How can manufacturing lead a recovery?

The Situation's picture
Rank: Baboon | 140

Why is manufacturing booming? In order for manufacturing activity to boom, doesn't there have to be demand at the end of the supply chain? I'm envisioning a sort of pull-demand model where consumer demand --> retailers sell more goods --> retailers demand additional supply from manufactures --> manufacuring activity.

Where is the demand for manufactured goods coming from? Are stimulus projects really doing that much? And surely it can't be investment capital goods because businesses won't invest in this environment...?

Or is my business cycle knowledge way off track?

Comments (13)

Mar 3, 2010

Inventories are rather depleted. Business will spell off their inventories and not replace them. In a slow economy these inventory reserves can last a while, but eventually they will become depleted. Once they are gone businesses have to replace them which fuels manufacturing. Unless the consumer and the economy as a whole starts going again it will be a temporary boom.

ISM is what, like 58 or so.

Mar 3, 2010
AnthonyD1982:

Inventories are rather depleted. Business will spell off their inventories and not replace them. In a slow economy these inventory reserves can last a while, but eventually they will become depleted. Once they are gone businesses have to replace them which fuels manufacturing. Unless the consumer and the economy as a whole starts going again it will be a temporary boom.

ISM is what, like 58 or so.

So since manufacturers are responding to depletion rather than demand, I wouldn't think they'd make very much inventory....so would I be correct to assume there is not much manufacturing activity in general, albeit more than there was last month (as the ISM measures activity relative to last month, I believe)?

If so, that means that a small amount of manufacturing activity is leading an entire recovery (albeit a temporary one)!?!??!

Mar 3, 2010

I would also think:

More manufacturing => more hours worked for expanded output => More disposable income

But I'm just guessing.

Mar 3, 2010
Revsly:

I would also think:

More manufacturing => more hours worked for expanded output => More disposable income

But I'm just guessing.

Your right, but wages haven't increased as much as they should so essentially profit per worker has increase.

More hours work = more overtime, but the money earned in overtime isn't high enough to offset the normal salary of a laid off worker. Additionally, until you see hiring increase people making all that overtime will pretty scared to go out an spend it with the prospects of being laid off waiting for them.

That being said, more hours worked is typically a precursor for hiring. I mean there gets a point where the company bits the bullet and starts hiring temps and then full time workers.

Mar 3, 2010
AnthonyD1982:
Revsly:

I would also think:

More manufacturing => more hours worked for expanded output => More disposable income

But I'm just guessing.

Your right, but wages haven't increased as much as they should so essentially profit per worker has increase.

More hours work = more overtime, but the money earned in overtime isn't high enough to offset the normal salary of a laid off worker. Additionally, until you see hiring increase people making all that overtime will pretty scared to go out an spend it with the prospects of being laid off waiting for them.

That being said, more hours worked is typically a precursor for hiring. I mean there gets a point where the company bits the bullet and starts hiring temps and then full time workers.

Exactly. The economic logic is sound... its just not happening in my opinion.

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Mar 3, 2010

There isn't much of a recovery going on right now. Government spending is keeping things going. Inventories are depleted, workers are producing a lot and working more hours, a precursor to actual hiring. I wouldn't say no one is buying, just a handful of individuals.

Bank lending is still incredibly slow and we need that to increase to see any real increase in activity. Take a look at companies balance sheets right now, they are overflowing with cash. Afraid to spend, but eventually they will have to do something with that money. I don't know if this is a double dip, but it isn't some glorious rebound thats for sure.

If anyone else wants to chime in feel free.

Mar 3, 2010

My view has always been that we wouldn't see the unemployment rate really come down until we get a substantial increase in the ISM Non-Manufacturing Index. After all, most of the jobs produced in this country are coming from non-manufacturing related activities, and any increase in demand for manufacturing goods will be met by one worker powering a crapload of machines.

ISM NM was around 53 last month, and the Employment Index is slowly creeping back towards 50. It'll be interesting if it's going to be sustainable.

On a similar note, what's up with the Baltic Dry Index? Anyone want to call a local bottom on it, or think we'll see it (shipping) head down further?

Mar 3, 2010

a lot of this was discussed in today's wsj. one reason is that exports are rising due to a weak dollar, which in turn creates more demand for manufacturing. additionally, as AnthonyD mentioned, inventories are depleted.

Baltic Dry Index is going a little haywire at the moment due to the incoming order of roughly 1400 new tanker-sized ships this year (traditionally there has only been a supply of 240 ships annually). BDI has usually has had very steady supply since ships are so slow to make, and since supply is constant, it has always been a great indicator of worldwide demand. now that there is going to be an influx in supply, the index in bottoming. note, 2009 also predicted a huge influx of new ships, but most were delayed/scrapped and the supply was unaffected, so this year people might be getting their panties ruffled over nothing.

Mar 3, 2010

Another big challenge to US manufacturing over the long-term could be labor costs. Hard to compete when everything you manufacture can be counterfeited and produced by people making cents on the dollar in other parts of the world. Even when these Asian economies start paying comparable salaries to the developed world, there are a whole host of countries waiting to fill the low-wage manufacturing model as a precursor to becoming an emerging economy. There are already frontier hedge funds in Africa looking at investment opportunities.

We need a United States MBA corps, like JFK's Peace Corps to sit down and work this country's competitive and debt problems out once and for all. We have the best schools in the world but we are not leveraging the talent in a constructive way.

Mar 3, 2010
jonmorris:

Another big challenge to US manufacturing over the long-term could be labor costs. Hard to compete when everything you manufacture can be counterfeited and produced by people making cents on the dollar in other parts of the world. Even when these Asian economies start paying comparable salaries to the developed world, there are a whole host of countries waiting to fill the low-wage manufacturing model as a precursor to becoming an emerging economy. There are already frontier hedge funds in Africa looking at investment opportunities.

We need a United States MBA corps, like JFK's Peace Corps to sit down and work this country's competitive and debt problems out once and for all. We have the best schools in the world but we are not leveraging the talent in a constructive way.

I agree with you in general, but I disagree with the low cost angle. There are many factors that go into a companies decision to move production overseas. Low cost labor is one thing, but when you add in the total cost of doing business in China the labor isn't that cheap. Still cheaper than here, but all things considered, far more expensive than their hourly wage alone.

Mar 4, 2010

What is the one thing that America has that many countries would die to get their hands on? Besides our military arsenal, we can sell our medical devices. Rich asian countries would pay handsomely to get better health care. In a perfect world, we would be able to profit by making these devices and have enough money to solve the health care problem.

But this is not a perfect world, so why don't we sell more planes, tanks, and ships to our partners Taiwan, South Korea and Japan. They would be better equipped to defend themselves against the attacks of Kim Jong Il and would be helping the American economy so that we can build more planes which will lead to more jobs and therefore a recovery of the markets.

Mar 3, 2010

Selling advanced military weapons to Taiwan is incredibly tricky since any major sale angers the Chinese. We just recently sold Taiwan a large shipment of military goods which was met with an unusually stern response from the Chinese government.

We do sell a lot of military items as it is to Japan and S.Korea. Unfortunately, military sales are not enough to pull a country out of a recession.

The United States has an incredibly diverse, open and strong economy. The rest of the world is suffering right along with the rest of us. China has been able to maintain their growth through one of the largest government spending initiatives in history which they are currently pulling back. I tend to agree with the "new normal" statement being thrown around. The economy got so hot because of over extension of credit. Now we are reverting to a more normal equilibrium. House prices have been brought back to earth, home ownership percentages have normalized, savings rates have increased, debt continues to be shed from consumer balance sheets. The economy will turn around, but it will look more like it did many years ago rather than 5-6 years ago.

Mar 4, 2010
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