A welcome farewell to the aughts

January 4, 2010
By: Tim Heston

A year ago Troy Berg wasn't in a good place.

"I knew in January that 2009 was gone. Never in the history of my business have I had to kiss off a year in January & Now that we're through 2009, the hard cuts have been made, we've made a little bit of money, and those of us who are still standing are looking at 2010 to be a better year."

A few days ago Berg told this to a reporter for the Wisconsin State Journal. Berg is president of Dane Manufacturing, a precision sheet metal shop in Dane, Wis., north of Madison. His comment pretty much sums up where metal fabricators stand today: battered and bruised, cautiously optimistic (an overused phrase these days), and ready to take on a better year. Some are expecting strong growth this year, some foresee it taking several years before sales volume gets back to 2007 and 2008 levels, but most agree we've started the recovery.

Thank goodness the aughts are history. Two recessions bookended the decade, and each effected major manufacturing job losses that were covered again and again by mainstream media. What wasn't covered so much was that those who remained became some of the most productive workers in manufacturing's history, according to The Manufacturing Institute, an affiliate of the National Association of Manufacturers. The value of U.S.-manufactured goods rose between 1998 and 2008 by more than 22 percent. At the time, if U.S. manufacturing were a country by itself, it would rank as the eighth-largest economy in the world.

A slow and steady recovery, as many are predicting, may be a better alternative to the recent economic roller coaster. The roller coaster forced manufacturing managers to become smarter, slash inventories, and run lean to respond to unprecedented changes in demand. Fierce competition surely caused some of these fluctuations; consumers can switch from one company to another incredibly easily to find the best deal. But investment bubbles, what I'll call the "fake economy," also made things less predictable. First it was the Internet, then housing and finance. Titans of business first thought computers and the Internet would change the rules. They did, but only to a point (profits, for instance, still mattered). They then thought new financial instruments that spread risk changed the rules. They did for a while, but the old rules came back to bite us.

We now start a new decade with businesses reverting to the old rules. Want a new machine tool? It'll require more than a purchase order. Banks want collateral and generally more assurance that companies will be able to pay back the loans. What a crazy thought.

2010 may mark the return to rational business thinking. Some of the trends during the past 20 years may start to reverse. Consider the trend of outsourcing manufacturing to Asia. Long supply chains may not make as much economic sense in the 2010s. A call center in India may be a smart business move; shipping containers full of parts to the other side of the planet may not be, particularly when everybody needs it yesterday.

"The biggest issue as far as shifting manufacturing back to North America is likely to be energy costs," said Chris Kuehl, economist for the Fabricators & Manufacturers Association, International®. He added that though oil prices have decreased, they will rise again as the global economy recovers. "At some point prices will go back up, and when they do, it will put a real crimp in long supply chains."

The logistic wizards at Walmart, he added, have "completely changed the notion of an efficient supply chain. Supply chains are now more regional. It's no accident that Warren Buffett has pursued BNSF [Burlington Northern Santa Fe Railway]." Such a railroad will be quite useful for regional distribution. "The change is significant for logistics and even more significant for manufacturers, because it makes it much easier being a regional manufacturer to fit in those existing supply chains that are being created by Walmart and those that are copying Walmart."

Kuehl made those comments at November's FABTECH Intl.® and AWS Welding Show. Many attendees at the event told me that the recovery at their businesses was already under way. This morning the Institute for Supply Management reported that although manufacturing improved again, not all industries reported growth, including fabricated metal products. Nevertheless, inventories, which were down to historic lows in 2009, are being replenished. And the PMI index is up to 55.9, the highest since 2006.

The signs of recovery are here. Let's hope those signs point to a steady and (perhaps most important) rational recovery based on real consumer demand, and not some fantastical, irrational bubble.

Tim Heston

Tim Heston

Senior Editor
FMA Communications Inc.
2135 Point Blvd
Elgin, IL 60123
Phone: 815-381-1314