US manufacturers cautious on recovery

US manufacturers cautious on recovery
By Hal Weitzman in Chicago and Jeremy Lemer
Copyright The Financial Times Limited 2010
Published: June 3 2010 23:39 | Last updated: June 3 2010 23:39
http://www.ft.com/cms/s/0/5c0964e4-6f5b-11df-9f43-00144feabdc0.html


When Boeing, the world’s second biggest aircraft-maker, announced this year that it planned to increase production of its 777, 747 and 737 models ahead of schedule, it was a positive sign for global industrial demand.

Randy Tinseth, vice-president of marketing for Boeing’s commercial arm, deemed 2010 “the year of overall economic recovery” and said the company was anticipating greater customer demand for aircraft.

Yet, as it readies itself for the production increases, Boeing is not only holding off on hiring significant numbers of new employees, it is completing a job-cutting plan that will see the company shed more than 10,000 positions – the vast majority of them in the US.

As the US releases closely watched non-farm payroll figures on Friday, companies such as Boeing which are cutting jobs are likely to appear the exception. Economists expect the report to show that the US economy added more than 500,000 jobs in May, a sharp increase on the 290,000 jobs that were added in April.

While much of the rise relates to a one-off increase in hiring of census workers by the US government, the manufacturing sector is expected to add some 30,000 new jobs. Manufacturing has played a critical role in job creation as the recovery has started to establish itself more firmly in the US.

Since December 2009, the sector has helped lead the way for the broader economy, rebounding sharply and adding a little more than 100,000 jobs out of a total increase of about 573,000.

Yet if Boeing – one of the US’s biggest manufacturers and exporters – is being cautious, it suggests that the industrial sector may not be able to bear the job-creation expectations that have been thrust upon it.

“It is difficult to imagine the pace of downsizing slowing even further, considering that the economy, while recovering, is still in a relatively fragile state,” said John Challenger, chief executive officer of Challenger, Gray and Christmas, the placement company.

One factor that may restrain hiring in the manufacturing sector is greater productivity. Non-farm productivity rose at an annualised rate of 3.6 per cent in the first quarter, better than the 2.5 per cent increase most economists had expected. “Companies continue to squeeze quite a bit of output from only small increases in hours worked,” observed analysts at Goldman Sachs.

Boeing’s reluctance to wade into the hiring pool stems in part from productivity improvements resulting from capital investment and evolving production techniques, said Tim Healy, a company spokesman.

Other manufacturers have used the recession to reassess the global distribution of their workforce. Caterpillar, the world’s biggest manufacturer of earth-moving equipment, shed 19,000 full-time positions and 18,000 contract-worker jobs last year. This year, it has announced a plan to hire back 9,000 workers, but two-thirds of them will be outside the US, in markets such as Asia and Latin America, which have driven demand for its products.

As that experience suggests, much of manufacturing’s recent strength has been built on sales abroad. The export component of the Institute for Supply Management’s manufacturing index climbed to its highest reading in two decades in May. “This is good news for manufacturers since manufacturing dominates US exports [59 per cent] and more than a quarter of manufacturing employment is supported by exports,” said David Huether, chief economist at the National Association of Manufacturers.

However, the US export drive could be damped by contracting European demand and a possible slowdown in Chinese industrial demand.

Back in the US, some stimulus spending is starting to be exhausted, while the recently expired new homebuyers’ tax credit is expected to retard growth in new home sales.

Industrial hiring is starting again from a low base. Since the start of the recession, US manufacturers have cut more than 2m factory jobs. Many will never be replaced. Mr Huether believes that only 30 per cent will come back over the next six years. IHS Global Insight, a research company, predicts that perhaps half of the lost jobs may return.

But even if growth and job creation in manufacturing – in the US and elsewhere – slows somewhat, most economists expect the trend to continue. JP Morgan estimates global industrial production will grow at an annualised rate of 6 per cent in the next quarter.