With even casinos not buying, can U.S. factories recover?

McClatchy NewspapersJuly 26, 2009 

US NEWS ECONOMY 1 MCT

Charles Martin, president of Bommer Industries in Landrum, South Carolina. Bommer makes commercial grade door hinges, and markets "Made in the USA" to differentiate himself from cheap foreign competitors.

KEVIN G. HALL — Kevin G. Hall / MCT

LANDRUM, S.C. — Charles Martin's been in manufacturing for more than 30 years, and over those years faraway Las Vegas has always served as an important, if not odd, barometer for his company that makes commercial-grade door hinges. Even in bad times, casinos were still going up in Nevada.

Not so today.

"When gamblers aren't building, forget about people who make rational decisions," said Martin, president of Bommer Industries, the last completely American manufacturer of door hinges for hotels, malls, universities and other big commercial buyers. "I think that says as much about the U.S. economy as anything I can say. The gamblers have quit building, and they're always optimistic."

The U.S. manufacturing sector is clawing back from a deep downturn, and manufacturing globally is on the skids. The climb back will be long and painful because the situation facing the sector isn't just bad. It's awful.

The Federal Reserve's latest measure of industrial output shows that in June, U.S. manufacturers were operating at 64.6 percent of their installed capacity. It means they are producing at more than a third below their potential, and this is the worst rate since these records began being kept in 1948. Since the recession began in December 2007, through last month, manufacturers shed 1.9 million jobs, according to the U.S. Labor Department.

Nestled along South Carolina's northwestern border with North Carolina, Bommer Industries was founded in 1876, making hinges for barn doors. It's since come to dominate the market for spring-loaded hinges in a way that Xerox became synonymous with copiers.

Martin's product isn't glamorous, but it's essential to virtually any sort of large-scale commercial construction.

That makes Bommer is a good measure of the broader U.S. manufacturing sector. Already struggling to fend off what Martin calls the "Chinese invasion," the 133-year-old company is positioning itself for the eventual economic rebound, trimming its workforce by 18 percent and hunting for new business.

But even if the recession ends in the fall, as many economists predict, significant growth for Bommer and other manufacturers will remain elusive.

"At best, the latter part of 2010," Martin said during an in interview in tiny Landrum, where the company relocated from Brooklyn, N.Y. in 1953. "From my own perspective, we've got at least 12 (more) months in the doldrums."

Data researcher Sageworks Inc. offers specialized statistics that highlight the grim reality gripping the manufacturing sector. It collects data from privately held manufacturers — those who don't offer shares of stock to the public — and found that both time it takes to collect payment from buyers and inventories on hand fell off the map last summer

Another important measure, profit per employee, is at the lowest level since the 2001-2002 recession that followed the Sept. 11 terror attacks. Sales by private manufacturers contracted almost a percentage point in 2001, but have shrunk by more than 3.7 percent in the first half of this year. Even as these manufacturers shed jobs and the associated costs, they're not becoming more profitable.

"Basically the economy is softer than we thought," said Brian Hamilton, CEO of Sageworks. "It's taken us by surprise ... and is worrisome. We're obviously not as reliant on the manufacturing sector but that's the one you think always has more stability."

The Bureau of Economic Analysis estimates that manufacturing accounted for 11.5 percent of all U.S. economic activity last year, far below the record 28.3 percent of all U.S. economic activity in 1953.

Manufacturing jobs have slipped away, but output and revenues have continued to grow alongside efficiency gains and automation. Bommer had 325 employees in 1978, but today has 115 workers and revenues five times that of 30 years ago.

In past recessions, a slowdown in the housing sector would affect some manufacturers, while problems in the tech sector might slow others. But there wasn't the blanket downturn witnessed today.

"It's pretty significant when you consider that in manufacturing, there are 19 major sectors and they are all unique. They're all driven by different demand, but to one degree or another they're all off significantly," said David Heuther, chief economist for the influential National Association of Manufacturers. "All the key demand components have fallen off and that is unprecedented, especially when compared to the last recessions. This downturn has really hit manufacturing across the board."

One reason for his worry: production continues to fall even as manufacturers burn through their inventories.

Usually, production is ramped up as inventory is burned off. That suggests that even when the U.S. economy begins to recover, the manufacturing sector won't be able to take full advantage and a rebound in employment will be slowed.

"It won't necessarily delay a rebound in production but it will certainly slow the pace. When demand picks up at some point, some manufacturers are just going to be liquidating inventory," Heuther said.

How quickly manufacturers get back on their feet may depend on the global economy. The U.S. economic downturn would be far worse if not for the strong performance of U.S. exports during the first half of 2008. About a quarter of U.S. manufactured goods are exported.

When the credit crisis hit in force between August and October 2008, that global economic driver took a dive as world's financial system teetered on the verge of collapse. As in the United States, manufacturing plunged in Europe and Asia and remains depressed, albeit it improving slightly.

While Bommer markets a Made in America policy at home, it's also looking abroad to grow its business. It is active in Canada and had significant sales in Egypt last year. Martin's export pitch is the same — buying American-made product means buying quality.

"It appeals to more people outside the United States than it does here. Unfortunately here it is price, price, price," he lamented.

Cheaper imports from China continue to challenge Bommer's market share, and Martin said he tries to compete through customer service and relationships.

"We have to stay close on price. We have to be in the neighborhood," he said, noting that if he can stay within 10 percent to 20 percent of the import price he has a fighting chance.

In today's tough environment, Martin and other manufacturers hope that the economy rebounds faster than expectations.

"We don't see anything on the short horizon that it is going to happen," said Martin. "I definitely hope I am wrong on that."

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