Has the time finally come for manufacturers to celebrate an upturn in the economy? Will our industry experience better times ahead? Last month’s editorial touched on the reasons why this is so, but we thought we would add to it with more specifics.
The latest reports show that factory orders in January were at the strongest pace in over four years. The manufacturing sector, which is bringing our economy out of the recession, was up 3.1% in January. This was the largest increase since September 2006. Comparing 2011 with a year ago, factory orders were up 10.8%. In February, the U.S. manufacturing sector grew at its fastest rate in nearly seven years.
Aerospace was responsible for a large portion of these gains as orders for civilian aircraft and parts jumped 52%. While a more volatile measure, automotive has also been up significantly in early 2011. In January, all of the major car companies reported double-digit gains. The strongest came from GM at 49% and Toyota at 42%.
The lack of international trade has been part of the reason for the growth in U.S. manufacturing. As activity has returned, U.S. businesses have increased their demand for equipment and machinery. This domestic demand has, in large part, been satisfied by U.S. production, which has helped to spur the recovery.
A measure of this expansion domestically can be seen in the Institute for Supply Management’s FebruaryReport on Business®. Issued in early March, it said, “February’s report from the manufacturing sector indicates continuing strong performance as the PMI registered 61.4%, a level last achieved in May 2004.” This number is up 0.6% from January’s 60.8%. An indicator that the U.S. economic recovery is helping U.S. businesses is shown by a comparison with the HSBC China Manufacturing PMI in February. As measured by this indicator, manufacturing activity in China fell to a seven-month low (51.7) in February. That’s nearly 10% below the U.S. index.
We mentioned this in an earlier editorial, but it bears repeating that the reports of the death of manufacturing in the U.S. have been greatly exaggerated. In every year since 2004, U.S. manufacturing output has exceeded $2 trillion (in constant 2005 dollars). This is twice the factory output of the early 1970s (in constant dollars). Based on this output, U.S. manufacturing would rank as the sixth largest economy in the world, just behind France and ahead of the U.K., Italy and Brazil. For 2009, the most recent year for which international records are available, our manufacturing output of $2.155 trillion (including mining and utilities) is more than 45% higher than China’s.
The productivity of the worker is an important reason why the U.S. continues to dominate. According to the U.S. Bureau of Labor Statistics, productivity increased 1.7% over the last four quarters, and annual productivity increased 3.6% from 2009 to 2010. More striking is the fact that manufacturing-sector productivity rose 5.8% in the fourth quarter of 2010. For all of 2010, this measure increased 6.0% – the largest annual increase since 2003. This is also the sharpest increase of all of the 19 industrialized countries in the world. In contrast, Japan experienced the steepest decline – 11.4%.
As an example of the trend toward producing more U.S. goods domestically, Caterpillar Inc. is building a $120 million plant in Texas to make excavator machines. Some of the machines produced in this plant had been previously made in Japan. Likewise, Dow Chemical Co. is building an 800,000-square-foot plant near its Midland, Mich., headquarters to make batteries for hybrid and electric vehicles. One caveat that I’ll throw in to this discussion comes from the CEO of Dow Chemical, Andrew Liveris. In spite of their investment, he believes that U.S. manufacturing faces possible decline unless the government comes up with a strategy to boost it, including bigger tax breaks and government support for R&D.
A video put together by the U.S. Department of Commerce discusses some reasons why companies choose to manufacture their products in the U.S. To highlight just a few, the U.S. offers a highly educated workforce, strong intellectual property (IP) protections and a business climate that supports and encourages innovation. Check out this five-minute video by using the Mobile Tag or by going to thislink to see the discussion and hear some tips for how to take advantage of our current manufacturing “boom.”IH
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