PVF comes of age at ASA Convention
BY MORRIS BESCHLOSS
PVF and economic analyst
The pipe-valve-fitting sector proved its commitment to the larger plumbing-heating-cooling-piping industry by providing the majority of wholesaler/manufacturer attendance at the ASA Convention, held Oct. 1-3 in Atlanta. This was the highest proportion of PVF attendees since the founding of the American Supply Association in 1970. The Industrial Piping Division was initiated in conjunction with the ASA, which originally comprised the merger of the Central Supply Association and the Federated American Institute of Regional Associations.
The Atlanta meeting reflected a microcosm of America’s bipolar economy. On the positive side is the booming industrial sector, much of which is centered in the greater Houston area. This is the orifice of most of the products manufactured, distributed, specified, utilized and exported by those companies comprising the pipe-valve-fitting industry. The plumbing-heating-cooling side is negatively impacted by the depressed housing sector, which has as yet not bottomed out.
The many PVF attendants at the Atlanta meeting had plenty of activities waiting for them. Starting with the ever-popular Industrial Piping Division breakfast session, sponsored by Weldbend, it featured the selection of Tim Arenberg, president, of Columbia Pipe as ipd’s outstanding pacesetter. This is not an annual award, but was given to Arenberg for his continued commitment to the PVF industry, and the leadership he has provided to the Industrial Piping Division.
This was followed by the combined reception and evening get-together sponsored by a number of leading PVF manufacturers. It gave the sponsors a chance to meet with their distributors at a central location while also enjoying a social evening.
The PVF activities culminated with the third annual PVF Blue Ribbon Panel, co-sponsored by The Wholesaler and the PVF Roundtable joint venture, which included a two-hour session of industry leaders’ presentations combined with a question and answer session.
Participants were Bob Cooper, president of Smith-Cooper, one of the nation’s leading master distributors; Steve Letko, spokesman for Weldbend; Dennis Lehman, president of Lehman Pipe; and Danny Westbrook, Westbrook Manufacturing and PVF Roundtable secretary-treasurer.
Each represented the state of the industry from their viewpoint, and projected the PVF outlook for next year. Most optimistic of future growth was Westbrook, who is very active in the oil patch. He related the physical expansion anticipated in the development of the domestic oil industry as well as power generation and pipeline development.
This panel has become immensely popular since it provides the industry audience with hands-on information useful to manufacturers, distributors and end users alike.
As the American Supply Association anticipates its meeting in Washington, D.C., next year, the position of the PVF sector has never been more powerful. I’m sure that factor will be recognized by asa’s executives at they finalize the industry’s “big tent” agenda in their first foray ever to the nation’s capital.
Most of the “heavy hitters” I talked to at the asa Convention expect a long-term economic slowdown, even with the bloated “Bank Rescue Plan” passed by Congress and signed by the President.
The psychological as well as economic damage done to thousands of businesses and individuals will have a lasting effect on America’s forward motion in the months to come, according to those with whom I talked at length.
These entrepreneurs expect increased government oversight and tough implementation of existing and newly written laws. Even those who took a longer view, stretching into 2010 and beyond, believe that the “high leverage” party of the last 15 to 20 years is over.
They further indicate that risk will be replaced by prudence, slowing down most mergers and acquisitions, as well as expansion of existing businesses that are surviving today’s financial hurricane. Most feel that higher taxes are in the offing, no matter who wins the presidency; they also feel that rising interest rates will become endemic to the business climate, as the Fed and the U.S. Treasury will do their part to stem further runaway growth, once the current crisis abates.
Some of those I talked to -- manufacturers, distributors and importers alike -- believe that a return to “buy American” will become a symptom of this upcoming “cooling off period.”
There is increasing concern that globalization may become the whipping boy of those whose businesses have been damaged by the “financial destruction” that has been wrought. They are concerned that this could negatively affect the red-hot export run, much of which has been powered by U.S. industrial products.
No one I talked to expected 2009 to be a recovery year. At best, I perceived a hope that some glimmer of strength, backed by the recovery dollar, will start to shine through by the end of the third quarter next year.
China destined for No. 1 manufacturing spot
China is set to overtake the U.S. next year as the world’s largest producer of manufactured goods -- four years earlier than expected -- as a result of the slowing down of the U.S. economy. This may come as a surprise to most Americans who, according to polls, have believed that America’s global manufacturing leadership was vacated many years ago. Much of this belief has been perpetuated by the shrinking of the automotive sector, as well as the closing of such traditional elements as steel, textiles, electric appliances and leather goods. Not as well publicized has been America’s shift toward technology and production facilities involved in power generation and energy development.
The great leap forward is revealed in forecasts by Global Insight, a U.S. economics consultancy. According to its estimates, next year China will account for 17% of global manufacturing value-added output of $11,783bn and the U.S. will drop to 16%.
In 2007, the U.S. was still easily in the top slot and accounted for a fifth of the total global amount. China was second with 13.2%. Germany and Japan have long been a significant part of the global manufacturing Big Four. However, much of their production has been geared to exports, while almost 90% of America’s production has been targeted for internal consumption.
John Engler, president of the National Association of Manufacturers, a Washington-based trade group, played down the effect of these projections. It was “inevitable” that China would take over on account of its 1.3-billion-strong population size, he said. “This should be a wholesome development for the U.S., for it promises both political stability for the world’s most populous country and continuing opportunities for the U.S. to export to, and invest in, the world’s fastest-growing economy.”
With America’s population well into the 300-million-plus range, the U.S. per capita income far outstrips that of the world’s other leading developed nations.
As recently as last year, Global Insight economists predicted that the U.S. would retain its top position until 2013, but a large downward revision in automotive and residential construction, plus reduction of some commercial construction projects accelerated the downward projection. This year and next is expected to cause the U.S. to slip more quickly than had been expected.
These data underline the surge of China’s manufacturing-led economy in the past 20 years. In 1990, before economic reforms began to kick in, China accounted for only a minuscule 3% of global manufacturing. Its industrial production had jumped to 17.5% of global gross domestic product by 2007. But much of this activity had been shifted to internal development of services, such as retailing, distribution, transport and communications.
This unexpected change will end more than a 100 years of U.S. dominance as the world’s leading manufacturing entity. According to economic historians, It vaults China to a practically unknown position of manufacturing leadership it had occupied for some 1,800 years up to about 1840. At that time, Britain became the world’s biggest manufacturer after the emergence of the Industrial Revolution.
Global Insight defines manufacturing production for specific nations -- including the activity of foreign-owned companies, as well as domestic ones -- as value-added output.
Value-added data are arrived at by subtracting “inputs” -- such as purchases of materials, parts and services -- from raw “gross output” as measured by the sales of individual companies. The data also uses current-year revenue figures.
If inflation adjustments are used to translate into constant pricing, the expected U.S. position looks better, because its inflation over the upcoming period is predicted to be lower than that of China’s.
But with China’s immense population as well as production growth, the Asian giant is expected to comprise 35% of the world’s $28-trillion industrial output by 2025. America will have slipped to over 10% of the world’s total, which itself is expected to double over current revenues.
Productivity drives U.S. production results
The unexpected strength of 2008’s second quarter productivity at a 4.2% increase underscores the strength of America’s productive power. Driven by technology and overseas competition, companies radically altered how they manage purchasing policies, inventories, production processes, and perhaps most important, labor. The U.S. workforce has become much more flexible, allowing businesses to respond faster to changes in demand, to the benefit of businesses and workers. Even now, surprisingly strong gains in efficiency are playing a key role in helping the economy bear up under great stress.
Productivity, measured as output per hour worked in private nonfarm businesses, increased 2.8% through this year’s second quarter from a year earlier. That’s unusual on two counts. Efficiency typically slows when the economy weakens, but this time it has sped up, from 1.1% annually over the previous two years. Plus, given that hours worked have declined 1% over the past year, productivity gains have accounted for all of the 1.8% advance in economic growth.
Greater use of part-time workers, especially in manufacturing and retailing, is a big part of the job market’s new flexibility and recent gains in productivity. From 1990 to 2000, the share of temporary workers on payrolls doubled to about 2%. During the 2001 recession, temps accounted for 20% of payroll losses. So far this year, temp jobs have accounted for 40% of all losses. Also, businesses are showing a greater tendency to cut hours rather than lay off workers. So far this year, employees working part-time have jumped by nearly a million, and the number saying they are doing so because of slack business conditions has soared to a record level.
What does all this mean for the current business cycle? Prior to the 1990s, businesses could not adjust to a drop-off in demand as quickly as they can now. That delay resulted in lost productivity, as output fell but hours worked did not, which jacked up the labor cost of each unit of production. Higher unit costs dug deeply into profit margins, causing large scale layoffs. A vivid example today is the U.S. auto industry, which never fully caught the productivity wave. Demand has crashed, but stiff labor contracts prevent companies from cutting workers or reducing work hours fast enough. Unit costs are soaring, and investors are hammering the companies’ stocks.
Now, with many businesses able to adapt to weakness more flexibly, profit margins of non-financial companies- though well below their record levels in 2006- remain relatively high. Profits in this sector have not dropped as sharply as in past downturns, thanks in large part to booming export businesses, which tend to be very efficient.
Plus, faster workforce adjustments have helped keep payroll losses at less than half those in the early stages of the last two recessions. Modest declines also reflect cautious hiring. Job growth since late 2001 has been the slowest in any business expansion since World War II. Conversely, payroll losses could end up the mildest of any postwar recession.
Productivity is also playing a role in holding down inflation and lifting the buying power of workers’ pay. Despite a weak job market, labor compensation has grown 4.3% over the past year, slightly faster than during the two previous years. Greater efficiency has allowed businesses to grant steady pay gains without adding significantly to costs. Unit labor cost, which is wages and benefits adjusted for productivity, has risen only 1.5% over the year, since pay growth has been offset by the solid 2.8% increase in output per hour.
In fact, the biggest drain on real wages right now is not a weak job market, but rising energy costs. With oil prices coming down and unit labor costs under control, the inflation outlook should remain moderate. This means the Federal Reserve will feel less pressure to lift interest rates before the economy is healthy enough to handle them.
Productivity is no quick solution to today’s economic weakness. But it’s providing a key support for lessening the downside.
Morris R. Beschloss, a 52-year veteran of the pipe, valve and fitting industry, is PVF and economic analyst for The Wholesaler.