Industry Today: The World of Manufacturing

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 Date:10/30/2009

 

Wake Up Call
Not So Fast
Peter Tourtellot argues that recovery isn’t just around the corner.

As turnaround management specialists, my colleagues and I have an intimate view of the recession. We’re working in a wide variety of industries, in companies of varying sizes and structures, as interim executive management and as specialized consultants. We are in the trenches, and from where we sit, the economic recovery appears to be off in the distance.

What we’re seeing:


  • The credit environment is still highly constrained. All but very large and abundantly qualified companies are finding it difficult to obtain the credit that would allow their revenues to grow. Our clients tend to be middle market companies, and they are in a tough spot, especially if their performance has declined, as is generally the case.


  • Particular industries and particular locations have been especially hard hit in this recession. The road back is going to be a long one for them, and some will never return to what they perceive as normal.


  • Many companies are still in the throes of restructuring, instigating continuing rounds of layoffs and closings of factories and branches.


We see the recession at ground level, from the inside of companies that are struggling to ride out the recession and positioning themselves for a strong comeback when the economy rebounds. These struggles are mirrored in larger trends and statistics.

Although the recession may be technically over, as Federal Reserve Chairman Ben Bernanke and others have stated, its effects are far from over. And for every sector that is showing signs of recovery, there appear to be others that have not yet felt the worst of the recession.

Unemployment is, of course, the most obvious indication that the economy is not out of the woods. Some 14 million people are out of a job, and never a week goes by without more layoffs reported. Most economists expect the jobless rate to get worse before it gets better.

It’s likely that unemployment will continue even as other recessionary conditions ease up. Employers will be reluctant to add to their payrolls until they are convinced that the recovery is real and sustainable, and until they see a clear demand for more of their products and services.

It’s also true that companies can get used to doing more with less. Even when demand increases, they may not be inclined to rehire workers or reinstate jobs.
John Engler, president of the National Association of Manufacturers, recently commented, “I think it’s going to be a very slow recovery, but as it comes back I think you’re going to see a lot of increased production without a lot of hires.”

Lack of a paycheck and anxiety about job security, decreased home values, losses in 401(k) plans and the like continue to have a depressing effect on consumer spending. In our view, what good news has emerged about an upswing in consumer spending is mostly attributable to federal transfer payments, such as the Cash for Clunkers program and extra payments made through Social Security and other federal programs and data just released supports that view. Until earned income goes up, real estate appreciates, and 401(k) plans show sustainable growth, it’s unrealistic to expect consumer spending, that fundamental engine of economic growth, to increase to the levels of a few years ago.

Until consumers feel confident enough to buy, they’re making do with their current houses, cars, furniture, computers, kitchen appliances, wardrobes and durable goods across the board.

That’s why the manufacturing companies we see are ordering fewer raw materials and parts, operating at much diminished capacity, and producing less. Whereas American factories overall were running at an average 80 percent capacity for the 30 years before this recession, the most recent figures show they are down to an average 67 percent capacity.

And in that domino cascade that began with the housing industry, the effects are now and still being felt in the industries that move the goods that Americans are now buying less of to put in their houses. The demand for trucks and railroad equipment is still in decline.

And it’s not just stuff, but places too, that are not seeing light at the end of the tunnel. Those amazing low hotel rates you see advertised are measures of a tourist and hospitality industry in long-term pain. And even as predictions suggest a slight improvement at the end of this year, no one expects it to be across the board, as the two- and-a-half year decline has been. A few markets can look forward to a brighter 2010, but for most, the recovery will take longer.

A dearth of tourist trade is only one of many woes that cities and states are experiencing. Forty-eight of the 50 states are facing budget shortfalls, with deficits of about 25 percent of their budgets. According to the Center on Budget and Policy Priorities, those deficits will rise over the next year.

And American municipalities haven’t hit bottom yet. A recent survey by the National League of Cities showed that city finance officers believe that the full weight of the dropping real estate values won’t be felt until 2010, 2011, 2012, since property tax re-assessments are typically phased in. Cities are looking at declines in all their major sources of revenue – sales taxes, income taxes and property taxes.

In our turnaround management work, we have ample opportunity to observe that one thing leads to another, that the parts of an organization are inextricably linked, and that by the time a company knows it’s in deep trouble, there is usually no quick and easy remedy. We also see that for a robust return to health and growth, assumptions and behavior have to change.

From our perspective, the same could be said of the economy. When the downward spiral is this deep, a full recovery is going to take time and will not be evenly spread across the country or across industries or across local communities. There is still much pain to be felt in the next 12 to 18 months.

Peter Tourtellot is one of the founding principals of Anderson Bauman Tourtellot Vos & Company, a turnaround management firm headquartered in Greensboro, NC. Visit: www.abtv.com.