Fabricators optimistic about near term

Metal fabricators give a thumbs-up to first quarter economic news.

Editor’s Note: This review of the first quarter Forming and Fabricating Job Shop Consumption Report from the FMA first appeared in Business Intelligence Brief, an online information service, prepared by Chris Kuehl, FMA’s economic analyst and partner in Armada Corporate Intelligence. To learn more about, Armada or sign up for one of its e-newsletters, visit www.armada-intel.com.

Yes, it is time for the quarterly report from the Fabricators and Manufacturers Association with the worst acronym ever devised. It is the Forming and Fabricating Job Shop Consumption Report (FFJSCR).

What makes this survey interesting is that these are businesses that rarely get this kind of treatment. They are mostly small to medium sized job shops and reflect the activity of the manufacturers they are selling to. We do the analysis of this survey once a quarter and have found it to be a very interesting assessment as far as the small business community is concerned and something of a harbinger for what is going on in the bigger companies.

This may be the quarter that separates the reality of the economy from that which has been expected. There is always a certain amount of enthusiasm when a new president takes control as people tend to take the political campaign slogans as signals of future intent (evidence to the contrary). This time the enthusiasm level was even higher than usual as it appeared that Trump would change many of the provisions that seemed to be holding the economy back. Now that the administration has been in place for a while it is apparent that many of the same old problems are in place and change will not be as easy as first hoped. Some of that sober realization is starting to crop up in the data for the latest FFJSCR.

One of the more important measures of the economy’s health is the level of operating capacity. If there are numbers below 80 percent capacity utilization there is too much slack in the system. The likelihood of additional hiring or equipment acquisition is therefore low. When capacity utilization is above 85 percent, there is likely to be a strain to keep up with demand, and this is when there will be bottlenecks and shortages—at least until there are more people hired and more equipment purchased. The FFJSCR data is showing that capacity utilization is on the low side—at just short of 70 percent. This would mean slack capacity among most of the respondents but when looking at the anticipated capacity there is a general sense that companies will be adding to it. That may mean more slack in the short term, but should mean less in the way of shortage and bottleneck later.

There remains a good bit of enthusiasm regarding the future and that has been evident in a whole host of measures lately. The consumer confidence surveys have been solid and so have those that assess the mood of the business community. The worry is that some of this is superficial as the level of retail sales has not reflected the consumer survey levels of confidence. In the manufacturing community, the level of real confidence is reflected in data such as new orders. The survey this month shows that 44.7 percent of the respondents are reporting more in the way of new orders, and another 41 percent are reporting that this activity has been stable. Only a little over 14 percent of the responses indicated a decline in new orders, and that suggests that there is more expansion in the manufacturing sector overall. That is expected to expand further into the year.

Hiring is another solid signal as far as expansion is concerned, and here there is also progress and stability. However, there are some factors to take into consideration that affect these numbers and have for some time. The survey reports that over 27 percent are expecting to do additional hiring, and just over 68 percent are staying right where they are as far as hiring s concerned. That means that only 4.5 percent of the respondents are planning to reduce their workforce. This is as low a level as has been seen in the last few years.

The wrinkle in all this is that most of the manufacturers are struggling to find qualified people to hire. This has been an issue for years, and despite all the hand wringing nothing has changed significantly. The pipeline as far as talent is empty, and companies really have no alternative but to poach one another’s employees. That generally means that labor costs will rise steadily as companies try to lure the people they want and need.

Beyond hiring the next biggest expense is raw material costs, and here the key factors are generally the price of steel and aluminum. The survey reports that the vast majority of respondents are seeing prices for both metals coming up. The percentage that reports that prices are going up is 59.4 percent and another 39.8 percent see the prices staying right where they have been. Only a tiny fraction (4.4 percent) have seen prices go down.

In general, the commodities suppliers have been trying to adjust to reduced demand over the last few years, and they have limited output as a means to hike prices. The tactic has worked pretty well, and the hope is that more production can be spurred when and if there is a boost in overall demand.

The cost of transportation and logistics has also been a factor when it comes to overall expenses, but there hasn’t been all that much movement. The percentage of respondents that report more logistics costs is 29.3 percent. and the vast majority have indicated that these costs have been stable—over 70 percent. Not one respondent reported that these costs are going down.

The variability within this category reflects the modes of transportation employed. Rail costs have been more stable than trucking costs, and there has been some reduction in the costs of ocean cargo due to the overcapacity issue facing maritime shipping. There is also a great deal of regionalism in logistics in part due to the fluctuating costs of fuel and overall operating expenses.

Just as with manufacturing there has been a shortage of manpower in transportation. It is estimated trucking companies are short some 80,000 drivers this year alone.

Generally speaking, the respondents are staying connected to their capital equipment strategies as 57.4 percent indicate that nothing has altered their plans, and they intend to buy what they had intended to buy. Roughly 18 percent have delayed their original plans by a quarter or two, and 24.6 percent have set their plans on the back burner indefinitely.

This is not much of a shock given the data on capacity utilization referenced earlier. Until that slack capacity is used up, there is less incentive to acquire anything new.

There is tremendous variability between sectors however. Those feeding into the agricultural community are seeing very low demand while medical manufacturing thrives. Automotive and aerospace are not as vibrant as they have been and so on.

Ultimately the real test is measuring outlook. How positive are companies regarding the future? Here the readings are better than they have been in some time. There is a sense that some significant impediments to business progress may be removed and that some of the stimulating efforts will bear fruit.

A whopping 61.9 percent see improving conditions for the coming quarter and another 34.3 percent expect things to be about as they are now. Only 3.7 percent expect things to get worse. This is the most confident the sector has been in a while.

As mentioned at the start of this analysis the confidence levels that have been rising among consumers and businesses have been contingent to some degree. Consumers are upbeat, but retail sales are still down. They are cautious. The promised changes have not taken place yet, and there is mounting evidence that many of the proposals presented in last year’s campaign will be hard to pull off given the mood of Congress and the power of inertia.