Economic Notes: How Low Can It Go?
6/19/2009
The Conference Board’s Leading Economic Index™ (LEI) rose for the second consecutive month in May. The LEI is a composite of ten measures of economic performance. Reading the LEI in conjunction with the other indices it maintains, the Conference Board concludes that the “recession is losing steam.”
The loss of contractionary momentum is evident in the financial markets (i.e., higher stock prices and monetary measures) and homebuilding, which has bottomed.
The manufacturing sector has yet to bottom, however. New orders have been up in two of the past three months (the seesaw effect), but this has yet to translate into increased production. Instead, total industrial output fell in May, as it has in every month but one since December 2007.
Manufacturing has borne the brunt of the contraction, with utilization rates at record-low levels (data is available from 1967). Of the 6 million jobs lost during the current recession, 30% were in the manufacturing sector – which only accounted for 10% of total employment at the outset of the contraction.
As recently as 1979, manufacturing employment totaled 19.4 million, over one-fifth of all jobs; it now accounts for less than 12 million (9.1%) of all workers. How low can it go?
Assessing manufacturing’s prospects is complicated by several factors, as outlined below.
First are the clouds over the auto sector. The production of vehicles and parts is down 38.4% from year-ago levels; auto-related facilities are currently running at 38.3% of existing capacity, one-half of the 1972-2008 average. There is little to suggest that these numbers are likely to improve substantially in the foreseeable future.
Foreign trade presents another complication in assessing manufacturing’s outlook. The United States is the third largest exporter in the world, behind Germany and China.
Through the third quarter of 2008 (Q3-08), U.S. exports remained robust (+14.3% year-on-year). But then the global recession caused trade to shrink worldwide — including American exports, most especially U.S. manufactured goods.
In Q3-08, goods accounted for 70.7% of all exports and services accounted for 29.3%. Over the next two quarters, as total exports fell by $102.8 billion, most of the drop (86.1%) was due to reduced exports of goods. While services exports fell (-10.2%), they were far more resilient than goods (-26.2%).
As global growth resumes, international trade will pick up, but it will involve increased competition and camouflaged protectionism (e.g., contrived regulatory standards, procurement restrictions, etc.).
U.S. manufacturers will face those international challenges while addressing yet a third complication: policy changes (i.e., taxes and regulations) that will almost certainly increase costs and restrain flexibility.
History suggests that the manufacturing sector will meet these challenges and increase its output through capital-fueled productivity gains, which translates into a continuing decline in employment.
How low it goes is anyone’s guess. But the truly relevant questions are: which sectors will pick up the slack – and when?
***
The statements, opinions, and conclusions contained herein are based solely upon the author’s own studies, research, and personal experience. Neither J.H. Cohn LLP nor the author makes any representation or warranty as to the accuracy or completeness of this information. J.H. Cohn LLP and the author expressly disclaim any liability for any loss or damage which may be incurred, of any kind whatsoever, as a result of or arising from the use of any of the information contained herein or reliance on the accuracy or completeness of it.