Recovery? Manufacturers Aren't Convinced

They're not hiring or spending despite an uptick in orders

To hear the optimists tell it, the battered manufacturing industry is finally on the mend. Orders are up, and production is climbing. After leading the U.S. into recession last year, manufacturers are ready to propel the economy back to the promised land of strong, sustained growth.

Better not sound the trumpets just yet, though. True, manufacturing has rebounded from last year's low, but the recovery remains weak and uneven. While such basic industries as steel and chemicals are increasing output, others, such as telecom and aerospace, remain depressed. What's more, the manufacturing rebound, such as it is, has yet to translate into the stepped-up hiring and increased capital outlays that every economist concedes is necessary for a full-fledged expansion. Although it's now only 17% of the economy, manufacturing is still critical because it's the swing factor, rising and falling while the service sector remains relatively stable.

Through the first five months of the year, industrial production has grown by a half-percent per month--about half the typical pace of past recoveries. And as measured by the Federal Reserve, production is still below levels that prevailed before September 11. That's hardly cause for celebration.

More sobering, in some industries, such as technology and telecommunications--sectors that drove economic growth during the 1990s--there's little evidence of much of a recovery. On July 2, Advanced Micro Devices Inc. (AMD ), the world's second-biggest maker of PC processors, said second-quarter sales were about $600 million--well below the $620 million to $700 million it had projected two weeks earlier. Blame that on fizzling PC sales, following an end-of-2001 spurt.

And even in areas where demand is picking up, manufacturers can't seem to get a break. That's due in part to a glut in manufacturing capacity that is forcing many producers to cut prices to keep going. Alcoa Inc. (AA ), the world's largest aluminum producer, reported on July 8 that its second-quarter profits fell by nearly 25%, to $232 million, as falling prices canceled out a rise in shipments.

It's no wonder, then, that manufacturing companies remain cautious and are keeping a tight rein on hiring and spending. Even as industrial production has picked up this year, manufacturers have continued to hack away at their payrolls, reducing them overall by nearly 200,000, including 23,000 jobs eliminated in June.

Instead of taking on more workers, companies are asking existing employees to work more hours or are hiring lower-cost temps. But even there, executives are moving cautiously. According to Manpower Inc. CEO Jeffrey A. Joerres, manufacturers are taking on temporary workers for 30- to 60-day assignments rather than indefinitely, as they did in the past.

When it comes to capital outlays, manufacturers are even more tight-fisted. A survey released July 10 by the National Association for Business Economics found that goods-producing companies slashed capital spending again in the second quarter--the sixth straight quarter that has happened. High-tech firms have been particularly brutal, with hard-pressed chipmakers expected to slash investment by 20% this year, according to Morgan Stanley analyst Steven Pelayo.

Yet all is not gloom on the factory floor. Auto sales have stayed strong, though Detroit has had to offer stepped-up incentives to entice buyers into showrooms. Honda Motor Co. (HMC ) is gearing up, announcing on July 9 a $466 million expansion at three of its North American plants. "We feel the market is gradually expanding," says Thomas G. Elliott, executive vice-president at American Honda Motor Co.

Other manufacturers aren't so sure, even with demand for their products rising. "While we are seeing improvements in several important sectors," says Raj L. Gupta, CEO of Rohm & Haas Co., a Philadelphia chemical maker, "we see no reason at this time to assume that demand will continue at this rate." His bleak assessment sums up the prevailing sentiment in Factoryland USA these days. Despite what the optimists say, the economy may still have a long, hard slog ahead.

By Rich Miller in Washington, with bureau reports

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