"A thought for my fellow CEOs: Of course, the immediate future is uncertain; America has faced the unknown since 1776. It's just that sometimes people focus on the myriad of uncertainties that always exist while at other times they ignore them (usually because the recent past has been uneventful)."
Those words from Warren Buffett in his 2012 letter to Berkshire Hathaway stockholders gently chide U.S. business leaders for what a number of observers consider too much timidity in their investments. But for many manufacturers, the fresh memory of a recession that saw production fall 13.6% in 2009 alone -- and employment rolls shed 2 million jobs -- continues to leave them cautious about the future.
At Newtex Industries, CEO Jerry Joliet has grappled with a wrenching series of challenges since taking over the company's top spot in 2006. The company makes a variety of products designed to protect people and equipment from heat and fire. When Newtex introduced its products in 1978 as a replacement for asbestos, the firm quickly grew. But by 2000, Newtex was facing a wave of cheap Chinese competition, while at the same time it opened a factory in China. The combination of Chinese imports and increased operating costs resulted in heavy losses.
By 2008, Joliet had restored the company to profitability, only to be slammed by the recession. With belt tightening and the help of a new management team he had installed, the company has come back strong, growing 25% last year.
But sequestration has already had an impact on Newtex. The company designed a heat shield for Air Force cargo planes, but so far it has only been installed on 17 planes instead of the hundreds originally anticipated. "Now that has been put on hold," he says.
"Executives are feeling a lot of uncertainty," says Bobby Bono, U.S. industrial manufacturing leader for PwC. Where in the past executives had better visibility into future revenue and could make resource allocations based on that, now, Bono says, there is less clarity as to what the future holds, not just with sales but with the impact of regulatory and tax policy.
"Most of the companies that survived the recession did so because they were really careful," says economist Chris Kuehl, managing director of Armada Corporate Intelligence. "They would rather risk losing a little bit of market share than get into a debt situation they can't handle."
When the Fabricators & Manufacturers Association (FMA) recently conducted a poll, Kuehl noted, about one-third of the companies were "modernizing as fast as they possibly can." The other two-thirds "were really being cautious." Kuehl said the investment approach seemed to be closely related to the industry sectors they serve, with companies that supply the aerospace and automotive industries typically being more progressive.
Formidable Headwinds Buffeting Manufacturers
Recent economic data have done little to make manufacturers feel sanguine about the future. In April, factory production slid by 0.4%, the third month in the past four that manufacturing output contracted.
"The output backslide in April was broad-based, with widespread weakness in both durable and nondurable manufacturing," observes Cliff Waldman, senior economist for the Manufacturers Alliance for Productivity and Innovation (MAPI). "Suppliers of numerous manufacturing supply chains such as machinery, nonmetallic mineral products and fabricated metal products all suffered contractions in production, indicating fundamental factory sector weakness."
While the Institute for Supply Management's purchasing managers index continued to indicate growth in April, the index fell to 50.7%, the lowest rate of the year, and the employment component fell 4 percentage points to 50.2%.
U.S. manufacturing has shown "very modest growth in production and sales" in 2013, says Chad Moutray, chief economist for the National Association of Manufacturers. He attributes the slowdown to a number of economic headwinds U.S. manufacturers had little control over, including uncertainty over the Affordable Health Care Act, sequestration and weakness in the world economy.