As the Economy Turns

The Biggest Risk to U.S. Manufacturing Is Not Slow Recovery, but Higher Structural Cost

Joe FeeleyBy Joe Feeley, Editor in Chief

While CBS decided to cancel its long-running soap, As the World Turns, the economic world of 2010 will wobble on.

Let me summarize a few forward-looking economic points made by Manufacturer's Alliance/MAPI economist Jeremy Leonard in his remarks at Rockwell Automation's Manufacturing Perspectives media day in November.

His company's most current forecasts indicated that, while metalworking machinery, pharma, electrical equipment and oil and gas machinery still showed accelerating declines in activity, industries such as HVAC equipment, industrial machinery in general, semiconductors and power transmission equipment began to decelerate their declines, as have material handling equipment and construction machinery.

MAPI predicts a pretty flat 2010 for all these areas but, at this point, foresees double-digit growth in 2011 and 2012.
Emerging markets, said Leonard, lead the rebound; western Europe and Japan will lag; and high debt and cautious consumers foretell a sluggish U.S. recovery.

Leonard cautioned that, even as things get better, spending won't immediately follow since we still will have to restart more unused capacity than since the Depression.

Nonetheless, American manufacturing remains an engine for growth in the global economy, he said. Productivity and wages consistently outpace the rates of other U.S. industries and foreign manufacturers, he pointed out. "Manufacturing productivity more than doubled in the past 20 years, and that's about twice the growth of the economy as a whole," he said. In addition, average wages and benefits in manufacturing are 25% higher than nonmanufacturing companies. "Contrary to popular belief, the U.S. economy is not deindustrializing," he maintained.

Leonard recognized what we all know: manufacturing has fewer employees. "But it's production volume that really matters," he argued. "We produce more with less, and that is a good thing. It moves resources to other sectors important to the economy."

The biggest risk to U.S. manufacturing, said Leonard, parroting cautions we've heard before, is not slow recovery, but higher structural cost than in other countries. "There are a lot of policies here that make it difficult for U.S. manufacturers to compete," he warned. He identified the biggest burdens as corporate tax rates, health care costs, tort liability and regulatory compliance.

Manufacturers are doing their parts, he said. Much is dependent on what happens in Washington.

"You can't build a sustainable economy around the principle of people giving each other haircuts," he said, summarizing the strong belief—at least within the manufacturing sector—that a strong, resilient economy can't get along without a strong manufacturing base.