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The Sputtering Road to Recovery

May 20, 2020
Manufacturers will be living with the outcome for years to come.

The COVID recession was a very short one – just two quarters, the minimum necessary to justify that label. This downturn was, in fact, a fraction of the length of the Great Recession (18 months from peak to trough). Moreover, economists believe the trough has probably already come and gone.

Yet, the world has never seen an economic collapse like this. After a first-quarter GDP contraction of 5%, economists forecast a second quarter downturn surpassing 30%, or three times as deep as the previous worst quarterly contraction in U.S. history. Some say it could even be more dire.

And manufacturers will be living with the outcome for years to come. Indeed, it will change the way they do business forever.

Considering the extraordinarily steep decline, the timing of manufacturing’s recovery – both in terms of length and speed – is still unusually murky. With the country still neck-deep in the economic muck left behind by the global lockdown, even the sharpest forecasters have difficulty looking out much beyond the third quarter of this year. The consensus seems to be that the most likely trajectory for the recovery will look something like the Nike swoosh. As one industrial manufacturing CEO said, “This is obviously a situation we’re not going to sail through, this is something we’re going to have to row through.”

The reason for the laboriously slow recovery is clear: while not the deadliest disease in recent history, COVID’s 1.3% mortality rate is still 13 times greater than influenza. And this virus is highly contagious, infecting people in more than 180 countries in just three months. This spring it took only 13 days for global cases to double from 1 million to 2 million, another 13 days for cases to reach 3 million, and just 12 more days to reach 4 million. With the United States accounting for about 30% of the global cases and ranking among the top 10 nations in COVID deaths per 100,000 people, manufacturers have been justifiably concerned about working conditions for their employees.

And yet, manufacturers also know they can’t stay shuttered indefinitely.  Over the past month, they have developed detailed plans to reopen their factories, with the dual goals of employee safety and restoring output. In a recent survey of the Manufacturers Alliance’ for Productivity and Innovation's (MAPI) large, global industrial companies, almost half will reopen all their operations in June and July. Another 20% are opening them this month or never shuttered their factories in the first place.

To balance the needs of employees with the need to run a business, an industry consensus has emerged on must-have safety practices at facilities. For example, almost 90% require a 6-foot distancing rule between employees, and two-thirds of manufacturers have barred visitors to their facilities. New working arrangements also include reinstating employees in stages, rotating teams, and otherwise customizing hours and shifts. Screening protocols have been adopted at about 90% of our members’ facilities, and protocols for use of PPE and masks have been standardized at virtually all of them. Nine out of 10 factories have new or heightened hygiene requirements and two-thirds have new or heightened PPE requirements.

Reopening may be the easy part. The larger challenge will be rebuilding output to pre-recession levels. Demand plummeted virtually overnight this spring. Almost three-fourths of manufacturers saw their capacity utilization decline at least moderately, with 40% experiencing dramatic changes. Recovery will take time.

Getting back up to speed is further compromised if we experience a second wave of the virus this fall. That, in fact, is the biggest concern of about 45% of manufacturers – how to ensure operations can be sustained if infection rates start rising again. Exacerbating this concern is the fact that the United States lags behind other major countries in one the most important parts of the virus response: early, vigilant and broad-based testing. A failure to prioritize the need earlier and lack of coordination challenges at multiple government levels have contributed to the current shortfall. This has clear implications for how fast manufacturers will be able to get back up to speed.

Even before COVID, American manufacturing had yet to reach the levels of output attained prior to the Great Recession.  With few underlying structural challenges prior to this recession, the sector should make steady progress on the road to recovery this year.  But instead of sailing through the recovery, we’ll have to row.

Stephen Gold is president and CEO of MAPI, the Manufacturers Alliance for Productivity and Innovation.

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