The continued decline of the economy last year forced organizations in all sectors to re-evaluate their business plans, re-examine their priorities and make concessions to cope with the vast challenges. Economic activity hit a wall and trade fell to a trickle. Yet positive prospects began to emerge for manufacturers, with signs pointing to a modest and fragile recovery in the United States.

The results reflect a growing sense of cautious optimism returning to the manufacturing sector.

Manufacturers' Top Challenges
In a ThomasNet survey of buyers and sellers in the fall, the greatest challenge for many of the 829 respondents (45.2 percent) last year was 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).

According to findings from the buying consortium Prime Advantage in the fall, purchasing professionals' top sourcing concerns in the second half of 2009 were the ability to focus on business process issues — such as cost savings and efficiency measurement — followed by an ability to manage costs of raw materials and the costs of components.

The Institute for Supply Management (ISM) last month reported that, after an April 2009 forecast of a 5.3 percent decrease in prices paid, manufacturers now report realized price decreases averaging 4.6 percent for the year: 13 percent of respondents said their prices were higher at the end of 2009 than at the end of 2008; 63 percent reported lower prices averaged a 9.7 percent decrease; and the remaining 24 percent indicated no change between the end of 2008 and the end of 2009.

Meanwhile, reduced access to credit throughout the recession made it difficult for manufacturers to maintain earlier levels of expenditure and investment, narrowing the opportunities for growth and causing many businesses to seek alternatives to bank lending. Yet credit availability began to show signs of thawing that may indicate better financial health for the industrial sector is on the horizon. The National Association of Credit Management's index of favorable factors has been at or above the 50 mark — which separates growth from contraction — for five of the past six months.

Output, Exports and Green Shoots
In the fourth quarter of 2008, manufacturing production in the U.S. fell at an 18.1 percent annual rate. In the first quarter of 2009, production fell by 22 percent.

Exports of goods, a source of strength for manufacturing, fell by 25.5 percent and 36.9 percent in the same quarters, according to the 8th edition of The Facts About Modern Manufacturing, released by the Manufacturers Alliance/MAPI (MAPI) and the National Association of Manufacturers' (NAM) Manufacturing Institute.

By the second quarter of last year, the productivity decline was 9 percent and exports recovered somewhat to a negative 6.3 percent.

There were "green shoots" in the middle of the year. Still, not many people were celebrating.

Orders for durable goods rebounded sharply in July, representing their biggest gain in two years, on the back of the government's Car Allowance Rebate System program. In the end, 690,000 vehicles were sold and ailing auto dealers saw a slow but steady recovery.

Conditions for the nation's manufacturers improved for the first time in 19 months in August. This came after the U.S. government guided both Chrysler LLC and General Motors Corp. through relatively quick bankruptcies. Ford Motor Co., which did not take a federal bailout, posted a surprise $2.3 billion profit in the second quarter due to debt restructuring. It started a slow, upward trend of making money for Ford that enabled it to pick up market share from GM and Chrysler and earned the automaker another $1 billion in the third quarter.

Late in the summer, economists started to declare that the recession had ended. Technically, economic growth resumed in the second half of the year, but most economists warn of a slow and fragile recovery.

The nation's manufacturing sector rebounded in the third quarter of 2009, increasing production at an 8 percent annual rate, according to MAPI's U.S. Industrial Outlook: No V-Shaped Recovery, a quarterly report released last month. During the same period, the U.S. economy expanded at a 2.2 percent annual rate, according to the Department of Commerce.

Economic activity in the U.S. manufacturing sector expanded each month from August through December, generally reflecting the trend of the overall U.S. economy, according to the latest monthly manufacturing ISM Report on Business. In October, U.S. manufacturing registered its highest reading in nearly three years.

"The return to growth after four straight quarters of decline in output probably ended the most painful U.S. recession in 70 years," Reuters said.

Reports from the 12 Federal Reserve Districts last month indicated that manufacturing conditions from mid-November through the beginning of December were, "on balance, steady to moderately improving across most of the country." Most districts reported mixed to moderately improving manufacturing conditions since the last report, and that their contacts were optimistic about the near-term outlook.

The Associated Press last month noted a promising and perhaps surprising trend: "Counties with the heaviest reliance on manufacturing income are posting some of the biggest employment gains of the nation's early economic recovery. This is a big change from just half a year ago, when some economists worried that widespread layoffs by U.S. manufacturers might be part of an irreversible trend in that sector."

"On an annual basis, MAPI forecasts manufacturing production to fall 11 percent in 2009, before recovering to 5 percent growth in 2010 and to 6 percent growth in 2011," MAPI states. The research organization's Quarterly Economic Forecast indicates that inflation-adjusted gross domestic product (GDP) will have declined 2.5 percent in 2009, before rebounding to 2.4 percent growth in 2010.

U.S. manufacturing accounts for 57 percent of all U.S. exports and, according to a commentary on the MAPI/Manufacturing Institute report, released in October, most of the U.S. trade deficit is due to "its high oil import bill, high propensity to consume, the aggressive policies of export-oriented countries and the hard facts of global competitive advantage."

In the new ISM semiannual economic forecast, released last month, 22 percent of U.S. purchasing and supply management executives said 2009 revenue was better than 2008 revenue, and that nominal (before adjusting for inflation) revenues increased an average of 20.3 percent over 2008. At the same time, 68 percent said their nominal revenues decreased in 2009 by an average of 22.1 percent. Respondents indicated an overall net nominal decrease of 10.7 percent in business revenues for 2009 over 2008, less than the 14.7 percent decrease that was forecast in April 2009 for all of 2009. The three industries reporting increases in revenues in 2009 were chemical products; miscellaneous manufacturing; and food, beverage and tobacco products.

Unemployment
At the beginning of 2009, great hope was placed in a massive federal stimulus program. The American Recovery and Reinvestment Act (ARRA), signed into law in February, was meant to staunch job losses, create new jobs and revive a wilted economy. It may have helped pull the teetering economy back from the brink, but the headwinds were too strong to keep the job market from falling over the edge.

Unemployment rates went into double digits in 2009, and the jobless rate reached its highest level in 26 years. The dire unemployment situation continues to be seen around the country. There are now more than 7 million fewer Americans with jobs today than when this recession began, and more than 20 million people collected unemployment benefits at some point in 2009. NAM's Labor Day 2009: The Manufacturing Report estimated a loss of 1.6 million manufacturing jobs last year.

Despite positive economic signs elsewhere, most economists and analysts continue to refer to a "jobless recovery." (The number of unemployed is considered a "lagging" indicator, meaning that there will be many other signs of economic recovery before companies once again start hiring in large numbers.)

Lawmakers scrambled to ease the blow of job losses by pushing for an extension of unemployment benefits. Although the ARRA pledged significant funding toward infrastructure projects intended to boost job creation, many of the efforts fell short, prompting a supplementary plan to stimulate job growth, with a focus on supporting small business hiring and funding additional infrastructure projects as jobless claims continue to rise.

Although unemployment remains high and the job market is unsteady, the unemployment rate unexpectedly fell in November, as did the pace of job losses. The Federal Reserve and private economists expect joblessness to stay above 9 percent through the end of 2010.

Global Recovery
McKinsey Quarterly recently pointed to a "new normal" setting in — "for many companies, an environment less comfortable than the one they knew in the pre-crisis world."

The crisis started in the U.S., which, according to MAPI and the Manufacturing Institute, still has the largest manufacturing sector in the world. Yet the recession has altered the role of the U.S. in the world economy, with large developing economies such as those in Asia gaining competitive ground.

The Obama administration's 2009 appointment of Ron Bloom as "manufacturing czar" helped to reinforce the importance of manufacturing to the U.S. economy. In September, Bloom assumed the title of senior counselor for manufacturing policy in addition to his role as senior adviser on the president's task force on the automotive industry. He's been charged with reviewing U.S. competitiveness in the global economy. His job includes coordinating with the Departments of Commerce, Treasury, Energy and Labor to integrate current programs with new initiatives.

The recession that continued in 2009 was global in scope. Pascal Lamy, the head of the World Trade Organization (WTO), said last month that global trade for 2009 would likely fall by more than 10 percent. Economists say that the global economy is in the early stages of a recovery following the sharpest contraction since the Great Depression, but progress is uneven.

"[I]n February this year, the global economic downturn was peaking," the WTO director general told a forum in Seoul. "Less than a year on, progress has been made but we are not yet out of the woods."

After unprecedented intervention by governments and central banks, the global economy began to strengthen in the second half of 2009. The International Monetary Fund projects that global real GDP fell by 1.1 percent in 2009 but predicts gains of 3.1 percent in 2010. In advanced countries, modest growth of 1.3 percent is expected after a contraction of 3.4 percent in 2009. The outlook is more positive for emerging economies and other developing countries — driven by China, India and a number of other emerging Asian countries — where growth is forecast at 5.1 percent in 2010, up from 1.7 percent in 2009.

Reports on the economy and the industrial sector were mildly encouraging at year's end, but the pace of recovery is slow and activity remains far below pre-recessionary levels. Now everyone's attention is turned to 2010, with hopes for a sustained recovery to take shape.

The next issue of IMT will focus on what manufacturers can expect for the year ahead.

Resources

Facts About Modern Manufacturing - 8th Edition
The Manufacturers Alliance/MAPI and the Manufacturing Institute, Oct. 6, 2009

The Facts About Modern Manufacturing
by Thomas J. Duesterberg and Emily Stover DeRocco
The Manufacturers Alliance/MAPI and the Manufacturing Institute, Oct. 6, 2009

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

December 2009 Semiannual Economic Forecast: Economic Recovery Continues in 2010
The Institute for Supply Management, Dec. 8, 2009

Credit Managers' Index: December 2009
National Association of Credit Management, Jan. 4, 2010

Manufacturing ISM Report On Business
The Institute for Supply Management, Jan. 4, 2010

U.S. Industrial Outlook: No V-Shaped Recovery
by Daniel J. Meckstroth
The Manufacturers Alliance/MAPI, Dec. 4, 2009

Gross Domestic Product: Third Quarter 2009 (Third Estimate)
The U.S. Department of Commerce, Dec. 22, 2009

U.S. Q3 GDP Revised to 2.8 Percent Rate
Reuters, Nov. 24, 2009

The Beige Book
The Federal Reserve Bank, Dec. 2, 2009

Quarterly Economic Forecast
The Manufacturers Alliance/MAPI, Nov. 18, 2009

President Obama Names Ron Bloom Senior Counselor for Manufacturing Policy
The White House, Sept. 7, 2009

Ford Reports Surprise Second-Quarter Profit
The Associated Press, July 23, 2009

Ford Turns a Profit, Reaping Rewards of Turnaround
The Associated Press, Nov. 2, 2009

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

Congress Extends Jobless Benefits, Home-Buyer Credit
by Corey Boles
The Wall Street Journal, Nov. 5, 2009

The Crisis - One Year On: McKinsey Global Economic Conditions Survey Results
McKinsey Quarterly, September 2009

Lamy Says New Banking Rules Must be "Non-Discriminatory"
The World Trade Organization, Dec. 7, 2009

World Trade to Fall 'Unprecedented' 10% This Year
Agence France-Presse, Dec. 8, 2009

Global Recovery Under Way but Likely to Be Slow...
International Monetary Fund, Oct. 1, 2009