We’ve seen the job losses and company collapses. There is sure to be more to come, but there are just a few signs that the worst may be about to end.
By Tricia Holly Davis
Although no analyst, economist or politician is prepared to call the bottom on the financial markets just yet, there are some encouraging signs that economic recovery may come sooner rather than later. The most recent signs of recovery come from the manufacturing sector, which has suffered the brunt of the credit crunch. The pace of decline in orders and output in the manufacturing industry eased last month, showing the strongest rating since October, according to the most recent purchasing managers’ index (PMIPMIPMI).
The manufacturing sector is one of the best barometers for how the economy is ticking along, because, by virtue of being a global industry, it is one of the first to feel the effects of an economic slowdown. But by the same token, it is also one of the first to feel signs of recovery.
One reason for the recent improvements in the manufacturing sector could be that global factory production collapses are removing excess inventories that would otherwise stand in the way of recovery.
“This is sound in theory, dependent on consumer confidence, because unloading excess inventories off companies’ balance sheets is no bad thing,” says Adam Buckley, head of programs for The Manufacturing Institute.
However, he is quick to add that the true test of the market’s stability is consumer demand. “Until the demand is there to give manufacturers a reason to replenish their stocks, then we really won’t see any big improvements,” says Buckley.
“There are still reverberations of the credit crunch running through the supply chain and so we will likely see additional job losses, which will obviously impact the sector’s health.”
Arecent poll of manufacturers in the northwest of England shows a snapshot of the state of the British manufacturing industry. When asked “How do you view your outlook over the next 12 months?” manufacturers had a split response in business optimism.
Of the half indicating that their businesses were likely to contract over the next year, 11 percent indicated that this would be a severe contraction and 39 percent predicted a slight contraction. Of the other more optimistic half, 21 percent indicated that their business was likely to grow, while the remaining 29 percent believed that their businesses would stay static.
Certain sectors are not feeling the pinch at all. Environmental technology firms, for example, are showing 100 percent increase in turnover, though this is partly because their market is underpinned by legislation and government-backed investment in materials for renewable energy and green auto production. Food and drinks manufacturers too Buckleyare holding up relatively well, as are chemical and pharmaceuticals.
RETAIL STRENGHT
The most promising news, however, is the strength of the retail sector, which is the true measure of consumer demand. “There are certainly signs that some falls in output have been faster than others and certain sectors are starting to stabilize,” says Neil Parker, a market strategist for Royal Bank of Scotland. “Retail sales in the UK and US, in particular, have held up better than expected,” he says.
Nick Bate, an economist with Merrill Lynch, observes that the manufacturing index increase in March was notably above market expectations. “Having previously been broadly flat from November to February, this is a sizeable improvement, and adds to emerging evidence that growth in the economy may have reached a trough in late 2008 and early this year.”
However, Bate cautions that the recent index rating is the most optimistic indicator from a range of evidence on the manufacturing sector. “The CBI and Bank of England’s agents surveys have continued to fall in recent months. That weighs against reading too much into one month’s [PMI] data,” he says. In addition, support for the manufacturing sector from the circa 27 percent decline in sterling since mid-2007 continues to be overwhelmed by the severe declines in both global and UK domestic demand.
Manufacturing output has already fallen around 13 percent from its peak in early 2008: a larger fall than the 8 percent or so decline in the early 1990s recession. “Further marked improvements in the sector – continuing in the vein of the latest index data – will be required to avoid a decline comparable to the 20 percent fall in the early 80s recession,” warns Bate.
But Hank Cox, of the National Association of Manufacturers in the US, says the decline in inventories augurs well for a rebound when consumers start buying again. “Last week we also saw an uptick in durable goods orders and a rise in home sales. The latter is important because that’s where the economic upheaval began,” notes Cox. Of course, house prices are declining a lot, which is key to the rise in sales, but then that was the problem all along – overpriced houses.
“So we see some glimmers of good news.” However, Cox notes it’s not time to break out the champagne just yet. “Activity in the US manufacturing industry failed to grow in March for the 14th month in a row and the overall economy contracted for the sixth consecutive month.”
The basic problem, he explains, is fear among consumers who have seen their home values fall and their retirement savings disappear and are concerned about losing their jobs. “They are just not buying stuff.”
CHANGING BUYING HABITS
The crisis has fundamentally changed attitudes that will affect buying patterns. For example, he says, many Americans have a habit acquired in earlier years of trading in their cars on a regular schedule, maybe every three years, which was a good idea back when Detroit was making low quality cars that didn’t last long.
“They have continued that tradition though today’s cars are much higher quality and last a lot longer. All across the country, consumers are thinking, wait a minute, we don’t need to buy a new car, the old one still looks great and runs fine.
“Around the world, the problem is too many countries depending on the American consumer. China, Japan and Germany need to develop their own consumer economies. We’re tapped out.”