July 2012
Insights: U .S. Manufacturing: Is this Resurgence Sustainable? by Carolyn Bagnall
Recent Trends When the recent recession arrived, manufacturing was one of the first industries affected. Manufacturing GDP peaked at $1,699 billion in the third quarter of 2007. A gradual downward shift accelerated to a plunge during 2008. The cycle’s low of $1,427 billion occurred in the third quarter of 2009. Manufacturing GDP fell by 16.0 percent in eight quarters. However, the rebound was even more Copyright © 2012 Cassidy Turley. All rights reserved.
dramatic. During the latter part of 2009 and throughout 2010 manufacturing production grew rapidly. By the first quarter of 2011 it exceeded the 2007 peak, reaching $1,726 billion. It required just six quarters to achieve the new high. Manufacturing GDP In Chained 2005 Dollars 1,800
Source: Bureau of Economic Analysis
$ US, Billions
1,600 1,400 1,200 1,000 800 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 2006 2007 2008 2009 2010 2011
GDP of Motor Vehicle and Parts Manufacturing In Chained 2005 Dollars 140
Source: Bureau of Economic Analysis
120 100 $ US, Billions
The U.S. manufacturing sector has been a clear bright spot in the recovery. With both domestic and global consumption rebounding – albeit at a choppy rate – America has steadily increased production of vehicles and parts, semiconductors, civilian aircraft, clothing, fuel oil, and commodity based food items, to name a few. Likewise, manufacturing employment has clearly reversed the downtrend. Since hitting a low point in January of 2011, the manufacturing sector has added 335,000 jobs ending in June of 2012. This is the strongest stretch of job creation in manufacturing since the mid-1990s, and prior to that period, one must go all the way back to the 1970s to find stronger numbers. Suddenly, the industrial warehouse sector looks increasingly robust. Over the last fifteen months, 116 million square feet of warehouse space has been leased up, right in line with pre-recession levels. The key question going forward is, of course, is this resurgence sustainable?
80 60 40 20 Q1 Q3 2006
Q1 Q3 Q1 2007 2008
Q3
Q1 Q3 Q1 2009 2010
Q3
The manufacturing of vehicles and parts was part of the remarkable turnaround. From the beginning of 2009 through mid2010 the production of vehicles and parts was lower than any other period since data became available at the beginning of 1987. From this near-death experience it rebounded dramatically. Early in 2009 the federal government provided $24.9 billion in bailout funds to two of the big three, General Motors and Chrysler. Aided
by the bailout, the auto industry bounced back. Production of $106 billion in the fourth quarter of 2010 was twelve times greater than the $8.8 billion produced at the low in the fourth quarter of 2009. In the second half of 2011 manufacturing GDP slipped a bit. The Bureau of Economic Analysis’ estimate was $1,573 billion for the fourth quarter of last year. Manufacturers may have paused from their torrid pace while waiting for the rest of the economy to catch up. Factors Driving Manufacturing Manufacturers ramp up production when there is demand from retail sales, growing exports of manufactured goods, or increasing business investment in equipment. All three were up in 2010. Retail sales produce the largest dollar volume. Before the recession cut into consumer spending, retail sales reached a peak of $1,128 billion in the second quarter of 2008. One year later they fell to a low of $1,007 billion, which was a drop of 10.7 percent. From there sales volume followed a steady upward trajectory. By the first quarter of 2011 it surpassed the pre-recession peak, and it continued to climb. In the first quarter of 2012 the total was $1,213 billion, for a gain of 20.5 percent in three years. Exports of U.S. manufactured goods also hit a peak in the second quarter of 2008. The total was $245.2 billion for the quarter. The ensuing drop took them down to $176.6 billion in the first quarter of 2009. Exports fell by 28.0 percent in
Total Retail Sales (Value) and New Vehicle Sales (Count) $1,300
Source: US Census Bureau and Bureau of Economic Analysis
$ US, Billions, SA
4,000 3,500 3,000
$1,100
2,500 2,000
$1,000
1,500 1,000
$900
Count in Thousands, SA
$1,200
4,500
500 -
$800 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 2007 2008 2009 2010 Total Retail Sales
Q1 Q3 2011
Q1 2012
New Vehicle Sales
less than a year. Then the climb back began. In the third quarter of 2011 exports of manufactured goods edged past the prior peak and for the first quarter of 2012 they reached $252.5 billion. Exports had increased 43.0 percent from the low recorded three years earlier. Businesses were somewhat slower to respond with investment in equipment. U.S. Census Bureau data show business equipment purchases bottomed at $136.7 billion in the first quarter of 2010. In the fourth quarter of that year they had climbed again to $193.0 billion. This was still a bit below the previous peak of $200.2 billion, which occurred in the fourth quarter of 2007. Vacancy in U.S. Manufacturing Space 9%
Source: Cassidy Turley Research
8%
7%
6%
5% Q1 2008
Q3
Q1 2009
Q3
Q1 2010
Q3
Q1 2011
Q3
Q1 2012
Meanwhile, Back at the Plant The recession’s drop in manufacturing production led to the closing of some plants. By the third quarter of 2010 vacancy in manufacturing facilities
Copyright © 2012 Cassidy Turley. All rights reserved.
reached 8.3 percent. It takes time to close manufacturing facilities, and so the effects of the recession played out over an extended period of time. However, the beginning of 2011 produced some improvement, and by the first quarter of 2012 vacancy had fallen half a point to 7.8 percent. During the six quarters of recovery to date the total net absorption was 34.8 million square feet.
Markets Showing Greatest Improvement
The markets that showed the greatest improvement were primarily on the west coast or in the central industrial belt. The markets where manufacturing vacancy increased from high to higher were also in the central industrial belt. Five markets should be mentioned because they started with relatively low vacancy and maintained it. These markets and their most recent vacancies were Dallas – Fort Worth (3.5 percent), Houston (2.8 percent), Minneapolis (4.4 percent), Salt Lake City (1.4 percent) and Seattle (3.7 percent).
Markets Showing Continued Weakness
Is the Resurgence Sustainable? Retail sales are one of the keys to the strength of the U.S. manufacturing sector. After cutting spending sharply in 2008 consumers gradually returned to shopping and spending. Record-low mortgage rates have helped. Although few are buying homes, many are refinancing at lower rates and lower monthly payments. Also, gas prices did not make the leap upward that was projected a few months ago. The money left in consumers’ pockets has been available to spend elsewhere. These factors also aided consumer confidence, which has trended gradually upward since 2009.
Market
Vacancy Q1 2012
Vacancy Q3 2010
Columbus
5.8%
7.9%
Indianapolis
7.2%
12.2%
Pittsburgh
7.4%
9.4%
Inland Empire
5.9%
9.6%
Oakland
9.7%
13.8%
Phoenix
10.5%
12.5%
Market
Vacancy Q1 2012
Vacancy Q3 2010
Chicago
10.9%
10.3%
Cincinnati
13.1%
12.3%
Detroit
12.8%
11.8%
Business investments in equipment are important, but data from the U.S. Census Bureau, as shown earlier in this report, indicate they total about $200 billion per quarter. Exports of manufactured goods have been slightly higher, with recent volume of about $250 billion per quarter. Retail sales, which the data above show are over $1 trillion per quarter, have a greater impact. Therefore, U.S. consumers will be the key to continued recovery. It appears that, with a bit of encouragement from gas prices, mortgage refinancing or other factors, consumers are willing to be confident and to spend. This reinforces the virtuous cycle of growth in manufacturing jobs leading to retail spending which supports manufacturing. This is the essence of economic recovery and sustainable growth. For more information contact, Carolyn Bagnall at 816.412.0244