‘Just-in-time’ economy cools torrid manufacturing sector
BY MORRIS R. BESCHLOSS
PVF and economic analyst
With several of the Federal Reserve’s regional sectors indicating pullback from the red-hot momentum of a revived manufacturing base during a five-month surge through mid-May, I’ve determined several reasons for this reversal of expansion:
• The catastrophic impact of Japan’s earthquake/tsunami. This has not only played havoc with the profusion of components on which many American-based manufacturers had become dependent, but it impacted U.S. exports into the Japanese domestic economy, which has constricted the most since Tokyo’s recovery after World War II.
• Much of the inventory buildup generated by distributors and retailers since earlier this year has perceptibly slowed. A “just-in-time” position to service customers has become universal among distributors, who are becoming increasingly concerned about a general economic slowdown that is expected to become more rampant in quarters three and four.
• The surprising rebound of international U.S. exports is cooling in tandem with a reduction of the frenetic activity that reflected overseas growth, especially in China, India and other rebounding Southeast Asian quadrant nations.
• Growing concern over the solution of the U.S. debt-deficit and increasing government policies considered restrictive by business. This belief has introduced a new wave of pessimism, with increasing numbers believing a double-dip recession is in the cards; I don’t believe this will happen.
• The recent dip in retail sales, after a 10-month stretch of increases. Also, the virtual disappearance of residential and light commercial construction, which had for decades formed the core of U.S. gross domestic product growth prior to the mid-September 2008 financial crash.
Although the energy-dominant Southwest region’s surge continues unabated, constant strife over Environmental Protection Agency regulations is impeding the major thrust that oil and natural gas shale “fracking” could bring to the general industrial economy.
‘Back to America’ movement continues to gain momentum
While the “Back to America” movement by business and industry — which began to be noticed late last year — seems to continue to gain momentum, the major impetus for the manufacturing sector seemed to emanate from last summer’s deep sea drilling disaster in the Gulf of Mexico.
Although there had been previous malfunctions relating to various aspects of energy production and processing, the determination of the originating source of the problem has not been disclosed.
The Gulf catastrophe was all-encompassing in the ongoing and growing setbacks emanating therefrom. It didn’t take long for global energy major BP to be tarred with the brush of guilt for the varied consequences. These affected tourism, fishing and a wide array of economic reverses that have still not been adjudicated and brought to a halt.
This incident set in motion various defense mechanisms by manufacturers, reacting to distributors’ and end-users’ requests to supply certification of product origin and its components. As these concerns and demands for such certification have multiplied, it has become readily apparent that the overwhelming verification of these demands is most often attained from American-based companies and the facilities for which they are responsible.
As previously revealed in these columns, the shift to “Back to America” has been quantified by “just-in-time” inventory policies, which are best supported by indigenous manufacturers and their distribution affiliates that allow immediate shipments to requite spot demands. Imports, on the other hand, require lengthy lead times, and are becoming increasingly costly, due to galloping overseas labor and transportation costs. Hard-to-get items are especially difficult to get in a timely fashion when relying on overseas sourcing.
Even such Fortune 500 companies as General Electric and NCR, in such disparate locations as Louisville, Ky., and Portland, Maine, are announcing domestic plant reopenings.
Such comments as shrinking cost margin differences between ostensibly comparable domestic and imported products and the need for certified quality standards are being heard with greater frequency.
Although this directional change in bringing goods and services back to the U.S. is as yet a trickle, it seems to have arrested the runaway trend to overseas dependence. For multi-nationals, however, the commitment to global manufacturing and licensing is expanding as the developing nations’ domestic market development is growing faster than that of the U.S., and they require full channels of distribution availability and on-the-spot deliveries.
U.S. corporate foreign tax repatriation benefits disputed
Despite mounting efforts by America’s major multi-nationals and their lobbyists to convince the federal government to declare another “discounted tax repatriation holiday,” in 2012, similar to that of 2005, the economic benefits touted are not valid, according to the National Bureau of Economic Research.
While such multi-billion-dollar U.S. giants as Pfizer, Johnson & Johnson, Google, Oracle and Procter & Gamble profess major benefits to the fiscal budget, job creation and stateside expansion, the 2005 results prove otherwise.
While the 2005 effect, which provided tax reduction from 35% to 5.25%, resulted in the repatriation of more than $300 billion of foreign earnings, less than 10% of the $16 billion increased tax generated accrued to new hires or the multi-nationals’ stateside expansion.
Much of the additional after-tax revenues available were used for stock buybacks and dividends. In fact, subsequent years’ tax collections from the corporate giants’ tax repatriation involvement indicated a sharp increase in foreign earnings invested abroad. This was climaxed by a record $320-billion capital expenditure in foreign countries in 2010.
This was more than triple the amount spent in the post-repatriation year of 2006. Even without the bargain tax rate, the years following have indicated substantially higher foreign earnings repatriation than existed in the five years preceding 2005. Even the financial crash year of 2008 generated $150 billion of return to the U.S. by foreign multi-national earnings accumulation. This was more than double the 2004 year high.
Although it may not be coincidental that both 2005 and 2012 preceded contentious elections, it’s fantasy to expect that this one-shot boost to the U.S. Treasury will be more than a relatively small, temporary expedient. Multi-nationals have primarily committed to accelerating expansion in growth markets overseas.
These corporate super giants have increased their holdings offshore to more than $1.5 trillion, which would likely generate $50 billion if a new tax holiday were to be declared in 2012. Starting in 2013, the normal repatriation of future profits would be less in subsequent years. The non-partisan Congressional Joint Committee on Taxation has estimated the prospective special program’s cost at $79 billion in lost revenues over the following decade.
With independent businesses that operate almost exclusively within the confines of America’s 50 states saddled with the major responsibility of providing additional employment to American workers, a periodic tax holiday for the industry conglomerates would not produce the job bonanza promised. Additional revenues into the government till are not the answer, but business-friendly government policies are.
Manufacturing comeback produces few new jobs
Although the administration is seizing upon the one bright spot in the dark employment firmament — manufacturing — as a boon to its re-election potential, this sector’s moderate growth is totally detached from any federal policies introduced during the past 21/2 years.
As I first revealed in my mid-December 2010 columns, distributors were building inventories at a time that such investments were subject to year-end “floor taxes” and took a watch-and-wait attitude as the new year unfolded. The reason for this reversal of previous shrinkage, which had plagued manufacturing since reaching a peak in the 1950s, was a sudden awakening of new orders from industrial end users, retailers, contractors and, most of all, exporters.
As previously explained, there was also universal anticipation that commodities across the board such as copper, scrap, steel, rare metals, and even lumber and cotton were starting to generate significant price increases. The distributors awakening to these factors figured that buying in at lower prices would substantially outweigh the bill for increased year-end inventory taxes.
Although the manufacturing production index has risen 13% since the March 2009 lows, and manufacturing jobs have increased 158,000 in the past year, the manufacturing personnel employment today represents an all-time low as a percentage of total manufacturing payrolls at 9%. This compares to the 1950 peak, when a similar statistic pegged manufacturing jobs at 31%.
Factors totally divorced from government policies and expenditures include the following major aspects:
• The awesome demand for American construction machinery, military and commercial aircraft, automotive products, industrial supplies, armaments and agricultural goods from developing nations, especially Southeast Asia, Brazil, Eastern Europe and Africa.
• The weaker dollar has facilitated exports, but U.S. manufacturing quality, brand name preference and product guarantees have combined to reverse years of manufacturing’s downward trend.
• The acceleration of import labor and transportation costs, size of shipment and lead time, as well as waning confidence in some foreign goods, exacerbated by frequency of malfunctions, especially in the vast and growing energy sector.
With perception now favoring “Made in USA” at the highest point it has seen in years, the return of manufacturing to the home base has begun, but is still yet a trickle.
Constitutional orthodoxy holds key to stable U.S. exceptionalism
It is probably unknown to most that the U.S. constitution is the only written code of governmental behavior still in effect after more than 230 years. No other global constitutional document even comes close.
What’s even more remarkable is that only 27 amendments have been appended, as the original colonies grew from 13 disparate states with a population of three million to 50 states and territories numbering over 100 times that many today. What’s more astounding is that this incredibly effective document has retained its invincibility despite the multi-faceted demographic changes ever impacting any of the world’s historical governmental entities.
The exceptionalism and creative entrepreneurial spirit unleashed by this commitment to a multi-century old legal structure, has also been responsible for the overwhelming dominant economic core, which has reflected a 67% consumer participation, never before experienced by any of the world’s 190 nations, large or small.
Only currently has this governmental structure balanced between the legislature, executive and judicial, come under mortal danger. The White House has originated a bevy of czars that have circumvented legislative, and even judicial, restraints, by implementing federal regulations that have not been tempered by either the legislative or judicial process.
Under the aegis of a force majeure (national emergency) steps have been taken to reorganize the American system to conform to a system that borders on enforced wealth redistribution.
Although generally supported by the nation’s largest publicly held corporations, who have received exemptions from the congressionally approved universal health dictum, the independent businesses — who employ two-thirds of the U.S.’s fully-employed — have become the target of these extra-constitutional circumstances and are suffering the most from them.
Unfortunately, this has resulted in further employee reduction and a downgrade in expansion. While the multi-faceted conglomerates continue to ship facilities and job potential abroad and to sequester their profits in low-tax foreign nations, most independent businesses don’t enjoy such a luxury.
Consequently, a downgrade in hiring and restricting expansion expenditures by private companies has become the regressive result of government initiatives.
Morris R. Beschloss, a 55-year veteran of the pipe, valve and fitting industry, is PVF and economic analyst emeritus for The Wholesaler.