Manufacturing forecast: Sunny days ahead

Is current economic news making you unenthusiastic about the rest of this year and 2014? The editors at The Kiplinger Letter say not to fret. Manufacturing's future in the U.S. appears to be pretty good in the near term.

In the early April newsletter, editors suggested that, even though manufacturing may appear to be losing some of its momentum this year, it will continue to be a strong driver of growth during this "feeble" economic expansion.  Manufacturing growth is expected to be 2.2 percent in 2013, just a little higher than the forecast GDP growth of 2 percent, but could be greater if public pressure forces lawmakers to moderate the effects of budget cuts related to the federal sequester. In 2014 manufacturing growth could hit 3.5 percent. In fact, manufacturing production levels should reach 2007 levels in 2014.

To dig deeper into the forecast, The FABRICATOR talked with Karen Mracek, a Kiplinger Letter associate editor.

FAB: What is the reason for your optimism about manufacturing growth in the U.S., even in the face of the dramatic cuts expected in federal government spending ?

Karen Mracek: The manufacturers that are going to do well through the sequester cuts—we will see a pullback in military spending, for example—are the ones that are pretty diversified. And most are. For example, there is Boeing and similar companies that provide parts for commercial airplanes. They work with both sides, the commercial side and the military side.

What we expect is that the pickup in commercial will offset the cuts for the U.S. military. It's not hard and fast and not everyone will see it. But we should see an uptick in orders on the commercial side, corresponding with the pullback on the military side. It also should be noted that foreign military sales will hang in there during this time.

The other thing with the sequester cuts is that the pullback on something like a military aircraft won't be immediate. The orders are already for this year and next year. So we might see that play out for companies like aircraft manufacturers down the line.

FAB: Of course, this line of thinking doesn't apply just to military aircraft, correct?

Mracek: You are definitely going to see pullbacks from here in Washington, D.C. So far they have tended to do the highly politicized ones. If it's a controversial contract, you might see more scrutiny. However, a lot of the defense manufacturers, their orders are in for this year and usually next. They might not decide on a big weapons system contract for delivery in 2016 as fast as they once did. They might choose to save money there. For contracts that are already in place, they will still expect delivery on those deals made a couple of years ago.

Having said that, we are winding down two wars, so there already has been a pullback outside of the sequestration in terms of orders from the military. So it's not totally unexpected for the industry.

FAB: Kiplinger says the housing market will pick up steam over the next two years. Do you see anything that could possibly derail the housing comeback?

Mracek: No. We see housing being pretty positive. There definitely will be pockets of the country that will do better. There are pockets of the country that have a lot farther to go to recover from housing.

Some areas such as Arizona, they actually can't build fast enough right now. Their inventory levels have dropped. Builders are trying to get back in business or at least ramp up production as fast as possible.

On the other hand, Florida has a lot of inventory. There are still vacant homes that need to work through the system. You won't see the building happen as quickly there.

That said, though, the fundamentals are pretty strong, and there is quite a bit of demand. What we are starting to see now in this first quarter is that it is starting to build on itself. That makes it self-sustaining. You see the increase in home prices, which helps people come out from underwater on their mortgages. They can put their home on the market because they are not underwater anymore. They can refinance under a government program. They can move to take another job when the job market picks up. It starts to build on itself. We think there is enough momentum this year and next year to really be a main driver of economic growth.

Good news for manufacturers is that everything that goes along with homebuilding—which has really stalled since 2008—is going to start to come back. That definitely is a bright spot.

FAB: Do you see reshoring being a real trend, and if so, what industry segments will get a boost from it?

Mracek: What it comes down to with reshoring is the cost of labor overseas, and we are definitely seeing an increase there, in China particularly. And you saw it even a couple of years ago with manufacturers taking a second look at countries other than China as they made their plant decisions. Countries that have benefited from that are Mexico and Vietnam, where wage costs are pretty competitive to China's. That's not to say that American wages and China's are similar; they aren't. But when companies have to make a decision where to put a plant, labor costs is a big factor, but how close they are to their customers and transportation costs are also very important.

One area where you are really seeing it is the auto manufacturers here that have moved to the Southern states. Not only U.S. manufacturers, but foreign manufacturers selling to U.S. customers. It makes sense to do it there and do it closer to your customers.

You are starting to see it in other durable goods manufacturing as well, such as for washers and dryers. Whether in the U.S. or Mexico, companies want to be closer to their customers.

The issue for computer and electronics manufacturers and other high-tech companies is the protection they are afforded when they stay here. If a company has intellectual property conflicts with China and producing in China, it just makes the U.S. more attractive. That said, the flip side is that electronics are small and not that expensive to ship, so these types of manufacturers are not where the auto manufacturers are in terms of bringing a lot of production back.

Overall I would say it's moving in the right direction whenit comes to reshoring.