Manufacturing a Recovery
Since late March there has been discussion in the U.S. about green shoots, consumer confidence and lack thereof, the “new normal” and whether unemployment is a leading or lagging indicator of a recovery. What I haven’t heard mention of is the critical role that manufacturing plays in not only a U.S., but a global recovery. The blame for the current recession has been firmly planted in the financial sector, but history shows us that it will be the manufacturing sector that will get us out of it.
There has already been too much said about whether what we are experiencing now is a second “Great Depression” so I won’t add fuel to that fire. I will say, however, that there are things we can learn from what caused and what ended it. The period of the great depression is widely viewed to have lasted from 1929 to 1933, although some historians and economists go so far to say that it didn’t really end until the start of World War II. Taking the consensus view that it ended sometime in 1933, one interesting question is what happened right before 1933 to drive the country out of the depression? The answer is in this chart:
You can see that industrial production (here measured by the INDPRO index) in the U.S. decreased all the way through the depression (with the exception of a slight up tick in early 1931) until it finally staged a major come back in late 1932. However, one data point does not a correlation make, so let’s look more broadly. Fortunately we haven’t had a lot of other depressions to look at, but there have been a number of recessions. They are shown in the chart below in the gray areas and in every case manufacturing increased (here measured by the ISM’s PMI Composite Index) immediately before the recession ended. (The ISM is a little harder to read as a chart like this since its actually a derivative – no not, that kind, the math kind. Anything below 50% represents a contraction in manufacturing, so we’re not so much looking for a positive or negative slope, but simply a reading at or above 50 before we exit the gray). Now we might be seeing a trend.
So what the has the trend in manufacturing output been in the recent past? Of course, there’s a chart for that too:
The last month reported in this chart was June 2009. The July 2009 ISM PMI was 48.9, just below that 50% rate that indicates manufacturing is expanding again. Does that mean happy days are here here again? Maybe…maybe not. But if history is any guide, I would say yes.
So what can the manufacturing sector do to ensure that the recovery in manufacturing sticks with us and is the positive factor that pulls us out of recession? Simple really: build the right product and build the product right.
More than ever, manufacturers have to make sure that they are building the products that customers actually want and will pay for. For some that may mean “exnovating.” As Jim Brown puts it: “Exnovation gives us the opportunity to jettison what is no longer relevant and the space to create something more relevant.” They also have to make sure that those products are built using the right materials for the job and in the most sustainable way possible. IDC recently released a research study that noted the role MES is playing as manufacturers deal with current economic conditions.
What are you doing to make sure your building the right products and building them the right way?
