Global Economic Report

Upbeat outlook

By Tom Klemens

American manufacturing is slowly regaining its footing

March 2013 - One of the great paradoxes of our time is that more data is more easily available than ever before, but it seems increasingly difficult to know what it all means. In particular, new economic data emerge daily, but often rather than providing clarification, the new information seems to increase the number of possible interpretations.

Fortunately, overall trends continue to surface. And those who manage to step back from the onslaught of incoming information often get a good idea of how they’ve gotten where they are, and what lies ahead.

To get a sense of how U.S. firms might be affected by the global economic picture, and especially what may lie ahead for the metal fabricating and forming industry, we asked several fabricators and end users to share their observations.

The world in a nutshell

Globally speaking, regional economies seem to be relatively stable as we enter 2013. Some are healthier than others, of course, but for the most part there are no signs of sudden changes on the horizon.

“North America continues to slowly improve,” says Phil Gilbert, managing director of P&M Corporate Finance. “Europe continues to tread water, but at a very low level of activity.” Automotive sales volume provides one good reflection of regional economic health, Gilbert says. “It’s an indicator of consumer confidence and consumer behavior, and a huge influence in most industrial economies.” And car sales volumes in Europe are down dramatically. Sergio Marchionne, CEO of Turin, Italy-based carmaker Fiat-Chrysler said in a Jan. 30, 2013, article in Automotive News Europe that the European car market “is in a free fall and perhaps has not yet hit bottom.” On the brighter side, Fiat expects its U.S. sales to increase by about 5 percent this year. At about the same time, AP reported that U.S. sales in 2012 reached their highest levels in five years, and they are expected to continue growing.


“Globally we’re pretty excited,” says Peter Zierhut, vice president of European operations for CNC machine tool builder Haas Automation. The Oxnard, Calif.-based company reports that 2012 was the best year in the company’s 30-year history. Revenues for last year exceeded $967 million, and more than half of the 13,324 machines shipped went to international markets.

“China was down the last few years, now it’s starting to come back,” Zierhut says. “Europe was down and Europe’s starting to come back, too. There are good opportunities there.” Supporting that outlook, Bloomberg News on Feb. 1, 2013, reported that U.K. manufacturing expanded in January for the second month in a row, with orders rising and a surge in output. So how good might the opportunities be? “We are forecasting about 20 percent growth, and I think we’re going to come close to that fairly easily,” Zierhut says.  

“Before the downturn, we were roughly 58 percent export and 42 percent domestic,” says Scott Rathburn, marketing product manager at Haas Automation. “We were seriously heading in the direction we wanted to go, with a lot more in the export market. Coming out of this, we’ve seen the U.S. stabilize before the rest of the world, and U.S. demand has picked up a little bit more. That is why we’re at a 50/50 point right now between domestic and international sales.”

Gilbert points to three factors that will drive North American industry in 2013. Disruptive events over the last couple years, like the tsunami that hit Japan, and economic considerations—including a reduction in the cost of doing business in the U.S., an increase in quality in Mexico and rising wage inflation in Asia—have led suppliers to shorten their supply lines.

“Domestic manufacturers are increasingly pulling production back to the U.S.,” Gilbert says. “They’re not doing it out of kindness, but rather because it’s cost-effective to make it here. It’s strictly a business decision.” In addition, he says, Asian manufacturers who historically had been importing are increasingly sourcing production internally for the North American market.

A second economic driver is the investment going into central Mexico. “One of the trends people should expect in 2013 is large manufacturing customers will continue to move operations southward,” Gilbert says, pointing to the migration of appliance manufacturing years back as an example. But not everything is going to Mexico. South Carolina is also seeing a significant increase in manufacturing, as are other southern states.


The third economic driver is subtle: The emerging expectation that construction will start increasing at a better rate. “We have seen a significantly heightened interest among equity funds in exploring opportunities in the building sector,” Gilbert says. That means equity fund buyers are beginning to think the construction materials market has bottomed out and is starting to go up.

Some domestic details

For Lynne Regan, the purchasing manager at Composite Motors Inc., Brookville, Fla., global challenges are a daily concern. The company employs nearly 400 people who build electric motors, all proudly “Made in USA,” for a variety of applications. Regan says she would like to buy all American-made components, but in some cases it just isn’t feasible.

“Metal absolutely kills me,” Regan says. “For me to buy magnets made in the U.S. I would have to pay seven times what I pay for magnets made overseas, including customs and freight.” She says she does buy American on a lot of components, sometimes paying twice as much and receiving them much more quickly, but not magnets. “I can’t justify the expense,” she says.

Regan hopes some of the specialty items the company has developed for the medical industry will begin to generate a return on investment this year. “When you invest in research and development and new projects, it does take a couple of years,” Regan says. Unfortunately those years are not cost-free, and that has added to a drain on the company the last few years. “So we’re hoping a couple of the new ones come to fruition this year,” she says.

Fabricators in the structural steel industry have yet to see much of a turnaround and generally anticipate little change from 2012. The sector typically lags in economic cycles, both as markets contract and again as they begin to pick up. Because vacancy remains in offices and commercial areas, demand for structural steel fabrication for new building construction has yet to pick up. The institutional, health care and education markets, which in some prior downturns helped keep shops working, also continue to operate at subdued levels of construction activity.

Although those markets are tight as far as construction and structural steel are concerned, the automotive industry may be another story. U.S. auto sales have increased, so suppliers are continuing to ramp up to meet demand. As a result, steel fabricators expect a few more opportunities to open up in the auto industry and related fields. 


Government projects also are on track to potentially provide work for steel fabricators, but they depend on the resolution of federal budget issues. One example is the Facility for Rare Isotope Beams, a new national laboratory—and a sizable structural steel project—to be constructed at Michigan State University. The FRIB project is one of three large nuclear research projects currently under development in the U.S. funded by the Department of Energy. All three are, for the moment, at the mercy of ongoing federal budget talks.

Fabricators continue to trim costs in-house where possible, but they also are bidding aggressively, sometimes taking projects at cost just to keep crews working. However, even establishing a project’s cost can be like shooting at a moving target. Some fabricators report instances of others bidding 20 percent or more below a reasonable bottom-line cost. Although that type of reckless bidding cannot continue over the long term, it remains a challenge in the short term.

Despite these issues, the mood is still hopeful and upbeat. Fabricators continue to bid for work, but are carefully looking for the opportunities that match their strengths and expertise.

A nor’eastern view

The business climate for fabricators in the Northeast is similar. “What we’re seeing is it’s not as good as last year,” says Hollie Noveletsky, owner of Novel Iron Works, Greenland, N.H. “There’s more work, bigger work, but the margins are less than last year.” Additionally, the smaller projects that normally would be Novel Iron’s bread and butter are in short supply.

“We’re financially sound, so we’ll just weather it a little bit longer,” Noveletsky says. “It’s all about how you stand, I think. A lot of people have loans and can’t weather it as well, so they chase the numbers. But you can’t just chase the numbers—eventually you get hurt. And it hurts the market.”

Even as Novel Iron waits for the downturn to pass, it continues investing. The company is currently in the process of putting in a new Peddinghaus scribing machine. “The philosophy has always been that you reinvest in the company,” Noveletsky says. “It was the philosophy my dad started the company with. You don’t take a lot of money out; you put it back into the company. Then you don’t have to worry about having debt, and you can keep up with technology and you can weather the storm.”

Noveletsky says she saw a lot of people overreact during this downtime. “It was hard not to panic. But you have to be ready for when it turns around. If you don’t keep investing, you’re not ready when it breaks open.”


That philosophy echoes the standard practice at Haas Automation. According to Zierhut, who joined the fledgling company in 1984 as employee No. 3, “In those first couple years we had a bank line of credit. But since then, we have operated solely on cash flow, not relying on credit and not having bank debt.” Using its own funding has allowed the company to proceed without having to worry about how to develop a new product or move into a newer, more modern facility. “It has been a huge benefit,” he says. 

Lending as tool and indicator

However, most firms borrow to some extent, especially when upgrading or expanding, and data from the equipment finance industry can provide good insight into industry activity levels.

The Washington-based Equipment Leasing and Finance Association tracks economic activity related to equipment and reports on this activity through a variety of channels. Its Monthly Leasing and Finance Index, also known as the MLFI-25, reports activity from 25 representative companies in the equipment finance sector.

The MLFI-25 released Jan. 25, 2013, showed December’s new business volume of $11.5 billion was up 6 percent from December 2011, when the volume of new business was $10.8 billion. Although those figures both represent a seasonal year-end spike, it’s worth noting that cumulative new business volume was up 14 percent for 2012 compared to 2011.

Other indicators point to industry’s improved economic health. For example, billings are one thing but getting paid is what actually counts. It’s good news then that receivables over 30 days continue their downward trend. In December 2012, they were down to 1.6 percent from a November level of 2.0 percent, and also below the December 2011 level of 2.1 percent. In fact, at the December 2012 level of 1.6 percent, receivables over 30 days were at their lowest point in two years.

Although charge-offs rose somewhat throughout the last quarter of 2012, they were down 14.3 percent from this time last year. An additional positive sign is credit approvals remain fairly high. In December, the approval rate was 78.5 percent, up from a November level of 77.0 percent.

If all these indicators seem to point to improving health of the industry, another softer indicator also adds to the encouraging, albeit restrained, positive outlook. The Monthly Confidence Index reported by the Equipment Leasing and Finance Foundation shot up in January to 54.2 from a December level of 48.5. Despite continuing concerns over unresolved issues between Congress and the White House, such as spending cuts and other fiscal management, this reflection of participants’ outlook is decidedly upbeat heading into the new year. FFJ

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