as renewable energy, it seems to be a losing battle. In “Stamping News Brief” (“Fabricating Update”’s sister e-newsletter), there was an article about Caterpillar bringing back 500 jobs from offshore. Nice, but Illinois has lost more than those 500 jobs from CAT over the years. I still contend that until the vast middle class is back to work, our recovery will be either very slow, or we will have a double-dip recession.”
What the current survey statistics show is a noticeable improvement in the number of companies that are doing better now than they were a year ago. According to Dr. Chris Kuehl, economic analyst for the Fabricators & Manufacturers Association, Intl. (FMA), there are optimistic signs for 2011, particularly for the small manufacturing sector. Whether the slow-paced recovery will continue, however, remains to be seen. Time and the 2011 “Fabricating Update” survey will tell.