American manufacturing businesses are no doubt struggling, but signs continue to emerge that the United States economy is improving, pointing to a modest and fragile recovery from this recession.

In a recent ThomasNet survey of buyers and sellers — including executives/general managers (34.6 percent), engineers (17.9 percent), marketing/salespeople (16.5 percent) and purchasers (8 percent) — the greatest challenge for the majority of 829 respondents (45.2 percent) has been customers cutting back or going out of business. Following customer loss, respondents struggled most in: growing their customer base (10.9 percent); retaining customers/projects (7 percent); expanding into new markets (6.2 percent); and cash flow/paying bills (5.8 percent).

Compounding their concerns, most respondents believe the government's $787 billion American Recovery and Reinvestment Act (ARRA) will not help them.

To be sure, the economy has kept many respondents up at night.

Yet when asked the No. 1 action their companies are taking to meet these challenges, the largest group (19.2 percent) responded with "developing new or innovative products."

Not too long ago, the default answer to sagging manufacturing profits was to slash labor costs by offshoring work. Today, as indicated in ThomasNet's Industry Market Barometer findings, innovation has become a primary force driving the growth, performance and valuation of companies.

Even in prosperous times, focus on innovation can get bogged down in bureaucracy and resistance to change. However, recent thinking is that recessionary times provide ripe opportunities for product innovation. The idea is if you wait until you can ramp up spending on innovation comfortably during an upturn, you miss the opportunity that the downturn offers to business because you start the clock running too late.

Scarcity, it seems, can be pretty good at prompting innovation.

"Many markets have been greatly affected by the economy, however, the R&D field continues to stay steady," one ThomasNet respondent, whose employer supplies equipment to those performing R&D, said. "Companies may have learned from previous recessions that cutting R&D funds hurts the future of the company.

"We have learned to keep our budgets steady, with no significant increases, to continue to keep our products noticed," the respondent continued.

Indeed, as manufacturers face a more cautious customer base, they're choosing to develop new products, look for business in new industries (14.9 percent), increase online marketing (6.2 percent) and widen their sales channels (6.1 percent).

"Marketing is the key and innovation is mandatory for small corporations," another respondent made clear.

Based on the 800+ responses, common lessons learned include:

• Diversify;
• Be efficient, flexible, agile and lean;
• Communicate — with customers, partners and employees;
• Focus on customer service;
• Invest in current employees;
• Hold high standards for quality;
• Pay attention to details, particularly with operating cash flow;
• Think locally;
• Keep an open mind to change; and
• Stay positive.

Despite the positive responses and lessons learned, it's impossible to ignore the belt-tightening and downright distress manufacturers have felt over the past year. Included among the top recession-combating actions taken by respondents: "reducing staff" (10.4 percent).

The manufacturing sector lost 1.96 million jobs between December 2007 and July 2009, primarily due to downturns in consumer durable goods purchases and housing, and isn't expected to add employment until 2011, according to the National Association of Manufacturers' (NAM) Labor Day 2009: The Manufacturing Report.

However, while NAM's latest annual report warns the economy is still fragile, it also confirms signs of improving conditions in the manufacturing sector over the past few months. "Following a loss of 1.6 million in 2009, manufacturing employment will fall a milder 65,000 next year, before rising 399,000 in 2011, 426,000 in 2012 [and] 89,000 in 2013," the 2009 Labor Day report projects. NAM forecasts that by 2014, the manufacturing sector will regain more than 40 percent of the jobs lost during the current recession.

In the end, despite ThomasNet respondents' cautionary forecasts, they are optimistic about their own futures.

While the largest group of respondents doesn't see the economy improving until the second quarter of 2010, more than 75 percent forecast that by December of this year their companies will have grown (35.6 percent) or at least stayed even (39.7 percent). The remaining 25 percent expect their business will have declined between July and December 2009.

This relatively positive outlook is reflective of recent findings from the buying consortium Prime Advantage. In its Group Outlook (GO) Survey of industrial manufacturing companies in August, Prime Advantage also found that manufacturers are becoming more optimistic about their business: 80 percent of respondents expect revenue for the second half of 2009 to either stay the same or increase, up from only 38 percent predicting the same in February.

Additional Resources

Defying Gravity
by Ryan McCarthy
Inc.com, May 1, 2008

Labor Day 2009: The Manufacturing Report
National Association of Manufacturers, Sept. 3, 2009

Latest Group Outlook Survey...Indicates Manufacturers Becoming Optimistic about Economy
Prime Advantage, Sept. 2, 2009