Forecasts called for economic improvement—then the coronavirus hit
Going into this year, economic improvement was forecast for manufacturing after a sluggish second half of 2019. Things weren’t expected to boom, but a solid economic year was supposed to be in the offing.
Then, the novel coronavirus (COVID-19) hit.
The global pandemic spurred a shutdown of the economy to try and slow the spread of the virus. Manufacturers tapped credit lines to ensure they had the cash to get through a sudden economic jolt. As 2020 concludes, manufacturing has bounced back from the depths of the COVID-19 slump. Companies established new safety procedures intended to protect workers from the deadly virus. Where possible, factory floors were realigned and schedules were altered. And masks became a common sight in factories.
In many cases, business improved, though falling short of pre-pandemic levels. And some industries, notably aerospace, are still struggling. What’s more, nobody can rest easy while there’s no cure for COVID-19. Governments are in a race to develop a vaccine that could be deployed rapidly by historical standards. While progress was reported, questions remained about how quickly and how widely people could be vaccinated.
The impact of the coronavirus was magnified by how fast it took place. When the shutdowns began in March, the economic impact was immediate.
“Before the pandemic got here, we had been forecasting softness in the economy in the first quarter” followed by improvement, said Brian Beaulieu, CEO of ITR Economics, Manchester, N.H. “Then COVID hit and ended up knocking the economy down like we’ve never seen before.” The economy, he added, “was not fundamentally broken. It was akin to turning off the lights.”
Turning Lights Back On
Now, the economist said, “Governments are going around, turning the lights back on. Governments here and aboard are saying we have to get the economy going.”
Pat McGibbon, chief knowledge officer for AMT–The Association for Manufacturing Technology, McLean, Va., has a similar analysis.
After the COVID closings, “Nobody was making anything,” McGibbon said. “In April, there were 1,700 cars made in the United States. We typically do a quarter of a million to 300,000 a month. It wasn’t gradual. It was overnight. The light switch really went off fast.”
AMT monitors machine tool orders through its U.S. Manufacturing Technology Orders (USMTO) program.
“This was not a financial-led recession, and the diversity of impact on different industries will be dramatic,” he said. “There will be people who will be hardly hit and some who will be devastated.”
The erratic nature of the manufacturing economy is reflected in the manufacturing index of the Institute for Supply Management (ISM), Tempe, Ariz. The index, known as the PMI, is watched closely. It is considered a leading economic indicator, a barometer of where the economy is headed. With the PMI, a reading above 50 percent indicates economic expansion. Below 50 percent shows economic contraction. The index is based on a survey of 350 supply executives in 18 industries. The PMI had been in negative territory to end 2019, but it got above 50 percent in January (50.9 percent) and February (50.1 percent). Then the economic drag from COVID-19 arrived. In March, when the first coronavirus factory closings occurred, the PMI slipped to 49.1 percent. The economic impact intensified in April, with the index falling to 41.5 percent. There was a slight improvement in May to 43.1 percent.
The index returned to positive territory in June because of factory re-openings and a rebound in new orders. “I don’t know why we would not continue to grow,” said Timothy R. Fiore, chair of ISM’s Manufacturing Business Survey Committee, which puts together the PMI. “There’s no reason we can’t run at 53 to 55 (percent).” At the same time, Fiore said the outlook varies by industry.
“You can isolate the industries that are really damaged and will be damaged for a long time,” he said. Examples include aerospace, where aircraft production has been slammed by order cancellations from airlines. Those carriers, in turn, are coping with a drastic decline in demand for air travel amid the pandemic.
Aircraft maker Boeing Co., Chicago, reflects what’s happening in aerospace generally. In the first half of 2020, Boeing delivered 70 commercial aircraft. That was down from 239 in the first half of 2019. Boeing’s business already was hurt after its 737 Max aircraft was grounded in early 2019 following two fatal crashes. The pandemic worsened Boeing’s prospects. Aerospace “is one industry that will benefit from a (COVID-19) vaccine,” said Beaulieu of ITR Economics.
Low fuel prices are also affecting the sector, he said. “High fuel prices tend to drive more fuel-efficient aircraft sales,” Beaulieu said. With fuel prices remaining low, airlines don’t have the incentive to purchase newer planes. Forecasts vary on how long it will take for aerospace to rebound. Some forecasts say air travel won’t recover fully until 2025. Beaulieu is more optimistic. “It’s more like 2022 before it comes back,” he said. The oil and gas sector also is struggling. “They are on their heels,” Beaulieu said. Fuel prices are “below what it takes to put in new wells.”
Auto Industry Rebounds
The auto industry has fared better. Automakers and suppliers resumed operations in May following COVID-19 shutdowns that began in March. Companies such as General Motors Co., Ford Motor Co. and FCA US LLC concentrated first on resuming output of large pickups, their primary source of profit. Production of other models soon followed. “This industry is a lot more resilient than I thought it would be,” said Kristin Dziczek, vice president of the Center for Automotive Research, Ann Arbor, Mich. “It’s amazing to me that we restored to sustained production. Truck demand is back to where it was before the pandemic.” The industry still faces concerns, however.
Historically, economic recoveries were V-shaped—sharply down and then sharply up. Dziczek said automotive is in a more complicated, K-shaped recovery. “K is where people who were doing well are doing fine and will recover,” she said. “People who weren’t doing so well, they don’t come back to pre-COVID levels.” People who have had jobs through the pandemic “are on top of the K.” Buyers of new vehicles tend to be older and “not the people who are on unemployment,” Dziczek said. “The industry is really tied to the upper leg of the K. … Our buyers and customers are on the upper side of the K.”
The issue is what happens if there are further economic hits. “If we have big economic shocks, if it impacts the over $80,000 (income), over 60-year-old person who buys some cars, we’ll be in big trouble,” she said. “The industry is resilient but not out of the woods.”
Automakers may be affected by the changing ways vehicles are being used. Prior to the pandemic, about 34 percent of driving occurred during commuting to and from work, Dziczek said. COVID-19 led to more people working from home and that may continue. “Commuting is probably going to be less than 34 percent,” she said. “I don’t know if that’s an up or down.”
Also, the industry may be affected amid swings in COVID-19 cases. “The big caveat is what happens when we have colder weather,” Dziczek said. That will lead to people being indoors longer, where the virus can spread more easily. “Will we have [a] change when it gets colder?”
One Company’s Story
The economy is often told in big strokes. But economic swings are also the stories of individual businesses. Machine tools from Mitsui Seiki (USA) Inc., Franklin Lakes, N.J., are used to machine critical components of other machines. Mitsui Seiki machines include jig borers, jig grinders and thread grinders. “We sell $1 million machines,” said Scott Walker, chairman of Mitsui Seiki (USA). “We had this tremendous run, a 10-year run.” Walker said he knew the run had to end sometime. He didn’t know when. “I saw the hit in March,” he added. “That’s when COVID-19 began to slam the economy. We had a 19-month backlog,” he said. “Right now, I’m living off that.” The company typically booked $6 million to $15 million in business a month. By the fall of 2020, it was about $2 million a month. During some months, no machines were sold.
Walker said Mitsui Seiki’s strengths are now with defense contractors, tool and die makers, and bargain hunters looking to buy inventory machines below manufacturing costs. “We are the last to fall off and are the last to come back.” At times, he said, business has been up and down. “We didn’t book any machines for a couple of months,” he said. “We recently booked seven or eight.” As a result, Mitsui Seiki has had to adjust. “It’s really easy to see where we’re going. The key today is cash. You need the cash to support the business. My business right now is more of a cash management business. I’m looking at cash as everybody is.”
For now, manufacturing must cope with a virus that has no cure. “We don’t have a solution here,” said Fiore of the Institute for Supply Management. “We know we have to wait a year-and-a-half for a solution. We have to do the best we can. We can do enough to grow and expand.”