While the February 2012 Manufacturing Report on Business from the Institute for Supply Management shows that the manufacturing sector continues on the “expanding” side of the Purchasing Managers Index benchmark at 52.4% (below 50% is a contracting economy), that figure is down 1.7% from January’s reading of 54.1%.
The ISM notes that this represents the 31st consecutive month of manufacturing sector expansion, yet the figures have hovered from a high of 59.7% in both March and April of last year to a low of 51.4% in July of 2011, for a 12-month average of 54.1%—not exactly boom times.
In fact, while most of the PMI Index categories are still in the “growing” direction, there’s nothing to make us believe that manufacturing is on fire at the moment. New orders, for example, are down 2.7% to 54.9% for February, from 57.6% in January. Production dropped 0.4%; employment is down 1.1%; and customer inventories continue to be too low, having dropped from 57.5% in January to 46% in February.
The picture painted by the ISM is one in which things are holding steady or dropping slightly, revealing an air of uncertainty among manufacturers. “Demand from auto makers is getting stronger,” said a respondent from the Fabricate Metal Products sector.
Plastics and Rubber products reported contraction in February, along with Electrical Equipment and Appliances and components. Food, Beverage and Tobacco products are reporting strong growth, and one respondent said that “Manufacturing is busy. Spending money on new equipment to accommodate customer demands. Material prices staying in check.” That would seem to bode well for the packaging industry.
Looking at both the production PMI and the Customer Inventories PMI, it would appear that companies are not ordering in large quantities and stocking warehouses in eager anticipation of consumers spending with wild abandon.
The Commerce Department reported on Monday, March 5, that U.S. factory orders actually fell 1% in January, the most in 15 months after orders for machinery and equipment fell sharply, due in part by the expiration of a related tax cut at the end of 2011. Overall demand for factory goods dropped to $462.6 billion or 37.7% above the recession low in March 2009. Demand is now just 4.6% below the peak in June 2008.
Orders for durable goods, those products expected to last three or more years, fell 3.7%, which was also reflected in the ISM’s manufacturing report showing a contraction in Electrical Equipment and Appliances.
So why the trepidation in manufacturing activity? Big OEMs still aren’t seeing signs of any real economic recovery, nor that the government is willing to create a more business-friendly climate by lowering corporate tax rates (at least not without strings attached). And the business model for manufacturing companies has shifted, even as China has become a less attractive place to do business.
A new manufacturing model?
A report published in the Dec. 21 issue of MIT Sloan Management Review, “Is It Time to Rethink Your Manufacturing Strategy?” noted that while natural disasters, more expensive oil, labor costs, and supply chain disruptions have many CEOs considering a return to the U.S., it doesn’t mean that it’s back to the manufacturing model of the 20th century. “Flexibility is becoming the new watchword for large U.S. companies,” said an MIT news commentary on the report by Alice Waugh. “This may mean having more plants in more strategic locations around the world, with each plant able to produce most or all of the company’s products rather than specializing in one or two. Also locating plants closer to customers, wherever they may be, reduces time-to-market . . . Thus the authors see a shift to a more regional manufacturing strategy where China manufacturing may focus mostly on markets in China and Asia, while manufacturing in Mexico or the United States may focus on North American markets.”
And, I might add, this might also mean more “mass customization” and fewer products heading into inventory in warehouses waiting for masses of consumers to create the demand. It could result in a “manufacture-on-demand” model to help manufacturers reduce their overall costs.