Where Do We Go From Here?
While we would like to believe that the worst of the economic storm has passed and the recovery from the worst recession since the Great Depression has begun, the economic signals are anything but clear. Though it is doubtful we will fall back to the depths of where we were in 2008 and 2009, this does not mean we are in for clear sailing without an economic relapse as the economy tries to right itself. We may find ourselves in uncharted waters as we go forward.
Let’s take a quick look at what the economy has been telling us in recent months. On the positive side, the U.S. manufacturing sector grew for the sixth straight month in January to the strongest point since August 2004. The Institute for Supply Management indicated its manufacturing index read 58.4 in January, compared to 54.9 in December, signaling an economic upturn.
Moreover, new orders—a sign of future growth—jumped to 65.9 in January, which is the highest level since 2004 and an increase from 64.8 in December. Current production for manufacturers reached its peak since 2004, surging to 66.2 from 59.7.
All of these positive economic trends signal a return to economic growth and normalcy. However, there are several disturbing numbers that will be a drag on our recovery and might cause us to ponder the future of our economy. The question that remains is whether these numbers will merely be a drag, or actually push us into an economic relapse or, worse still, into a double-dip recession before another period of economic growth can be assured. Ten states now have underemployment rates of more than 20 percent, and one in eight Americans received help from food banks in 2009, a record 33.7 million people.
After every recession since the 1940s, manufacturing jobs shrunk throughout the recession only to pick up after the recession ended. This trend began weakening in the 1970s. Even during the recession of the early 1990s, manufacturing jobs picked up slightly throughout the decade. However, since the 2001 recession, manufacturing has been plummeting and has completely broken the trend. Surprisingly, we now have the same number of individuals working in manufacturing as we did in 1940. However, there is one slight difference: The United States had a population of approximately 132 million in 1940; the current population is approximately 307 million. In other words, we have 2.5 times the population, but the same amount of people working in manufacturing.
In 1965, manufacturing represented 53 percent of the GDP of a $712 billion economy, thus contributing $377 billion to the overall economy. In 1988, manufacturing represented 39 percent. But, in 2004, it represented only nine percent of an $11.7 trillion economy. That change from 1988 to 2004 represents a 46-percent drop in manufacturing’s role in our economy.
When measured in value-added production, manufacturing now represents about 12 percent of GDP, down from about 27 percent in the early 1950s. The Manufacturers Alliance trade association estimated that manufacturing was down 12 percent for all of 2009. This drop was much greater than the overall drop in the GDP, which declined by only 2.9 percent for the economy as a whole.
While the manufacturing sector will rebound in 2010, it is not likely to rebound back to its previous highs because of overall trends in the global economy. A study by the International Labour Organization found that overall employment in manufacturing will decline due to rising productivity and a growing share of output made in low wage countries.
The trade publication Manufacturing and Technology News reported that on the global scale, productivity is allowing output to grow by four percent per year with no increase in jobs. Interestingly, most countries have maintained or grown their factory job sector. A relative handful of countries, led by the United States, Great Britain, Germany and Japan, have borne almost all of the job losses. Between 1990 and 2005, Great Britain lost 43.5 percent of its manufacturing jobs (2.6 million); Germany lost 31 percent of its manufacturing jobs (3.6 million); the United States lost 24 percent of its manufacturing jobs (5.09 million); and Japan lost 22 percent of its manufacturing jobs (3.36 million).
Not only has the United States shed approximately five million manufacturing jobs, there are 35,000 fewer U.S. factories than there were just eight years ago. This is not the same as the slow, productivity driven event like the 85-percent drop in farm jobs from 1900 to 2000, but a largely trade driven impact with much less time for economic assimilation of displaced factory workers into good-paying jobs, which are vital for economic growth.
The loss of manufacturing jobs has a long-term economic impact on GDP, unlike the loss of jobs in any other sector of our economy. In the book entitled “Can American Manufacturing Be Saved?” author Michele Nash-Hoff shows how the multiplier effect in our economy is much greater for manufacturing than other types of business.
Manufacturing jobs experience a multiplier effect, reflecting linkages that run deep into our economy. For example, every 100 steel or automotive jobs create between 400 and 500 new jobs in the overall economy. This contrasts with the retail sector, where every 100 jobs generate 94 new jobs elsewhere, and the personal and service sectors, where 100 jobs create 147 new jobs. Moreover, each manufacturing dollar generates, according to Nash-Hoff, an additional $1.37 in economic activity. After all, it is manufacturers who utilize services such as banking, finance, legal and information technology.
Nash-Hoff estimates that each manufacturing job creates three to four other jobs, while service jobs only create one to two jobs. Therefore, the loss of 3.2 million manufacturing jobs since 2000 may have caused more than 10 million jobs to disappear, according to the author. In addition, to make the economic impact even worse for the coming years, the U.S. Department of Labor estimates that another 1.5 million manufacturing jobs will be lost by 2016.
Last year, the 2.4-percent drop in GDP was the largest decrease in economic activity for an entire year since the 10.9-percent drop in 1949. But the economic expansion in the 1950s and 1960s saw an extended period of growth with some manageable ups and downs, as the economy ushered in a new era of middle-class consumption brought about by higher wages driven by manufacturing and construction. Though, we are not likely to see this type of recovery in the years ahead, as manufacturing jobs shrink and construction is held back by the natural aftermath of the financial collapse we recently experienced caused by an inflated housing boom.
However, it is more ominous than even these numbers suggest. The manufacturing sector accounted for 15.4 percent of the economy in 1998, but its share fell and accounted for only 12.7 percent of GDP in 2003. Furthermore, according to an economic analysis by the trade group the Manufacturer’s Alliance, the government sector accounted for an equal amount of economic activity, the identical 12.7 percent, as manufacturing did in the same economic time period.
So, what does all this mean and, more importantly, where do businesses go from here? It is unlikely that we will see a significant rising tide to lift all the boats in the next few years. The days when you, as a small business owner, could simply wait for the economy to turn around to recoup your losses or rebuild your revenues are likely over.
In the future, simply having a boat will not be enough. You now need the same navigational aids that large businesses have been acquiring for years to control their costs, manage their cash flow and predict their short- and long-term cash and capital needs. At the same time, you will also need to build innovative incentives for your employees to improve productivity, which will in turn improve profits and incomes for all.
The task you face as a small- to medium-sized business owner is overcoming the natural resistance to change. However, the stakes to make the needed changes in your business are much greater today than they have been in the last 20 years.
Those survivors who believe the post recovery periods from past recessions are a safe guide to rely upon and that a rising tide will lift their boats may be sadly mistaken. The certainty of a strong recovery is very much in doubt, and we may be in for a future relapse before we see another robust period of growth. While this may sound ominous to many, it should solidify your confidence that you can rebuild a new foundation for your business.