Mixed signals

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. 

“The annual growth rate [in U.S. gross domestic product (GDP)] will decelerate as the pace of business equipment spending slows,” predicted Daniel J. Meckstroth, chief economist of the Manufacturers Alliance for Productivity and Innovation (MAPI). “While there is pent-up demand for replacing worn equipment, productivity-improving investment and capacity expansion, it is the uncertainty about the fiscal cliff, declining business activity in Europe and worries about a hard landing in China that is holding back longer-term commitments.” 

MAPI expects the final growth figures for U.S. GDP to be around 4.5 percent for 2012 and 2.3 percent in 2013. These figures are down from 5.2 percent and 3.3 percent, respectively, in earlier forecasts. Similarly, MAPI has revised its estimate for total new U.S. jobs in manufacturing for 2012 and 2013. For this year, MAPI revised its May forecast of 312,000 new manufacturing jobs to 208,000. MAPI’s May forecast of 361,000 new manufacturing jobs in 2013 has also been revised to 231,000. 

“We forecast that the pace of manufacturing growth will simply match the slow growth rate in the overall economy during the next three quarters,” Meckstroth said. “However, a faster growth rate in business equipment spending in the spring of 2013 should eventually propel manufacturing growth above the rate of expansion in the general economy.”

Production in non-high-tech manufacturing industries is expected to increase 4.7 percent in 2012 and 2.4 percent in 2013, MAPI predicts. High-tech manufacturing, which accounts for about 10 percent of all manufacturing, is anticipated to grow 4.9 percent in 2012 and 5.8 percent in 2013. MAPI uses the Federal Reserve’s definitions of high-tech as computers, communications equipment and semiconductors, and non-high-tech as everything else. 

MAPI expects U.S. industrial equipment expenditures to advance 8.9 percent in 2012 and 10.1 percent in 2013. Its outlook for spending on transportation equipment is for growth of 18.3 percent this year and 6.6 percent in 2013. 

Inflation-adjusted exports of all goods and services from the U.S. are anticipated to improve 3.8 percent in 2012 and 3.7 percent in 2013. Imports of the same are expected to grow 3.7 percent this year and 4.1 percent next year. Unemployment will remain stubbornly high at 8.1 percent next year, according to MAPI.

A positive factor for manufacturing in 2013 is reshoring, the repatriation of manufacturing jobs that were outsourced to Asia and elsewhere. “An upward trend in the reshoring of U.S. jobs suggests that any slowdown in business for job shops will be offset to a significant level by business coming back to the U.S.,” AMT’s McGibbon said. “Exports have been on a roll since early 2010, but as the dollar strengthened and reshoring became a more significant trend, the growth rate slowed. With the U.S. looking to be about the only economy with any strength (with the possible exception of China, others noted), the dollar is not likely to get any weaker and may well get stronger, further negatively impacting export growth.”

The World Outlook

In this ever-more global economy, what happens halfway around the world affects even the smallest shops in the U.S. The International Monetary Fund, in its most recent “World Economic Outlook” report, stated, “A key issue is whether the global economy is just hitting another bout of turbulence in what was always expected to be a slow and bumpy recovery or whether the current slowdown has a more lasting component.”

International factors will indeed play a key role in how U.S. manufacturing performs in 2013. “Europe is an economic basket case,” Frost’s Plucker said. Reduction in economic demand due to the European economic crisis, especially for aerospace and defense products and durable goods, leaves excess capacity in both North America and Europe. “Where is the demand going to come from?” he asked. As has been the case for several years, the answer is Asia, he said.

Cutting Quickens

Despite faltering growth in the global economy, the metalworking sector enjoyed a strong 2012. For the machine tool industry, 2012 is proving to be a great year for orders and next year may be close to or even match this year, according to AMT’s McGibbon. “Next year, growth in the market looks like it will be down just slightly [even] in the worst-case scenario,” he said. “Orders in 2012 will likely set a new peak. Clearly, a 2013 order level in the neighborhood of this peak would be a good outcome. The beginning of 2013 should be a bit slow but the decline in order bookings should bottom out between March and the summer months. This coming fall should see a pickup in bookings that will help moderate the declines in the earlier part of 2013.” 

The sale of cutting tools is another strong indicator of the health of U.S. manufacturing. Sales of member-companies of the United States Cutting Tool Institute (USCTI) were up 13.1 percent from January to August 2012 compared to the same period in 2011, and were up a whopping 48.7 percent compared to the same period in 2010.

The outlook for 2013 is positive, according to David J. Povich, president of toolmaker Tool Alliance, Huntington Beach, Calif., and incoming president of the USCTI. “The next 6 to 12 months look good for the industry,” he said. “Reshoring, the cost of logistics and some quality issues” mean business will be returning here, he added, during an interview with CTE Publisher Don Nelson at IMTS.

So is manufacturing coming back to the U.S. in a big way? “Yes, especially high-tech manufacturing,” Povich said. However, even the more labor-intensive manufacturing sectors may benefit due to reshoring. “Costs are escalating rapidly in China,” Povich noted. He also pointed to some technological developments that are “mind boggling.” Technologies like additive manufacturing may give traditional metalworking a challenge. But if metalworking can compete with its own creativity, it will do well, Povich said.

Caution, Optimism

How will manufacturing deal with the challenge from new technologies and how will it grapple with those pesky political factors? “I see technology as adding to growth rather than being a problem in any way,” AMT’s McGibbon said. “Additive technology, increased ease of programming multifunction machines and expansion of automation integration will continue to make U.S. products more sought after.” 

There are new challenges, however, that manufacturers must be aware of. “The political landscape has many corporations delaying investment decisions, slowing their capital investments and looking to keep liquid. Once there is some certainty about the investment environment, companies are likely to be back in the markets in a big way,” McGibbon said.

Next year, according to the experts, will probably be much like 2012, with manufacturing doing very well, better than much of the rest of the economy. CTE

About the Author: George Weimer is a freelance writer based in Lakewood, Ohio. He has an extensive background in the metalworking industry’s business press. E-mail: weimerg4@yahoo.com.