Cautious consumer, consolidations, unsettled markets among three trends manufacturers must address when recovery begins, notes Chris Kuehl.
There are three emerging global trends that U.S. manufacturers must address to best position themselves for growth when the economy starts to emerge from a recession, which started to manifest itself in the third quarter.
Admittedly, analysts are having a hard time settling on what the news of the day might mean. The latest data show manufacturing levels throughout Europe have started to improve as the PMI numbers for most of the nations in the Eurozone are now above 50 – while the export data from Germany has been trending up for almost five months. China is back on pace to grow by over 9 percent, but Japan saw a slump in industrial production not seen in 20 years. The United States witnessed a spike in activity with the PMI tracking at 55.7, marking the highest point reached in over a year. There was a bump in durable goods orders, but at the same time there has been a continued slowdown in industrial demand.
The question is whether we are transitioning to a solid growth period or to something flatter. Will commodity costs drive up the price of goods faster than the market can adjust? The best that can be predicted at the moment is that three trends are emerging.
The first trend is really a continuation of one that has dominated the past several months: a cautious and wary consumer.
The recession may have started to fade in the past several months, but there has been considerable financial damage and it will be a while before the consumer jumps back in. This limits the advance of many sectors – automotive, appliances, major electronics, furniture, and so on. It may be well into 2010 before the consumer really comes back to life.
The primary motivation for consumer reticence at the moment is unemployment. It came as something of a shock to analysts when the jobless number jumped to 10.3 percent. Not that many believed that the threat of unemployment had ended but there had been some signs of stability and it had been hoped that this trend would have extended. The higher rate has shaken consumer confidence a little more and that will result in even slower consumer recovery. It should be noted that the number of new layoffs has been declining and that is a sign that the unemployment numbers are unlikely to get a lot worse. It is just that they are not slated to improve much either.
There are two factors that keep the average consumer from spending. The first is that there are high prices chasing them out of the market and the second is fear of cash flow interruption from losing one’s employment. For a few weeks it looked as if commodity price hikes might force up prices and deter consumers but that threat is fading as gas prices have stabilized to some degree. The surveys suggest that most consumers are expecting a slow build for inflation. Thus it comes back to jobs. There is no sense that employment numbers will improve much before the middle of 2010 but if the situation gets no worse the people who have job security will begin to relax and start to spend again.
The signs of some recovery have started to manifest themselves. Durable goods orders have been up for four months in a row and factory orders reached levels not seen in almost a year. If this pattern extends past the need to replenish depleted inventory that is a solid sign that consumers are back in the game.
Reduction and distribution
The second trend relates to the consolidations taking place in various industries. It hasn’t been automotive alone that has seen this reduction and distribution. Major industries are no longer centered in the United States and Europe. This means that the pivot points are now in Asia and, in some cases, Latin America. That makes it mandatory for manufacturers to have footholds and contacts in these markets. That is a big challenge for larger companies, and a very complex situation for smaller ones.
It has become more and more obvious that economic growth is taking place in Asia faster than it has been taking place in the U.S. or in Europe. That is placing a heavier emphasis on trade with this region and it has meant that commodity prices are responding to what is happening in China and India more than what is going on in the U.S. The recession means that more overseas operations are seeing opportunities in the U.S. as well – the price of acquisition is as low as it will be for years. This has meant that Fiat now controls Chrysler’s fate and China’s Beijing Automotive now owns Saab.
Asia was long seen as a place to have a sales presence but the growth of these economies has meant that Asia plays a more central role now. Companies have no choice but to be engaged in the activity in China, India and other Asian states – to monitor commodities, engage in financial action and to be part of the Asian supply chain.
Yes, your dad’s banker
The third trend is movement toward a more unsettled financial market that carries over into other sectors.
The banks and investment groups are getting back on their feet, but they will be changed institutions when they do recover. The old-school banker will be back in vogue, and that banker will have a host of government agencies looming over his shoulder. This means that capital flow will be inhibited, making it harder to expand and invest to accommodate the two previously described trends. Cash will remain king for a while longer, and there will be more growth through mergers than from organic expansion.
For manufacturers, the implications vary, all depending on where a company sits within a given sector. It has been said before: The most critical time in a company’s history is when the economy is starting to emerge from a recession. This is the dangerous moment when competitors make their moves and a company without some strategic sense of how to organize often finds itself constantly on the defensive, reacting to attacks by competitors.
There are already companies making their move. FedEx is famous for lying in wait during a recession, prepared to come out swinging as the downturn ebbs. UPS is just starting to see that strategy unfold and, by all accounts, the FedEx moves will be blindingly fast. There are those in other fields that will adopt similar approaches. The transition period is confusing and provides room for opportunistic companies and strategies.
Manufacturers are in a more challenging position, as they also have to puzzle out what their consumers are thinking if they want to keep servicing them.
Dr. Chris Kuehl is chief economist with the Fabricators & Manufacturers Association, Intl. (FMA), a professional organization with more than 2,300 members working together to improve the metal forming and fabricating industry. Visit: www.fmanet.org.