US Manufacturing - Is this Resurgence Sustainable

					                                                                                                                                                                                    July 2012

Insights: U.S. Manufacturing:
          Is this Resurgence Sustainable?
                                       by Carolyn Bagnall

The U.S. manufacturing sector has been                      dramatic. During the latter part of 2009                                                    by the bailout, the auto industry bounced
a clear bright spot in the recovery. With                   and throughout 2010 manufacturing                                                           back. Production of $106 billion in the
both domestic and global consumption                        production grew rapidly. By the first                                                       fourth quarter of 2010 was twelve times
rebounding – albeit at a choppy rate                        quarter of 2011 it exceeded the 2007                                                        greater than the $8.8 billion produced at
– America has steadily increased                            peak, reaching $1,726 billion. It required                                                  the low in the fourth quarter of 2009.
production of vehicles and parts,                           just six quarters to achieve the new high.
                                                                                                                                                        In the second half of 2011 manufacturing
semiconductors, civilian aircraft, clothing,
                                                            Manufacturing GDP                                                                           GDP slipped a bit. The Bureau of
fuel oil, and commodity based food items,
                                                            In Chained 2005 Dollars                                                                     Economic Analysis’ estimate was $1,573
to name a few. Likewise, manufacturing
                                                                             1,800                                                                      billion for the fourth quarter of last year.
employment has clearly reversed the                                                                               Source: Bureau of Economic Analysis

                                                                             1,600                                                                      Manufacturers may have paused from
downtrend. Since hitting a low point in
                                                                                                                                                        their torrid pace while waiting for the rest
                                                            $ US, Billions

January of 2011, the manufacturing                                           1,400

                                                                                                                                                        of the economy to catch up.
sector has added 335,000 jobs ending                                         1,200

in June of 2012. This is the strongest                                       1,000
                                                                                                                                                        Factors Driving Manufacturing
stretch of job creation in manufacturing                                      800
                                                                                                                                                        Manufacturers ramp up production
                                                                                      Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
since the mid-1990s, and prior to that                                               2006  2007  2008  2009  2010  2011
                                                                                                                                                        when there is demand from retail sales,
period, one must go all the way back                                                                                                                    growing exports of manufactured goods,
to the 1970s to find stronger numbers.                      GDP of Motor Vehicle and Parts
                                                                                                                                                        or increasing business investment in
Suddenly, the industrial warehouse sector                   Manufacturing
                                                            In Chained 2005 Dollars                                                                     equipment. All three were up in 2010.
looks increasingly robust. Over the last                                                                                                                Retail sales produce the largest dollar
fifteen months, 116 million square feet                                                                           Source: Bureau of Economic Analysis
                                                                                                                                                        volume. Before the recession cut into
of warehouse space has been leased up,                                        100                                                                       consumer spending, retail sales reached
                                                            $ US, Billions

right in line with pre-recession levels. The                                   80
                                                                                                                                                        a peak of $1,128 billion in the second
key question going forward is, of course,                                      60
                                                                                                                                                        quarter of 2008. One year later they fell to
is this resurgence sustainable?                                                20                                                                       a low of $1,007 billion, which was a drop
                                                                                                                                                        of 10.7 percent. From there sales volume
Recent Trends                                                                         Q1 Q3
                                                                                                   Q3  Q1
                                                                                                             Q3    Q1
                                                                                                                       Q3  Q1

                                                                                                                                                        followed a steady upward trajectory. By
When the recent recession arrived,
                                                                                                                                                        the first quarter of 2011 it surpassed the
manufacturing was one of the first                          The manufacturing of vehicles and parts
                                                                                                                                                        pre-recession peak, and it continued to
industries affected. Manufacturing GDP                      was part of the remarkable turnaround.
                                                                                                                                                        climb. In the first quarter of 2012 the
peaked at $1,699 billion in the third                       From the beginning of 2009 through mid-
                                                                                                                                                        total was $1,213 billion, for a gain of 20.5
quarter of 2007. A gradual downward                         2010 the production of vehicles and parts
                                                                                                                                                        percent in three years.
shift accelerated to a plunge during                        was lower than any other period since
2008. The cycle’s low of $1,427 billion                     data became available at the beginning                                                      Exports of U.S. manufactured goods
occurred in the third quarter of 2009.                      of 1987. From this near-death experience                                                    also hit a peak in the second quarter of
Manufacturing GDP fell by 16.0 percent                      it rebounded dramatically. Early in 2009                                                    2008. The total was $245.2 billion for
in eight quarters.                                          the federal government provided $24.9                                                       the quarter. The ensuing drop took them
                                                            billion in bailout funds to two of the big                                                  down to $176.6 billion in the first quarter
However, the rebound was even more
                                                            three, General Motors and Chrysler. Aided                                                   of 2009. Exports fell by 28.0 percent in

Copyright © 2012 Cassidy Turley. All rights reserved.
Total Retail Sales (Value) and                                                                                                             reached 8.3 percent. It takes time to           Markets Showing Greatest Improvement
New Vehicle Sales (Count)                                                                                                                  close manufacturing facilities, and so the      Market             Vacancy     Vacancy
                     $1,300                                                                               4,500
                                                                                                                                           effects of the recession played out over                           Q1 2012     Q3 2010
                                               Source: US Census Bureau and Bureau of Economic Analysis

                                                                                                                                           an extended period of time. However,            Columbus           5.8%        7.9%

                                                                                                                  Count in Thousands, SA
$ US, Billions, SA

                                                                                                                                           the beginning of 2011 produced some             Indianapolis       7.2%        12.2%
                                                                                                                                           improvement, and by the first quarter of        Pittsburgh         7.4%        9.4%
                      $900                                                                                1,000
                                                                                                                                           2012 vacancy had fallen half a point to         Inland Empire      5.9%        9.6%
                               Q1 Q3  Q1 Q3  Q1 Q3  Q1 Q3                           Q1 Q3           Q1
                                                                                                                                           7.8 percent. During the six quarters of         Oakland            9.7%        13.8%
                              2007   2008   2009   2010                            2011            2012
                                                                                                                                           recovery to date the total net absorption       Phoenix            10.5%       12.5%
                                       Total Retail Sales        New Vehicle Sales

                                                                                                                                           was 34.8 million square feet.
less than a year. Then the climb back
                                                                                                                                           The markets that showed the greatest            Markets Showing Continued Weakness
began. In the third quarter of 2011
                                                                                                                                           improvement were primarily on the west          Market             Vacancy     Vacancy
exports of manufactured goods edged
                                                                                                                                                                                                              Q1 2012     Q3 2010
past the prior peak and for the first quarter                                                                                              coast or in the central industrial belt. The
                                                                                                                                                                                           Chicago            10.9%       10.3%
of 2012 they reached $252.5 billion.                                                                                                       markets where manufacturing vacancy
                                                                                                                                                                                           Cincinnati         13.1%       12.3%
Exports had increased 43.0 percent from                                                                                                    increased from high to higher were
                                                                                                                                                                                           Detroit            12.8%       11.8%
the low recorded three years earlier.                                                                                                      also in the central industrial belt. Five
                                                                                                                                           markets should be mentioned because            Business investments in equipment are
Businesses were somewhat slower to                                                                                                         they started with relatively low vacancy       important, but data from the U.S. Census
respond with investment in equipment.                                                                                                      and maintained it. These markets and           Bureau, as shown earlier in this report,
U.S. Census Bureau data show business                                                                                                      their most recent vacancies were Dallas        indicate they total about $200 billion per
equipment purchases bottomed at                                                                                                            – Fort Worth (3.5 percent), Houston (2.8       quarter. Exports of manufactured goods
$136.7 billion in the first quarter of 2010.                                                                                               percent), Minneapolis (4.4 percent), Salt      have been slightly higher, with recent
In the fourth quarter of that year they                                                                                                    Lake City (1.4 percent) and Seattle (3.7       volume of about $250 billion per quarter.
had climbed again to $193.0 billion. This                                                                                                  percent).
was still a bit below the previous peak                                                                                                                                                   Retail sales, which the data above show are
of $200.2 billion, which occurred in the                                                                                                   Is the Resurgence Sustainable?                 over $1 trillion per quarter, have a greater
fourth quarter of 2007.                                                                                                                    Retail sales are one of the keys to the        impact. Therefore, U.S. consumers
                                                                                                                                           strength of the U.S. manufacturing             will be the key to continued recovery. It
Vacancy in U.S. Manufacturing Space                                                                                                        sector. After cutting spending sharply in      appears that, with a bit of encouragement
                                                                                Source: Cassidy Turley Research
                                                                                                                                           2008 consumers gradually returned to           from gas prices, mortgage refinancing
                                                                                                                                           shopping and spending.                         or other factors, consumers are willing
                                                                                                                                                                                          to be confident and to spend. This
                                                                                                                                           Record-low mortgage rates have helped.
                                                                                                                                                                                          reinforces the virtuous cycle of growth
                                                                                                                                           Although few are buying homes, many
  6%                                                                                                                                                                                      in manufacturing jobs leading to retail
                                                                                                                                           are refinancing at lower rates and lower
                                                                                                                                                                                          spending which supports manufacturing.
  5%                                                                                                                                       monthly payments. Also, gas prices
                       Q1        Q3    Q1        Q3          Q1           Q3          Q1            Q3         Q1                                                                         This is the essence of economic recovery
                      2008            2009                  2010                     2011                     2012                         did not make the leap upward that was
                                                                                                                                                                                          and sustainable growth.
                                                                                                                                           projected a few months ago. The money
Meanwhile, Back at the Plant                                                                                                               left in consumers’ pockets has been            For more information contact,
The recession’s drop in manufacturing                                                                                                      available to spend elsewhere.                  Carolyn Bagnall at 816.412.0244
production led to the closing of some
                                                                                                                                           These factors also aided consumer
plants. By the third quarter of 2010
                                                                                                                                           confidence, which has trended gradually
vacancy in manufacturing facilities
                                                                                                                                           upward since 2009.

Copyright © 2012 Cassidy Turley. All rights reserved.

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