The Age of Cautious Optimism

WWW.THEFABRICATOR.COM MARCH 2003

March 13, 2003

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When it comes to the economy, cautious optimism is as good as it gets.

For most of my life I thought that cautious optimism was an oxymoron -- that people were either optimistic or pessimistic, and anyone who professed to be cautiously optimistic was sitting on the fence, waiting to see which way the wind blew, or, worse yet, really pessimistic and trying to hide it. To me, cautious optimism belied the very meaning of optimism: a tendency to expectthe best possible outcome. I couldn't fathom how could one expect the best possible outcome cautiously.

I've seen the light. I've come to believe that we are living in the Age of Cautious Optimism, an age marked by the distinct prevailing mindset that the best possible outcome could occur only ifcertain conditions are met.

As 2003 approached, economists and prognosticators pored over economic data, surveyed corporations, and attempted to forecast the future. The result? Cautiously optimistic outlooks.

CFO Survey

Fleet Capital Corp.'s 2003 Middle-Market Outlook, a survey of manufacturing company Chief Financial Officers (CFO), showed that "CFOs surveyed this year are more optimistic about the economy than they were in the four previous surveys, with nearly 70 percent saying they believe the national economy will expand in 2003. More than 71 percent anticipate revenue growth for their own companies in 2003, suggesting that many CFOs feel the economy has bottomed out. However, some CFOs remain cautious, citing concerns about the cost of materials, equipment, and labor."

According to the survey findings, "this cautious optimism about the current state of the U.S. economy extends uniformly across all regions of the country. The majority of CFOs perceive the current state of the economy as good, giving it an average score of 65 on a scale ranging from 0 (extremely weak) to 100 (extremely strong). This rating reflects an increase of 12 percent over the 58 score of 2002.

"Sixty-nine percent of the survey respondents believe the national economy will expand in 2003, a significant increase over the 43 percent answering expansion one year ago. Five percent expect contraction, the lowest percentage in the five consecutive years the survey has been conducted."

In the January 21, 2003, edition of thefabricator.com e-newsletter, we asked our readers to tell us how they expected their businesses to fare in 2003. Here is how they responded.

thefabricator.com Survey

In the January 21, 2003, edition of thefabricator.com e-newsletter, we asked our readers to tell us how they expected their businesses to fare in 2003, using the following descriptions:

  • Substantial decline
  • Moderate decline
  • Flat, stay the same as '02
  • Moderate growth
  • Substantial growth

Five percent of the respondents expected their businesses to experience substantial decline, the same percentage of CFO respondents who expected contraction. Respondent Bob W., who chose substantial decline, stated, "Off-shore fabrication reduces labor costs in products that are 65-percent labor-based costs. Customers are selecting low-price suppliers. They are buying systems in lieu of components, which means we are dealing with many different organizations with different expectations."

Thirty-five percent of thefabricator.com survey respondents expected business to remain flat. Mike F. said he expected his business to remain flat because capital spending is down because of low company profits.

Forty percent anticipated moderate growth, and 20 percent predicted substantial growth -- a total of 60 percent as compared to the 71 percent of Fleet survey respondents who anticipated growth for their own companies. Scott D. expects a moderate increase with substantial gain in the fourth quarter, largely due to suggested new products and increased interest in capital purchases by the company's largest customers. Increased interest mightlead to actual business, the requisite condition for cautious optimism. Another respondent who chose moderate increase said that "a few new customers have asked for quotes; nothing solid yet." More cautious optimism.

The Case for Cautious Optimism

In his article The capital investment climate for 2003 - Weighing the positives and negatives, Mike Whitney, a principal at Creative Strategies, a market research firm specializing in sales and marketing strategies for metalworking manufacturers, said, "Businesses spend a lot of time and money forecasting. Their usual tendency is to downplay the effects of negative factors and overplay the effects of positive factors."

Offering lists of what he saw as the major positives and negatives going into 2003, Whitney concluded that the glass is half full as he considered the possibilities for renewed capital investment in manufacturing for 2003: "What's in the glass makes me optimistic for modest increases in the levels of capital investment compared to where we have been for the past three or four years. Manufacturing technology is measurably more productive (by an average factor of 25 percent) than the technology that produced the last golden age of machine tool investment from 1995 thru 1998."

Whitney predicted "a 'real' improvement in machine tool orders of approximately 6 percent for 2003 compared to 2002 based on dollar volume. Most of this improvement will come from higher metal cutting machinery orders with metal forming orders lagging. Geographically, orders will rise most dramatically in the U.S. manufacturing heartland (from Minneapolis east to Pittsburgh, and south through Tennessee and Alabama), with the coasts lagging. Depending on oil prices, Houston may prosper as well."

He cites the excessive number of machine tool suppliers who compete in the U.S. market as a factor that will result in "great pricing for customers but barely any improvement in the profitability of machine tool suppliers a trend that is documented by the U.S. Bureau of Labor Statistics and confirms the inability of metal cutting and metal forming companies to raise their prices while their own costs increase."

A Mixed Bag

The Commerce Department's Feb. 20 report showing yet another sharp widening in the foreign trade deficit bodes poorly for manufacturing. Export and import trends will have a significant impact on 2003's economy. According to some analysts, until overseas demand for U.S. products increases, a complete, lasting recovery in U.S. manufacturing will not happen. The Institute for Supply Management (ISM) showed export orders continuing on an upward trend for the month of February, which could signal a reversal of the decline on exports in 2002.

As long as imports from low-cost producers continue to rise, manufacturers will have a difficult time raising prices. Manufacturers' profits, workforces, and investors will continue to suffer.

January saw a 2.1 percent gain in capital-goods orders -- the second increase in a row -- and the demand for capital goods was up 5.4 percent, excluding aircraft. Production schedules continue to hold. The ISM reported that its manufacturing activity index slipped to 50.5 percent in February, but a reading higher than 50 percent indicates that industry is expanding. The production index slipped to 55.4 percent from 56.3 percent in January; any reading higher than 49.9 percent is generally consistent with a rise in the Fed's industrial production data. According to some analysts, another bit of encouraging news is that production should increase further once demand picks up because inventories are at such lean levels.

However, many forecasters had predicted business spending and hiring picking up by now and are referring to the first quarter as disappointing or worse. Add the faceoff with Iraq to the usual mitigating factors, and we have a situation in which cautious optimism is as good as it gets.



FMA Communications Inc.

Vicki Bell

Web Content Manager
FMA Communications Inc.
833 Featherstone Road
Rockford, IL 61107
Phone: 815-227-8209

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