Manufacturing Booms as Deere Exemplifies Productivity Surge
After a 40 percent drop in sales from October 2008 to February 2009, Materials Processing Inc. laid off workers, changed the way it sets prices and took fewer risks in the volatile commodities markets.
The efforts returned the Logansport, Indiana-based metals- processing company to profitability starting in March 2009, and sales are back to pre-crisis levels, said Chief Executive Officer Clay Barnes.
“We aggressively restructured and are going to be around for our customers for a very long time,” he said.
Once-ailing manufacturers are enjoying a robust rebound as cost-saving moves from job cuts to a greater reliance on technology help drive stronger-than-forecast growth. The shift has helped set the stage for a potential “manufacturing renaissance,” says James Paulsen, chief investment strategist at Minneapolis-based Wells Capital Management. He predicts the industry will set the pace for U.S. expansion and the American stock market during this decade, as technology did in the 1990s.
“Manufacturing is leading the whole economy,” said Paulsen, whose firm oversees about $340 billion. U.S. manufacturers “had to find religion. They’ve really cleaned up their balance sheets. What is left is the cream of the crop.”
Investors’ confidence in the industry is evident in the Industrial Select Sector SPDR Fund (XLI), an exchange-traded fund made up mostly of manufacturers including Peoria, Illinois-based Caterpillar Inc. (CAT) and Boeing Co. (BA) in Chicago. The fund has climbed 37 percent since Dec. 31, 2009, compared with a 20 percent rise in the Standard and Poor’s 500 Index.
Cooper Industries Plc (CBE), Deere & Co. (DE), Kennametal Inc. (KMT) and Timken Co. (TKR) are among businesses that “have emerged quite strongly and are able to benefit not only from the domestic recovery, but the global strength of markets,” said Eli Lustgarten, a senior research analyst at independent investment- research firm Longbow Securities in Independence, Ohio. While he recommends all four companies, Lustgarten said neither he nor Longbow owns their shares.
Timken, the Canton, Ohio-based maker of roller bearings and steels used in tools, cars and farm equipment, hired back all 3,500 manufacturing workers it had laid off in the recession and is creating 200 new jobs at three plants in its hometown, said spokeswoman Lorrie Paul Crum. It’s also added new product lines in areas such as wind energy, she said.
“The company is now on pace to achieve record earnings this year, and sales are growing substantially around the world,” Crum said.
The rebound in manufacturing -- buoyed by a falling dollar -- “has been much faster and stronger than companies anticipated, and they’ve been able to ramp up production without having to dramatically increase hiring,” Lustgarten said.
IntercontinentalExchange Inc.’s Dollar Index, which tracks the greenback against currencies of six major trade partners including the euro and yen, has dropped 12 percent in the past year as emerging-market wages rise. China’s private-sector pay in urban areas increased 14.1 percent on average to 20,759 yuan ($3,197) in 2010, according to the country’s National Bureau of Statistics.
“We’re seeing quite an uptick in our exports from the U.S. because of the low dollar,” said Eric Spiegel, president and chief executive officer of Siemens Corp., a subsidiary in Washington of Munich-based Siemens AG. (SIE) Siemens exports $2 billion to $3 billion a year from the U.S.
Shrinking Trade Gap
The Obama administration is counting on manufacturers to help double shipments to foreign markets by 2015 and reduce the trade deficit. Rising exports have helped shrink the trade gap 24 percent to $45.8 billion as of February, the most recent month available, from $59.9 billion in January 2008, a month after the recession began.
U.S. companies “recognize there are tremendous opportunities overseas” and have made “some pretty impressive productivity gains,” said Chad Moutray, chief economist for the National Association of Manufacturers, an industry trade group in Washington. “You’ve started seeing a lot of pent-up demand.”
Signs of a robust rebound are reflected in the Institute for Supply Management’s factory index, which shows the industry expanding for 21 consecutive months through April. Manufacturing led “moderate” growth across much of the U.S. in February and March, according to the Federal Reserve’s Beige Book regional survey released April 13, with nine of the 12 Fed banks citing improvements in production, orders or revenue.
Manufacturing productivity rose 5.9 percent last year, the third fastest increase since Labor Department records began in 1987, behind gains of 7.3 percent in 2002 and 6.3 percent in 2003. Profits from current production jumped 72 percent in 2010, the biggest annual increase since 2004, according to Commerce Department data.
At the same time, companies have added just 250,000 jobs since December 2009, when employment dropped to a post-World War II low of 11.5 million; the peak was 18 million in the late 1980s, according to Moutray.
“We are still a ways away from getting back to where we were,” said William Strauss, a senior economist and adviser at the Federal Reserve Bank of Chicago, which represents most of Illinois, Indiana, Michigan and Wisconsin. While production eventually should return to pre-recession levels, “I would question to a degree whether employment levels go back to where they were in late 2007,” he said. Still, “if you believe the industries hit hardest come back the strongest, that’s definitely true for manufacturing.”
Sales at privately held Materials Processing’s three units plummeted during the recession because of falling orders and a decline in commodity prices that saw copper go from $4 a pound to $1.50 a pound within months, said Barnes, 45.
The company laid off half of its 600 employees and began setting prices when a customer placed an order, in anticipation of further declines in metal values, instead of when a product shipped, Barnes said. It initiated a third step: using futures contracts as a hedge against falling prices for copper and brass, which it was buying on the open market.
“We took the approach that things would not get better at the trough of the downturn and we needed to re-size our organization to what we considered to be a new reality,” Barnes said. “The recession forced everyone to get leaner.” The company has since rehired 150 of the 300 people laid off, he said.
Cheaper than China
Foreign companies increasingly see the attraction of having operations in America. Siemens is spending $170 million to expand a gas-turbine factory in Charlotte, North Carolina, that will manufacture the turbines “at the end of the year cheaper than we can make them in Shanghai,” Spiegel said. “It’s a good time to be adding new production capability in the U.S.”
Subsidiaries of overseas businesses consider America’s skilled workforce an important reason to invest in the country, according to a survey last year by the Organization for International Investment.
“For some of the European companies, the U.S. has become a cheaper source of labor,” said Nancy McLernon, president and chief executive officer of the Washington-based organization.
The downsizing of manufacturing during the last decade also has left what Spiegel called a “void in a lot of areas,” including wind energy. Siemens opened a new 300,000-square-foot wind-turbine facility in Hutchinson, Kansas, in December. Rising transportation costs, on the back of surging oil prices, have enhanced the attractiveness of setting up shop in the U.S. rather than importing such heavy items as blades for wind plants, according to Spiegel.
“You’re going to see more people like us starting to put manufacturing back in the U.S.,” he said.
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