Manufacturers are becoming less optimistic about U.S. economy, says Grant Thornton LLP study

While manufacturing has been considered a bright spot for the United States economy during of the economic downturn, recent data from consultancy Grant Thornton LLP indicates that manufacturers are losing faith in the growth prospects for the economy.

A survey of nearly 70 U.S. manufacturing leaders conducted by the firm, entitled the Business Optimism Index, found that a mere 13 percent of surveyed manufacturers think the economy will improve over the next six months, down from 40 percent in May and 60 percent in February.

What’s more, Grant Thornton found that 40 percent of surveyed manufacturers maintain the U.S. economy will get worse compared to 26 percent and 3 percent, respectively in May and February. And another 53 percent are very or somewhat optimistic about their own business, which is down from 80 percent in May and 91 percent in February, while 47 percent are pessimistic about their own business compared to 20 percent in May and 9 percent in February.

“Directionally, it is not a surprise how COOs and CEOs are feeling about the direction of the economy,” said Wally Gruenes, Manufacturing Practice Leader at Grant Thornton LLP and a member of the board of directors of the National Association of Manufacturers. “Although manufacturing has held up well since 2008, the sector lost about 3,000 jobs in August, and productivity is down about 1.5 percent.”

Gruenes said these numbers are in direct correlation to the fact that there is less business occurring and volumes are trending down. He also explained that this data does not fully explain what is happening with exports on a real-time basis.

While July exports were up 11 percent annually according to Department of Commerce data, Gruenes said it does appear that the economic weakness in Europe and the mild slowdown in Asia are impacting the United States’ ability to export product.

“It does appear to be driven by the morass in Washington and the Eurozone and less volume,” he said. “The combination of the two is somewhat toxic. While 40 percent said they think the economy will get worse, 53 percent feel pretty good about their own business. So the environment is not great, but some feel better about their own business rather than the economy in general, which is consistent in this data going back to February.”

Along with the declines reported in the Grant Thornton data are concurrent declines in the Institute for Supply Management’s monthly Manufacturing Report on Business. While the ISM’s report has shown growth in the manufacturing sector for 21 straight months, its manufacturing index, known as the PMI, fell to 50.6 in August (a reading of 50 or higher indicates growth is occurring).

Another thing to note is that the U.S. manufacturing base is significantly smaller than it was in the 1980s and has been in a three decade span of decline, and has seen 2 million-to-3 million jobs lost—and not regained—since the recession began in 2008.

But even with the loss of jobs and shrinking domestic manufacturing base, Gruenes said that according to NAM data the U.S. manufacturing economy still does account for 21 percent of the value of manufactured materials that are produced compared to Japan and China, which are at 14 percent and 13 percent, respectively.

“There is still a significant level of manufacturing performed in this country, but some of the challenges we have seen, with the concept of near-shoring to Mexico and points south, as well as China and Vietnam, we think the long-term trend is going to be bringing production back closer to home,” said Gruenes. “And the megatrend is that supply chains are going to be shortened from a physical perspective.”

This approach brings manufacturers closer to their customers and suppliers closer to manufacturers, raising the question of manufacturers asking if the costs of transporting the product from the other side of the world—as fuel and transportation costs increase—are offset by labor costs, he said.

In certain parts of the world, he said this is evident, with manufacturers not being able to find personnel with the right amount of skill to bring in-house to work in their factories. Part of this is a broader social issue, with fewer young people interested in that type of career path.

Looking at public policy initiatives, survey respondents cited the reduction in effective corporate tax rate as the one they are least optimistic about at 54 percent, followed by 25 percent and 21 percent, respectively citing job creation and deficit reduction as the initiatives they are least optimistic about.