The December ISM Manufacturing Report is out, and the headline story is good news.
But the full report is a bit of a mixed bag for our industry.
Manufacturing is back in expansion mode as the Purchasing Manager’s Index, “‘The PMI™,’ registered 50.7 percent, an increase of 1.2 percentage points from November’s reading of 49.5 percent, indicating expansion in manufacturing for only the third time in the last seven months. This month’s PMI™ reading moved manufacturing off its low point for 2012 in November.” – ISM Report Dec 2012
A closer readinghowever notes that “The nine industries reporting contraction in December — listed in order — are: Nonmetallic Mineral Products; Chemical Products; Miscellaneous Manufacturing; Plastics & Rubber Products; Fabricated Metal Products; Transportation Equipment; Machinery; Electrical Equipment, Appliances & Components; and Apparel, Leather & Allied Products.” – ISM Report Dec 2012
Precision machining is an industry of Fabricated Metal Products. Four of our most important market segments were also in decline in December: Transportation Equipment; Machinery; Electrical Equipment, Appliances & Components. The market we see is not as rosy as the headline.
In addition, the New Orders component of the survey, at 50.3, went unchanged. This suggests that new orders, the source of our business’s future production, was virtually unchanged in December. The backlog of orders component, at 48.5,indicates a small contraction of the orders book.
The reason everyone wants to describe our current unemployment situation as cyclical just might be because ‘cyclical unemployment’ is cause agnostic. Cyclical unemployment is defined as just “the deviation of unemployment from its natural rate.“ Link
Since it is just a variation, we need not look too hard for causes, it will go away.
Sandra Pianalta, Chairman of the Cleveland Fed, and a member of the FOMC, is on record as saying that unemployment is cyclical:
Pianalto: I still believe that our current high unemployment is a cyclical problem and not a structural one. There’s been a longstanding relationship between the amount of growth in the economy and the improvement that it translates into in terms of job creation. We’ve had a very weak recovery that hasn’t created a lot of jobs. So the slow pace of this recovery is causing that unemployment rate to move down more slowly than we’d like.
I’m reassured that this issue is cyclical and not structural when I look at job openings. Prior to the recession, there were two individuals looking for every job that was open, so it was a 2-for-1 ratio. During this recession, that number has jumped to four people looking for every one job opening. So we just have a very slow pace of job openings, which, again, is cyclical, in my thinking. Link
Structural unemployment is defined as a mismatch between skills demanded and labour available
Structural unemployment means the folks you can hire can’t do what you need done.
“Unemployment caused by a mismatch between workers’ skills and the skills needed for available jobs. Structural unemployment essentially occurs because resources, especially labor, are configured (trained) for a given technology but the economy demands goods and services using another technology. Employers seek workers who have one type of skill and workers seeking employment have a different type of skill. This mismatch in skills, largely the result of technological progress, creates unemployment of the structural variety.” Link.
Those of us trying to hire people with skills to operate our CNC equipment, people who can do math- trig, offsets, enter programs into controls, read vernier calipers- we know its a structural problem. We see and hear it in each interview.
Those college grads with all those student loans needing to be repaid can’t do these things.
Sure looks like “Employers seek workers who have one type of skill and workers seeking employment have a different type of skill” to me.
But I have a very smart (and modest) friend who suggested that I might be mistaken.
“Perhaps it is cyclical, ” he explained, “ifthe ‘cycle’ you’re referring to is 40 years of failure in public education, undermining the family as a social building block, the complete decoupling of executive compensation from everybody else, an eroding sense of the “public good”, the reckless expansion of easy credit, extremist positions on the social safety net, even more extreme positions on law, order, and incarceration (including drug policy) and, in some pockets, the fostering of contempt for empericism, all while the rest of the world gets leaner, smarter, and richer.”
Maybe he’s right. I’ll admit that our unemployment today is cyclical, if cyclical means 40 years of failure in public education, undermining the family as a social building block, and extremist positions on the social safety net that keep job seekers at homeinstead of job seeking and the host of other factors he mentioned. These are the reasons our precision machine shops and advanced manufacturing companies can’t seem to find the skilled labor for which we have openings.
So what’ll it be? Structural or Cyclical?
What’ll it be?
Today’s unemployment problem is structural, unless you want to accept a 40 year cycle of failure in public education and culture.
“Convincing millions of Americans they don’t want a job or compelling desperate workers to settle for part time work has been the Obama Administration’s most effective jobs program.” – Peter Morici
Adding to the deficit to pay for it is yet another issue.
The economy added 146,000 jobs in November, up a bit from 138, 000 in October. The Dept. of Labor reported that Unemployment fell to 7.7 percent, largely because 542,000 additional adults chose not to look for work.
In the weakest recovery since the Great Depression, most of the reduction in unemployment from its 10.0 percent peak in October 2009 has been accomplished through a significant drop in the percentage of adults working or looking for work.
Were adult labor-force participation the same today, the unemployment rate would be 9.7 percent.
Hooray! Not really This is only a small part of the real unemployment picture.
Adding more than 8 million part time workers who can’t find full time work, and discouraged workers no longer looking for work, the unemployment rate becomes 14.4 percent. It rose above 14 percent in the wake of the financial crisis and remains stuck there.
Underemployment is even more onerous.
Gallup tracks underemployment monthly as well, and the official Labor Dept. figures seem to be about three percentage points below those of Gallup.
I know some folks who have an uncanny ability to predict the future. They are not psychic, indeed, they are the kind of people that discount that sort of thing out of hand.
The secret of these folks is that as critical thinkers, they are able to recognize the assumptions of the present state, AND MAKE INFERENCES from the data that they have.
They make these inferences by not being slavishly tied to the present assumptions.
12 page pdf about your impending future. Scarier than Stephen King.
8 bullets that tell the future your business is facing:
Absent legislative action, large spending cuts and large tax increases will hit the economy at the same time, causing a total fiscal contraction of $500 billion, or about 3.2 percent of GDP.
Washington’s failure to address the pending fiscal cliff is already having an impact, cutting 0.6 percentage points from GDP growth for 2012.
The worst could be ahead. If the fiscal contraction happens, the economy will almost certainly experience a recession in 2013 and significantly slower growth through 2014.
From 2012 to 2015, the economy will lose 12.8 percent of the average annual real GDP it could have attained with moderate growth, sapping critical resources from all economic sectors.
Job losses will be dramatic. By 2014, the fiscal contraction will result in almost 6 million jobs lost, and the unemployment rate could reach more than 11 percent. (U-3 unemployment U-6? Too scary to contemplate!)
Households will take a big hit. Real personal disposable income will drop almost 10 percent by 2015.Reduced U.S. Standard of Living
Manufacturers of consumer goods and defense contractors likely will see large and durable contractions in their industries.
It will take most of the decade for economic activity and employment levels to recover from the fiscal shock. Another recession could deal a substantial blow to long-term economic potential, permanently reducing living standards in the United States.
These eight points document why manufacturers are worried about slowing economic growth.
You know what to do…
If you think that Hurricane Sandy is the perfect storm, wait until you see what happens when sequestration cuts, other federal spending cuts, and layoffs hit at the same time that U.S. taxpayers- investors, businesses, employees get hit by a sudden increase in tax liability.
The day on which the average American has earned enough gross income to pay off his or her share of the spending and regulatory burdens imposed by government at the federal, state, and local levels is called the Cost of Government Day. For 2012 the Cost of Government Day was last Sunday, July 15.
197 days worth of your earnings (up through last Sunday) went to federal, state, or local governments.
Every year, the Americans for Tax Reform Foundation and the Cost of Government Center calculate the Cost of Government Day. No one in Washington D.C. is even looking at this, but here is what you need to know:
The cost of government makes up 54.0 percent of annual U.S. gross domestic product (GDP).
Read this report! A 5 percent reduction in regulator budgets would increase GDP by $376 billion and expand employment by 6.2 million jobs over the course of five years.
I’d love to see this calculated on a small business basis, for whom the cost of compliance of the ever increasing burden of regulatory decrees is dissuading both investment and hiring.
These costs are estimated conservatively- taking into account only the cost of complying with regulations: the material resources and labor needed to carry out compliance. Not counted are the negative economic effects of regulatory requirements—the deadweight loss of these policies.
One more great fact for you to consider:
Over the last ten years, regulator budgets have grown by 72.5 percent, much faster than the decade’s growth in regulatory costs.
The blue bar segments in the following graph shows us that as the baby boomer cohort leave the workforce, there are currently not enough under 25 and 25- 34 year olds to make up for their loss. This means that not only will productivity increases have to continue, but also that we need to really make an effort to bring 34 and under people into our skilled workforce in manufacturing. This will certainly be a challenge for employers, and if nothing is done, will mean a new management version of the No Job Blues– “the no skilled worker blues” – for our shops as we try to find candidates for open positions left by the departing boomers.
If you are a savvy shop, you are working on this issue today- if the average age of our manufacturing workers is 50, that means over half of our workforce are within a few short years of retirement.
What’s your plan for workforce and skill development in your shop, city, region and state?
The pundits lately are all increasingly pessimistic about manufacturing these days. Industry Week, NFIB, Bloomberg.
Please ignore the negativity in the press, we have some positive data to share.
The PMPA Business Trends Index was reported to be 125 in March, up 6 points from February.
PMPA members can access the current report here. (Accredited media can contact mfree(at)pmpa.org to receive a copy.)
Compare that to March ISM report which showed manufacturing up just 1 percentage point.
Why we are excited about prospects for manufacturing in 2012:
The correlation coefficient for our first four months of the year sales to the end of the year average is 0.958.
If you don't know what correlation coefficient means, ask a Statistics Professor.
As the graph below shows for the years from 2003 to 2011, the blue line is the average of our Index for the first four months of each year; the red line is the Shipment Index’s year end average.
It looks like our Index's average of shipments for the year could be around 123.
Last year’s average was 113 ( 2000, 2010= 100). Our current look (three months data) could be that precision machined products manufacturing in 2012 is up 10% from last year.
Our products are embedded as components in practically all manufactured goods- automotive, aerospace, off road, heavy truck, agriculture, food service, appliances, munitions.
Our data strongly suggests that suppliers who are fixated on fear, uncertainty, and playing defense may be doing a far greater disservice to their company’s performance this year than any external factors.
What are you doing to help assure that your company is prepared to deliver a possible 10% greater sales performance in 2012 than you did in 2011?
After all, it’s not really about our numbers.
It’s about how you manage your business.
Our Business Trends Index numbers suggest you should be managing for growth!
Selection of materials for precision machined parts should be held to a higher standard than just “cheapest price per pound.”
Here are 4 questions to help decide if a grade of steel (or other material) is appropriate:
Is it economical in assuring a satisfactory end product?
Does it provide sufficient safety factor for the properties called upon in the design?
Does it provide the most economical means of production?
Is it the lowest cost raw material?
The order in which these questions are asked is critical. Answering number 4 first puts the entire company in jeopardy for product liability lawsuits if the first three questions are ignored in the buyer’s holy quest for cheapest raw material price.
In steel, with many possible carbon and alloy grades, qualities, and finishes (cold drawn, turned and polished, ground and polished, or combinations of these) the end use is of particular importance in arriving at the grade, type, and quality of the steel.
Human safety critical components (airbags, anti lock brakes, climbing equipment) require different thinking than parts for less critical applications where failure is merely inconvenient, not life threatening.
Components for expensive machines and production equipment also fall into this category, where the failure of a part purchased under the assumptions of “false economy” result in extensive downtime of a very high value production asset.
Once the suitability for the end use and safety factor as designed has been determined, then the suitability of the material for the production method becomes the next selection criteria. In high volumes of relatively simple parts, for example, very low carbon, plain carbon steel is the appropriate choice using cold heading. If the volumes are not there, attempting to use this same steel on screw machines would result in inferior finishes and far more expensive parts than if a free machining grade of steel were chosen. Selecting for Manufacturability can help lower the total cost over the entire supply chain as well as for the final consumer.
The final criteria then becomes transactional cost. But even this is more than just dollars and cents- it is both dollars and sense! Is the supplier a legitimate source? Do they have statistically controlled systems? Do they have a mature quality system that has demonstrated it’s strength over time? Do they limit their number of suppliers so that you will not be subjected to the full range of variability of inputs possible in an increasingly global, interconnected world?
If buying for mere cheapness was the point, we could replace all purchasing agents with third graders. By third grade, most kids know which number is larger, and which is smaller.
It might take some effort to get them to choose the lower number, though...
The professional value that purchasing adds is by establishing and following a process that assures an optimum outcome for the entire value chain, not just one part of it.
When I grew up I learned Economics from Uncle Bob.
Uncle Bob had the family farm, and worked as a foreman in the steel mill.
This is the mill Uncle Bob worked in.
Uncle Bob taught me that wealth is created by either growing it , manufacturing it, or mining it. And since he had a working oil/gas well on the farm, he knew of what he spoke.
He grew food and raised livestock on the farm, he manufactured steel in the mill, and he sold the oil from the well and burned the gas for heat.
Then I got to college and saw that the folks with money weren’t working in mills or mines or farms. There was this burgeoning service economy.
Today, I just prepared PMPA’s Business Trends Report for October 2011. It aggregates sales and sentiment data from a little over 80 PMPA members in the U.S..
The Business Trends Indicator flattened a bit- a decline from a value of 114 last month to 111 this month.
Woe is me- NOT!
The fact of the matter is that the Business Trends Sales Data is up 15% for the year to date. Our average is 115. in 2010 it was 99.
Precision Manufacturing- according to PMPA’s respondents are up 15 percent over last year.
So how does that 15% stack up against the interest rates that those service economy bankers are paying you on your savings, checking and Certificates of deposit? How does 15% compare to how the rest of your investments- real estate, stocks, bonds- are doing?
According to our data, Uncle Bob seems to be right. There are many worse places to be in today’s economy than precision manufacturing.
