An Economist's View of the Manufacturing Sector

An Economist's View of the Manufacturing Sector

The chief policy officer for the Federal Reserve of Cleveland sits down for an exclusive Q&A with IndustryWeek.

The global economic recession didn't just rattle the very foundation of our financial system, it also has made many reevaluate what role and responsibilities should be endowed upon the Federal Reserve. Over the last 18 months, in an effort to stabilize the economy, the Fed took a series of extraordinary steps and doubled its balance sheet.

Some have questioned whether the Fed's oversight and consumer protection efforts have been strong enough. Congress is weighing a proposal to strip the Fed of all bank supervision powers and focus almost exclusively on monetary policy.

Amid this backdrop, IndustryWeek recently sat down for an exclusive interview with Mark Sniderman, executive vice president at the Federal Reserve Bank of Cleveland.

Sniderman, who serves as the Cleveland Fed's chief policy strategist, shared his perspective on how manufacturers are coping, what made this recession so extraordinary, the Fed's role in stabilizing markets and what to expect over the next year. Edited excerpts:

IndustryWeek: Unlike previous recessions, many have said this economic crisis was unique because its breadth was so wide and it hit so many industries at great depth. What has struck you about this recovery that's unique?

Mark Sniderman: After a recession, you always see a struggle for companies to regain their footing. During the boom time, CEOs say they're so busy getting product out the door or bidding on proposals or fulfilling contracts, that all sorts of inefficiencies creep into the operation. It isn't cost-effective and there isn't time to deal with it because the business environment is so good that you're more concerned with losing business measured in sales than you are in dealing with these issues. You're less worried about monkeying around with a computer system or parts of your business model because there's less pressure to meet customer demand than during those boom periods. What's unique about this recession and recovery is that we're finding that regardless of your education or experience level as a worker, if you get tossed into the unemployment pool, you have to tread water as long as everybody else does to get out.

More Insider's Look

Insider's Look offers exclusive commentary and analysis by digging deep into the stories that most affect manufacturers. IW Associate Editor Peter Alpern talks with manufacturing executives on the ground as well as industry experts about the trends and challenges the manufacturing sector faces. See the latest in this continuing series.

IW: Much has been made of the recovery that's underway, yet jobs have been slow to develop. What are you seeing on this front?

MS: When you get into the recovery, you see a slower hiring period and you see it for two reasons. One is an innate caution about business and demand circumstances, but also because some of the productivity improvements companies make, such as leaning out or creating new ways of doing business, are being worked on. And during the upswing, a lot of companies find ways of meeting customer demand without necessarily calling people back to work. At first you don't even need more hours from workers. Then it's adding hours, but not bodies. Then as demand ticks up from there, it's adding temporary hires, then permanent hires. There's a lot of steps to go through before we see permanent additions.

IW: You had mentioned earlier that caution was a significant reason companies haven't hired. What kind of caution are you referring to?

MS: One of the things that's very interesting is that in talking with business leaders about the environment, what many CEOs have said is there are a lot of uncertainties around issues that will effect business cost. Look at health care reform. Health care costs are closely related to hiring, so how that gets resolved will impact the cost on the employee base. For many manufacturing companies, the whole discussion about cap and trade and carbon taxes is a huge issue. Business leaders, especially at the larger companies, say it's not so much the financing environment that's a constraint on them as it is the broader uncertainties and how it's going to affect them.

IW: Apart from direct federal stimulus, are there any monetary strategies or Fed measures that you think work best to strengthen manufacturing?

Mark Sniderman, executive vice president at the Federal Reserve Bank of Cleveland.

MS: Generally speaking, no. Monetary policies are designed to support an environment of slow and stable inflation and one that's conducive to the economy reaching reasonably maximum employment over time. It's not designed to affect the composition of economic activity. That said, low and stable inflation is a very good planning environment for all businesses.

IW: How are some of the regional banks prepared today, as opposed to a year ago, to address the borrowing needs of domestic manufacturers?

MS: Compared to a year ago, I think the banking system seems clearly stronger. At first, during the depths of the financial crisis, everyone was just trying to understand this environment and figure out what kind of exposures their institutions really did have. In some cases, it wasn't immediately obvious how certain assets that you might have on your books might be exposed to a problem somewhere else. It took a while to figure that out. Then it took time to figure out what mitigation strategies are the best ones to pursue and those strategies differed from institution to institution.

IW: In what ways did this crisis change the lending habits of banks?

MS: I think the interesting thing there is every bank now wants to take a look at what their business model is and where they want to go going forward because for many banks the game has changed. They see different kinds of industries as more or less attractive than they did before. This seems to be a period of sorting out among banking institutions where they're paying more attention to the overall composition of the loans on their books.

Next week: More excerpts from IndustryWeek's exclusive sit-down with Mark Sniderman.

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