NAM Says U.S. Manufacturing Will Lag in Overall Recovery

In an interview with FMI Corp., Raleigh, N.C., David Huether, chief economist of the National Association of Manufacturers (NAM), Washington, D.C., said the U.S. manufacturing sector has been hit harder by the current recession than the overall economy and will probably be slower than the general economy to recover.

“Many of the factors that caused the recession have been corrected; however, slow growth overseas and an overvalued dollar will likely continue to be a thorn in the sides of manufacturers in 2002,” he said.

Since mid-2000, manufacturing output has fallen by 7.5 percent and employment has fallen by 1.6 million, Huether said, compared to only a 5 percent output drop and less than a million job losses in the 1990-91 recession.

The good news for manufacturers is that inventories reached a 10-year low in November 2001.

“This is solid evidence that the inventory overhang is over,” Huether said, “which means that firms will begin to respond to increased demand with increased production in 2002.”

A recent NAM survey of its members suggests that capital spending in the sector will increase by 5 percent next year, although the structures component of that spending appears to be less robust.

The complete interview with Huether follows:

FMI: It has been a tough period for U.S. manufacturers. How bad has it been in relation to what we have seen in the past?

Dave Huether: Since mid-2000, manufacturing output has fallen by 7.5 percent and employment has fallen by 1.6 million. While this is not as severe as the 1982 recession, when manufacturing output fell by 10 percent and more than 2 million jobs were lost, the current downturn is much more severe than the 1990-91 recession, when manufacturing output fell by 5 percent and industry employment fell by less than a million.

FMI: Some pundits say that these factory jobs are lost forever because of free trade. What does NAM think will happen as a result of free-trade policies?

Dave Huether: There is no doubt that the U.S. economy has become more globalized. During the past 15 years, two-way trade (exports plus imports) has grown from 17 percent to 25 percent of GDP growth. This globalization has taken place mainly in the manufacturing sector, which accounts for nearly 70 percent of U.S. trade. NAM is a strong supporter of free trade agreements such as NAFTA and continues to work hard to help pass important legislation such as Trade Promotion Authority that will help break down trade barriers for U.S. exporters. The United States already has among the lowest tariff rates on imports of any country in the world, while tariff rates on industrial products, especially in developing nations, remain quite high. Therefore, new trade agreements that lower barriers overseas will strongly benefit America's manufacturers. There are currently more than 100 free-trade agreements in the world. The United States is party to only three. It is important that the United States agressively works to lower trade barriers abroad, which is why NAM supports future efforts such as the Free Trade of the Americas (FTAA) that will tie South American markets to U.S. producers.

The argument that free trade has destroyed America's industrial base is just flat wrong. During the past decade, when the economy became much more globalized, U.S. industrial output expanded by 61 percent, nearly double the growth rates of the past two decades. This is not so say that free trade has no negative effects on the economy and workers in terms of job dislocations. However, free trade also creates many high-paying jobs. So, rather than trying to qualify trade as a “job destroyer” or “job creator,” a more accurate assessment of the general impact of trade on the U.S. economy is that it shifts the mix of U.S. production and employment toward high-skilled sectors where the United States has a competitive advantage.

FMI: FMI is forecasting a short shallow recession with improved prospects for manufacturing in 2002. The Institute for Supply Management (ISM) expects revenues to grow 3.2 percent this year. How do you see it?

Dave Huether: I agree. There is mounting evidence that a turnaround is begining to form. New orders for manufactured nondefense capital goods have been positive for the past three months, the Federal Reserve has lowered interest rates to their lowest level in 40 years, and energy prices have fallen 26 percent since June 2000. In short, many of the factors that caused the recession have been corrected. However, slow growth overeas and an overvalued dollar will likely continue to be a thorn in the sides of manufacturers in 2002.

FMI: NAM must find the continuing selling off of business inventory to be a good sign. What do you make of this? Doesn't this mean new orders and increased production this year?

Dave Huether: Yes, inventories were worked off aggressively at an annual rate of $120 billion in the fourth quarter. And while more than a quarter of this decline was in retail auto dealerships in reaction to the zero-percent financing deals offered last fall, the overall inventory-to-shipment ratio for manufacturers and trade industries reached a 20-year low by November 2001. This is solid evidence that the inventory overhang is over, which means that firms will begin to respond to increased demand with increased production in 2002.

FMI: Generally, factory capacity utilization rates have been at very low levels not seen since the early 1980s. For this reason, FMI is forecasting a flat industrial construction market this year, while ISM is forecasting a nearly 15 percent drop. Do you think this situation will turn around in 2002, with increased capital investment and growing demand for new factory space? Or will cash-starved companies tighten capital expenditures to a trickle?

Dave Huether: Actually, we just suveyed our membership on this topic last week. The results of the survey, which can be found on our Web site (www.nam.org), suggest that overall capital spending will rise by about 5 percent (in 2002). However, the structures component of capital spending appears to be less robust. While about half of the respondents expect investments in structures to rise up to 5 percent (in 2002), almost 40 percent expect investment to be negative.

FMI: In the view of NAM, what are some things that the United States must do to keep the economy growing?

Dave Huether: Because the recent downturn has been really a business recession — personal consumption remained surprisingly buoyant since last March — it is important to foster an environment that will foster a turnaround in the business sector of the economy. As I said earlier, businesses operate in an environment with little pricing power, and that will not likely change. Therefore, it is critical that our country's elected leaders in Washington enact policies to improve the business climate (keep interest rates low, expand domestic energy production, open markets abroad, etc.) and refrain from passing legislation that will increase costs for American businesses.

Reprinted with permission from FMI Corp., (919) 787-8400. For more information, visit www.fminet.com or call Angela Blackburn at (919) 785-9220.