Mixed signals: Industry Trends & Analysis

Manufacturing faces more uncertainty than usual in 2013, but the year ahead could be a good one. By George Weimer

The coming year is shaping up to be quite a cliff-hanger for manufacturing. Will the good times of 2012 continue, or will manufacturing and the rest of the economy go over the much-discussed “fiscal cliff,” with automatic budget cuts and tax increases driving the U.S. into recession? Will the seemingly endless European economic crisis drag down the global economy or will the European Union resolve its problems?

For now, at least, manufacturers are reaping the rewards of a strong 2012. The U.S. economy continued to grow in 2012, albeit slowly, and manufacturing continued to lead the recovery with another strong performance. But, like everyone else, manufacturers are waiting to find out how and if the issues behind the fiscal cliff are resolved.

A recent report from the National Association of Manufacturers noted that U.S. businesses are reluctant to make investments due to Washington’s failure as of mid-November to address the pending fiscal cliff. “The fiscal cliff has forced manufacturers to plan for a future in which business is down and their tax bills are up,” said NAM President and CEO Jay Timmons. “If we fall off the fiscal cliff, another recession is almost guaranteed, and we will see 6 million more people out of work.” It could take 10 years or more for manufacturing to recover if the fiscal cliff is not avoided, according to the report.

However, presuming that Congress and the President reach some kind of compromise and the U.S. avoids deep automatic spending cuts and massive tax increases, and presuming this is enough to avoid a new recession, manufacturing could have a decent year in 2013.

Does the fact that President Obama was reelected matter much? “It probably will not make a significant difference,” said Wayne Plucker, head of Frost and Sullivan’s aerospace and defense research unit in Mountain View, Calif. “Budget realities will be the driver. Aerospace will likely muddle along at about the pace that it has been. Defense will fall, and any difference between the two approaches (Democrat or Republican) will likely be minimal, although hotly discussed.” Others disagree when it comes to aerospace and defense business.

A Very Good Year

Manufacturing clearly had a good 2012, especially in some sectors such as housing, machine tools and automotive. And manufacturing outperformed most other economic sectors. For 2013, some observers see continued growth in manufacturing, while others say growth rates will flatten. However, even a flat year would represent a strong performance for manufacturing, considering the slow projected growth in the overall economy.

“The upbeat news is that many of the structural costs of making things in [the U.S.] have eased,” said Pat McGibbon, senior vice president and chief economist for AMT – The Association For Manufacturing Technology. “Raw materials are more readily available at reasonable prices. The U.S. is growing less dependent on foreign sources of energy. The federal government is making strides in [its efforts to] reduce regulatory costs, although nothing done to date has actually reduced costs. A more competitive cost structure will work to offset a potentially stronger dollar and be a boost to exports.”

Frost’s Plucker expects 2013 to be a relatively flat year in aerospace and a down year in defense because of budget cuts. However, he still predicts some increased airplane production. “Boeing and Airbus will indeed have increased production, but it is a marginal increase in that new models are supplanting older models. They will be up, but Embraer and Bombardier have a slightly declining, nearly flat market,” Plucker said.

“Business aviation is waiting for an economic turnaround,” he continued. “An old rubric is that turnarounds in business aviation come 2 years after a business turnaround. We are still waiting for the business turnaround. The smaller the airplane, the smaller the market.”

However, it is important to recognize that aerospace is coming off a very strong 2012. “It’s shaping up to be a fantastic year,” said Richard Aboulafia, vice president of analysis for Teal Group Corp., a market research firm in Fairfax, Va. He expects the total market to grow 9.2 percent from 2011 to 2012. Because 2012 was so strong, a flat year ahead for various manufacturing sectors would still be good news. (Teal Group’s trade figures are based upon numbers from the U.S. International Trade Commission.)

Aboulafia sees aerospace continuing to grow, particularly due to strong exports. “Aerospace and defense are the best exporting industries in the U.S.,” he said. Sectors would include large commercial jets and fighter aircraft as well as other arms. Boeing alone accounts for 2 percent of all U.S. exports.

One notable development in aerospace is the increasing use of composites for aerospace and defense applications, Frost’s Plucker noted. “This reduces, but complicates the types of cutting operations required. It also reduces overall demand for cutting tools, but drives demand for some higher-value tools.”

Other technologies, such as additive manufacturing, are emerging in aerospace production, according to Aboulafia. However, these new technologies and the increasing use of automation may reduce demand for labor. “The whole labor picture in terms of manufacturing has changed dramatically due to technology,” he said. “Manufacturing involves fewer and fewer people [for the same amount of value-added output].”

Driving Growth

Automotive has also been a key driver for manufacturing, and the good news in the sector will likely continue. Projections are for continued growth in automotive in 2013, though at a slower pace.

About 15 million new cars will be sold in 2013 in the U.S., according to a forecast released in September by Edmunds.com Inc., Santa Monica, Calif. That would be a 4 percent increase over the 14.4 million new car sales the automotive information provider expects for 2012.

“We think that 2013 will likely be the first year of non-double-digit sales growth since the recovery began in 2010,” stated Lacey Plache, chief economist at Edmunds.com. “Economic uncertainty at home and spillover effects from slowing economies abroad will continue to slow the pace of American economic growth, including car sales. But many of the same positive factors in play now will continue to support car sales’ momentum in 2013.”

Decelerating Growth

Of course, manufacturing depends, in part, on the overall health of the U.S. economy. Manufacturing has thrived due to booming exports and growth in key markets, such as aerospace and automotive. Still, slower growth in the general economy is bound to bring manufacturing back to earth.