Haworth College of Business News

U.S. Manufacturing Outlook

The Institute of Supply Management compiles monthly data from supply chain executives to determine if manufacturing output is expanding or contracting in the U.S.  An ISM manufacturing index of above 50 percent indicates that the manufacturing economy is generally expanding; an index below 50 percent indicates that it is generally declining.

Here is the great news for America and manufacturing driven economies such as Michigan – economic activity in the manufacturing sector expanded in April.  The index registered 54.8 percent, an increase of 1.4 percentage points from March’s reading of 53.4 percent, indicating expansion in the manufacturing sector for the 33rd consecutive month!  Why does this matter?  Well, if manufacturing keeps expanding, then at some point companies have to hire more people, and that is exactly what is starting to happen.  ISM’s employment index registered 57.3 percent in April, which is 1.2 percentage points higher than the 56.1 percent reported in March.  This is the 31st consecutive month of growth in the employment index!

Keep in mind that around six years ago the ISM manufacturing and employment indices were below 50 for several years. Long before the United States started its overall economic recession, there was a manufacturing recession going on. Over four million manufacturing jobs have been lost in the last decade and over 10 percent of those were in the state of Michigan alone. It is going to take several more years of manufacturing expansion to get those jobs back and it is indeed possible (but unlikely). If gas prices drop to $2 per gallon and U.S. vehicle sales jump to 18 million units annually (from the current 13 million and a low of 9 million 3 years ago), then a lot of our problems would go away.

And even though this has happened before (1990s), we should not hold our breath.  Today, for the first time in American history, most manufacturing jobs are not out on the shop floor (they are in the cubicles).  Today, America has the most productive manufacturing workforce on the planet and can produce six times the product with the same number of workers as it could 40 years ago. However, let this productivity phenomenon be a warning to all American workers that you have to be good at something that cannot be outsourced. Most of the jobs in manufacturing now require a college degree or trade skill. These jobs that require a college degree (production control, inventory management, procurement, etc.) or a trade skill (electrician, plumber, welder, machinist, etc.) command good salaries because they are not competing against non-Americans.

I know it is easier said than done, but we need to work harder to develop these skills so that we will not be as adversely affected by globalization.

My dad warned me 30 years ago that his factory job would not be around for me. He was right and we need to warn others because people like Romney and Obama will not fight the power — they are the power. Large and influential segments of our workforce benefit from globalization and they will make sure this trend does not reverse itself.  However, there is a way we can all move forward and prosper, and it begins with training and education (take it seriously and fast). In the meantime, let’s hope America’s working class gets educated and trained in order to protect their standard of living.

Side note

My heart goes out to America’s working class. My immigrant father was a United Auto Workers (UAW) union worker for General Motors and we lived the American dream because of it.  Those days are unfortunately gone because the American manufacturing laborer is competing against non-Americans who will work for much less money (around $1 per hour in China and $4 per hour in Mexico). Free trade agreements (NAFTA, CAFTA, WTO, etc.) with underdeveloped countries have perpetuated this situation. There will be no end in sight because the global economy revolves around generating shareholder value. The ability of American companies to invest abroad has benefited very large portions of our workforce, but it has also left several behind.

This brings me to the real problem at several of America’s more mature manufacturing companies whose hourly workers tend to still have strong union representation. You can blame what might be overpaid hourly workers, but mismanagement is at the heart of the problem on both the management and union side. For example, the stock prices of these manufacturing dinosaurs have slipped because of an inability to generate a positive and large return on investment. Yes, these companies make money (sometimes and often), but its net income as a percentage of total sales is small and that turns investors away. The only way these companies can improve their return on investment is to widen margins and improve asset turnover rate.

Reducing their direct labor costs will widen margins and improve the return on investment. They could increase sales, but that is not easy in the saturated and competitive U.S. market which is still the largest economy in the world.  I also realize that these companies are competing against companies that have much lower direct labor costs. However, where do most of their costs come from? Most of their costs come from direct material purchases and overhead (not direct labor). Another way to improve return on investment is to manage and reduce inventory because that would increase your asset turnover rate.

My point is that management and union leadership have let shareholders down more so than its hourly workers. Management needs to more effectively reduce its direct material and overhead costs, and better manage its assets such as inventory.  They should work with their hourly workforce to implement lean manufacturing techniques that are proven methods for reducing costs and improving performance. The unions should also bend over backwards with open arms to help management implement these techniques.  Fortunately, all of this is happening and will hopefully contribute to more positive news as is being reflected in the ISM manufacturing and employment indices.