Credit, cash, and the manufacturing recovery

I still remember his tropical-print shirt, which stood out among thousands of people walking the FABTECH® show floor at the Las Vegas Convention Center. He worked at a major wind tower production facility in California, which perhaps could explain the tropical print he was wearing. But it didn’t fully explain what he told me: The company was busy as ever and had a backlog through 2011. Yes, 2011, and this was in October 2008, weeks after the Lehman Brothers collapse.

He wasn’t the first to tell me things were humming along nicely in late 2008. Many small companies in metal fabrication already had good cash positions, and they weren’t particularly worried about credit. The real concern, they told me, was their customers and other large companies down the supply chain.

Their worries were not unfounded. As credit markets froze, many in metal fabrication had the rug pulled out from under them. By January 2009, it was a different ballgame altogether, and that wind tower backlog went the way of the credit markets.



Two reports released this week may give credence to the idea that manufacturing, a sector leading the economic recovery, isn’t losing steam. The Institute for Supply Management just released its Purchasing Managers Index (PMI) for manufacturing. According to this metric, U.S. manufacturers haven’t been this busy since 2004, back when shops were well into recovery mode after the dot-com bust and 9/11.

Perhaps more significant is the Credit Managers’ Index (CMI), which climbed to 66.2 for manufacturing--the highest number since 2007. (The CMI is like the PMI; numbers higher than 50 indicate growth.) With the current credit situation, manufacturers are building up raw inventory to hedge against future price surges, thanks to unprecedented demands from countries that (technically speaking) happen to have amazing amounts of people who could use an amazing amount of stuff.

FMA economist Chris Kuehl, whose firm, Armada Corporate Intelligence, puts together the CMI, described its significance this way: “Part of the change in the credit situation stems from the fact that banks have been far more interested in the manufacturing community, and this has trickled down to other credit opportunities. The machine-tool makers are seeing increased demand, and there has been an additional boom from the manufacturers that are seeking credit in order to accumulate some reserves in commodities and other raw materials.” He added that, for many, the fear of material price inflation may be outweighing the drawbacks of holding more raw-stock inventory. (I suppose raw is at least better than work-in-process or finished goods.)

During the past few years many have been concerned about liquidity, and it was especially pronounced during the initial stages of economic recovery. A company ramping up production spends more cash on machines, materials, and labor, and if those jobs aren’t completed and (most important) paid for fast enough, an organization can run out of cash real quick--without enough in reserves.

In other words, it’s been all about cash, cash, and more cash. But maybe the CMI is a harbinger for the next stage of this economic recovery. Now that more credit is flowing, the purse strings are loosening up, and this may continue to fuel manufacturing’s growth.

As harbingers go, this one is pretty positive.