The aftermath of exuberant times

Remember former Federal Reserve Board Chairman Alan Greenspan's comments about the U.S. economy being swept up in "irrational exuberance"? He used the phrase in 1996 to describe the stock market boom that might have been overvalued.

To be frank, I thought he had coined the phrase in the 2000s to describe the stock market expansion of recent times. It's amazing how one economic expansion reminds me of another.

Having said that, I'm afraid this recovery won't be similar to ones in recent memory. Manufacturing has to deal with the ramifications as it relates to its own period of "exuberance" in building up manufacturing capacity.

I was reminded of this in a conversation with an industry consultant recently. His business obviously had slowed in 2009, and the big OEM customers had yet to return to their spending ways in 2010. He figured it might be a long climb back to the days of 2007.

"The '08-'09 economic issues … Part of the problem was a buildup of capacity over a long period of time, perhaps the last 15 years. There has been an exuberance to just build more capacity. That's fine until the sales aren't there. Then you have a massive albatross where you are trying to figure out what to do with that giant piece of equipment that is not turning out anything today," he said.

There's no doubt that metal fabricators had an interest in new equipment several years ago. In 2007 FMA Communications Inc., the parent company of The FABRICATOR magazine, conducted its first Capital Spending Report, and the research initiative revealed that fabricators were interested in purchasing at levels that have yet to be matched again three years later. For example, in that first survey, fabricators indicated a desire to purchase $148 million worth of punch presses; in 2010 that total was $61 million. In 2007 fabricators estimated spending $176 million on laser cutting equipment, and three years later that level of expected spending came in at $120 million.

Of course, the equipment that was purchased during the go-go days of 2007 and before probably was much more efficient than the equipment and processes it replaced. I think this plays a huge part in manufacturing not absorbing more workers even after coming off a robust final quarter of 2009, when U.S. GDP hit 5.7 percent.

Also consider that companies have a ways to go before they reach capacity levels achieved in 2007. For instance, three years ago the Capital Spending Report suggested that companies with 50-99 employees was running at 81 percent capacity; in 2010 the same survey revealed that fabricating businesses were operating at 68.4 percent capacity.

In short, this protracted recovery shouldn't be a surprise. I'm not sure when metal fabricators will start hiring and spending on new equipment at 2007 levels, but I will bet that it will be several months before it happens. This is a gradual tale that's in no rush to reveal its ending.

Before ending this, however, I have one more warning about "irrational exuberance." I think the federal government has found itself caught up in the middle of stimulus fever, all while fighting two wars and trying to stay on top of its commitments to the two largest socialist entitlement programs that even the tea-partiers don't want to give up--Social Security and Medicare. Economists are starting to sound the warning bell because trying to contend with a deficit as large as the current one inevitably forces the Federal Reserve to make monetary decisions it may not be ready to make.

The longer politicians and the voters that return those incumbents to office wait to address this situation, the longer the recovery period will be when the issue finally forces this country's leaders to react. Now's the time for some "rational restraint."