Manufacturing’s future: Wanted: new customers
From The Economist print edition
Pummelled by recession, manufacturers face an uncertain future
[Greg Ip] AFTER the worst slump in modern memory, American factories are showing signs of life. Manufacturing production rose in August for the second straight month, and a survey of purchasing managers says new orders are rising briskly.
Yet manufacturers remain gloomy. Both output and employment are down 15% from the start of the recession in December 2007, far more than overall GDP and employment. Shipments collapsed when the near-paralysis of the financial system a year ago caused businesses worldwide to cancel orders and run down their stocks. On September 15th Dan DiMicco, head of Nucor, a steel company, said operating rates would be higher in the third quarter than the second, but only because of inventory replenishment. “Real demand is in for a long, slow recovery,” he said. Bad as this year has been, John Engler, president of the National Association of Manufacturers, a trade group, says many of his members “think next year will be worse”.
Manufacturers were hammered in the recession of the early 2000s in large part because they were at the centre of the preceding boom in capital spending. They seemed far removed from the housing and finance bacchanalia that spurred the latest recession. Indeed, employment never recovered from its previous collapse (see chart). But much of America’s manufacturing output is destined for new homes and buildings, from bricks to bulldozers, and a lot also goes into cars. When sales of both collapsed, manufacturers were clobbered.
Consumers, indebted and hobbled by tight credit, cannot help much. Rather, a balanced expansion should require America to narrow its trade deficit: manufacturers will have to export a lot more, seize domestic market share from imports, or both. Macroeconomic trends should help. After a crisis-related interruption the dollar has resumed the slide that began in 2002, and emerging economies are likely to grow faster than America for years to come.
Yet making a substantial dent in the deficit will be difficult. The share of domestic manufacturing consumption taken by imports has risen from 31% in 1998 to 37% in 2008, according to Dan Meckstroth of the Manufacturers’ Alliance, a trade group. Certain manufacturers such as GE, Emerson and NCR have said they will bring some outsourced production back to America, but that will do little to close the gap. Mr Meckstroth notes that America no longer makes many of the things it uses, such as consumer electronics. It is a formidable exporter of aerospace machinery, capital equipment and medical technology. Nonetheless, data from Mr Engler’s outfit show that American manufacturers are the least geared towards exports of the 15 large manufacturing economies.
Manufacturers are increasingly looking to the federal government for help. They enthusiastically backed the federal cash-for-clunkers car trade-in scheme. Now they want an extension of the first-time homebuyer credit, and more federal spending on infrastructure such as air-traffic control. Barack Obama, who hopes to nudge the economy away from consumption and towards exports, nods sympathetically. On September 7th he appointed Ron Bloom, who oversaw the government’s investments in bankrupt General Motors and Chrysler, to the additional role of “manufacturing tsar” to advise on helping the sector. Mr Obama has directed stimulus money to domestic manufacturers of renewable-energy technology, promised to revisit controls on exports of technology with national-security implications and has said he will protect American intellectual-property rights more rigorously abroad.
All fine and good, but the risk is that this enthusiasm for promoting industry slides into protectionism. On September 11th Mr Obama slapped tariffs on Chinese tyre imports, and China threatened the same on American chicken and car parts. The dispute simmered as Mr Obama met leaders of the G20 in Pittsburgh. They promised to rebalance their economies (in effect, requiring America to reduce its trade deficit and China to reduce its surplus) and to avoid protectionism. But if the first commitment fails, so may the second. As leaders met, three American companies and a union, no doubt encouraged by the tyre tariffs, accused Chinese and Indonesian companies of “dumping” paper (selling below cost or below home market price), and Nucor accused Chinese and Taiwanese exporters of bolts, screws and other fastenings of illegal subsidies as well as dumping. “To keep manufacturing, and manufacturing jobs, in the country, it is essential that the US government vigorously enforce our trade laws, especially during hard economic times like we are experiencing now,” said Nucor’s lawyer.
The original story is linked here.