Economic Slump Hits Manufacturing Industry

In a recent Podcast, Dan North, Chief Economist at Euler Hermes Inc., described how the current economic conditions have been affecting the manufacturing industry which he said was “showing some weakness like the rest of the economy.”

“Industrial production fell last month on a year-over-year basis for the first time in nine months,” North said. Manufacturing shipments have also declined by 3.5 percent just last month, which is the largest drop since January of 1996. “One of the indicators that we like to look at… is the Institute of Supply Management Index,” North said. “That’s now at its lowest level in three years and has fallen three months in a row… The ‘new orders’ component of that index is the lowest it’s been in 18 months,” which North said indicated a slump in future activity.

North said that the two major reasons for the slowdown in manufacturing are the tightening procedures of the Federal Reserve Board and the weak housing market. “My opinion is that the Fed tightening has probably gone a little too far,” North said, referring to the Fed’s efforts to curb inflation by enacting measures to slow the economy.

“The housing market has been in a free fall for well over a year now and you can look at all kinds of statistics to show the weakening of the housing market,” North said. Both existing and new home sales have been on the decline, as have housing permits and housing starts, all of which illustrate the decaying housing market. “There’s one number in particular that, I think, really shows how bad it is and that is the fact that the median sale price of existing homes has now fallen two months in a row,” North said. “In over 37 years of data, they’ve only fallen four months before the last couple of months. It’s only happened once before that prices have fallen two months in a row and they were the largest declines in prices ever recorded.”

North also indicated that more economic troubles lay ahead. “Actions by the fed can take over a year to take full effect,” North said. “The most recent tightening was in June, so we’ve got a lot of tightening left in the pipeline for the macroeconomy.”

In addition to the worries of a continually slowing economy, North noted that the industry is also concerned with the recent inflation of labor prices. “Up until recently, labor rates were very benign and this was a great thing for corporate profits.” In the last quarter, however, unit labor costs have risen up to 5.3 percent higher than last year’s. “If unit labor costs grow at a very slow rate it’s a wonderful thing because you can keep your prices the same and in theory earn more profits because your margin shrinks.” An increase in labor costs will, eventually lead to increased production costs, which in turn leads to higher selling costs and inflation.

“Manufacturing is subject to some unwelcome developments,” North said.

Source: NACM, Dan North at EulerHermes ACI

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