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Manufacturing’s Bumpy Ride

Bill Koenig
By Bill Koenig Senior Editor, SME Media

After an up-and-down 2016, more of the same may be in store next year

The US manufacturing economy had its ups and downs in 2016. According to the Institute for Supply Management, it began the year by contracting, something that had begun in the fall of 2015. When spring arrived in March, a five-month streak of mostly modest expansion began. Then a month of contraction in August, followed by growth.

“The year has been lackluster on the whole,” said Bradley J. Holcomb, chair of the ISM’s Manufacturing Business Survey Committee. “We can expect more of the same for this year. People seem to be hanging onto their money and being conservative. I think people are being a little bit cautious and prudent.”

Business investment “is almost nil,” said Nalanda Matia, director of econometrics solutions at Dun & Bradstreet. “Business investment has been almost zero in the past few GDP reports. The economy seems to be running on consumer expenditures. The consumer is driving the economy.”

As 2016 draws to a close, various economic indicators have been mixed, including machine tool orders and manufacturing employment. Along the way, some major manufacturers have had their challenges. Boeing Co. (Chicago) and Caterpillar Inc. (Peoria, IL) pared their earnings estimates after the year began. Boeing had a $234 million deficit in the second quarter, its first quarterly loss since 2009.

Mixed economic indicators occur “when the underlying growth rate is slow,” said Mark Killion, director of US industry services for Oxford Economics (London). Next year will see “probably positive growth, there are certainly no expectations for booming expansion.”

Familiar Story

Boeing-worker-768x829.jpg
The global aircraft business is still growing but its expansion has downshifted. Still, aerospace has remained one of the stronger performers in manufacturing.

For manufacturing, the refrain is familiar when it comes to what is holding down growth.

—A strong dollar makes US-produced goods more expensive in international markets, holding down exports.

—Oil prices have remained low, reducing energy exploration, which had been a major market for manufacturers. “There’s some decline in the heavy machinery kind of sector that caters to mining and drilling,” Matia said. “They’re not doing well.”

Brent crude oil is forecast by the US Energy Information Administration to be at $51 a barrel in 2017, up from $43.43 this year. West Texas Intermediate oil prices are forecast at about $50 a barrel for next year, up from $42.78 in 2016. That’s still far less than the days of $100 a barrel oil.

—Some major global economies have cooled, including China. In July, when announcing second-quarter financial results, Caterpillar said in a statement that, “World economic growth remains subdued and is not sufficient to drive improvement in most of the industries and markets we serve.”

Major manufacturing indicators vary but generally point to, at best, slow economic growth for now.

ISM (Tempe, AZ) surveys manufacturing purchasing and supply executives across 18 industries. That information is used to compute the group’s PMI. A reading above 50% indicates economic expansion, below 50% shows contraction.

The PMI averaged 53% over a 36-month period, Holcomb said. That went down to 51.8% for 24 months and 50.3%—barely into positive territory—for 12 months.

“In any case, it’s moving along,” Holcomb said. “We seem to be doing better on the whole than China and Europe.”

ISM also calculates indexes for new orders and production. Those have been running stronger than the PMI.

The index for new orders “is what we always look to as the gas in the engine,” Holcomb said. “Production follows suit.”

The main weak spot is the group’s employment index. ISM forecast in May there would be no manufacturing employment growth for 2016.

A similar picture emerges in the monthly jobs report from the US Bureau of Labor Statistics. Manufacturing consistently underperforms when compared to overall economy.

The bureau’s initial estimate of US manufacturing employment was 12.262 million in September, down from 12.309 million a year earlier. That’s also not much higher than the low of 11.45 million in February 2010 following the severe recession following the financial crisis of 2008.

“I see no signs of the much-hyped manufacturing renaissance,” Steven Ratter, former head of the Obama administration’s auto task force, wrote in June on Twitter after a monthly loss of 10,000 manufacturing jobs in May.

Manufacturing Tech

Another economic indicator with rough patches in 2016 was the Association for Manufacturing Technology’s monthly report on orders for machine tools and related equipment.

IMTS-Crowd-768x432.jpg
IMTS 2016 in September provided the machine tool and manufacturing technology industry a boost it needed after business was down for much of the year.

For much of the year, those orders fell compared with the previous and year-earlier months. By the end of the summer, there was some signs of life. Still, AMT (McLean, VA) expected that 2016 would lag 2015’s results.

For expansion to occur, “You have to have a signal the economy will be better,” Pat McGibbon, vice president of analytics for AMT, said in a June interview. “You’d like to have the backlog pick up a little bit. Confidence and backlogs are a little soft.”

In the fall, in an AMT video concerning results for August, McGibbon said progress had been made.

“We’re making our way back through the negative numbers to a positive number,”McGibbon said at that time. “It looks like we’re heading in the right direction.”

AMT also held its mammoth IMTS trade show in Chicago in September, which typically provides a bump in manufacturing tech orders. The 2016 edition of the show finished No. 3 in its history for registrants (115,612) and the most ever for exhibiting companies (2407).

Still, AMT was not forecasting a sustained recovery until next spring. “We’re looking for a soft end to 2016 and a pickup in stronger order levels in the second quarter of 2017,” McGibbon said.

For much of 2016, aerospace and automotive were the strong performers in manufacturing. They showed signs of softening by mid-year.

“The world aircraft industry is still growing. That’s the good news,” Richard Aboulafia, vice president of analysis for Teal Group Corp. (Fairfax, VA) wrote in a report about the aerospace industry. “The bad news is that the industry’s growth rate downshifted significantly last year. Meanwhile, the sluggish level of growth that remains is threatened.”

He wrote that production goals “appear out of line with economic reality.” China, “now the largest jetliner market in the world, is weakening noticeably, with GDP growth falling below 7%.” Other international markets, including Brazil, India and Russia are weakening, Aboulafia wrote.

Another factor causing a softening for aerospace is low oil prices, according to the analyst. “Inexpensive fuel reduces the incentive for airlines to replace their older jets,” Aboulafia wrote.

For 2017, AMT is expecting a more widespread recovery in machine tool orders.

No ‘One Big Thing’

“It’s not going to be one big thing,” McGibbon said in the fall video. “No big program, no big industry. It’s going to be a lot of little things.”

There was one other topic that kept arising during 2016 that didn’t have a hard number but may have had an impact anyway.

That was uncertainty spurred by political events. “One thing always mentioned is uncertainty,” said ISM’s Holcomb.

In international markets, the primary example was the UK vote to exit the European Community, known as Brexit. It will take years before the UK actually extracts itself from the EU. Still, that spurred concern it will affect trade of goods. It also caused a drop in the British pound.

The US, meanwhile, held a contentious presidential election between former Secretary of State Hillary Clinton and businessman Donald Trump, a Republican. Trump won the contest in the Electoral College despite Clinton winning the popular vote.

The chairman of one major manufacturing group, the National Association of Manufacturers, said companies need to get used to such uncertainty.

“Those are the kinds of things that one day people are feeling good about and the next day they’re not so sure,” said Gregg Sherrill, the NAM chairman who is also CEO of auto supplier Tenneco Inc.

In 2017, major elections are scheduled in Germany and France, which have the potential to also spur uncertainty for business, he said. Germany has Europe’s largest economy and Chancellor Angela Merkel is one of the most powerful figures on the continent.

“Volatility is more the norm than it is unique anymore,” Sherrill said in an interview following a speech at the Detroit Economic Club. “We just need to be able to live in that world, to be successful in that world.”

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