Manufacturing continues to contract. What will the recovery look like?

[Randy Littleson]

The headlines are daunting:


China manufacturing sector close to recession (http://www.industryweek.com/ReadArticle.aspx?ArticleID=18126)
U.S. manufacturing slumps to 1980 lows (http://www.industryweek.com/ReadArticle.aspx?ArticleID=18125)
Manufacturing output plunges in EU countries (http://online.wsj.com/article/SB123151452517968119.html?mod=fox_australian)
Manufacturing tumbles globally (http://online.wsj.com/article/SB123094144619950373.html?mod=fox_australian)

I’m sure there are many more such stories, but enough already.


Let’s talk about the recovery. I do believe there will be a recovery. This is a terrible down cycle, but all down cycles are eventually replaced with a recovery.


There’s a lot of debate going on about when (this is best called after it happens! http://blog.kinaxis.com/wp-includes/images/smilies/icon_smile.gif ) and what it will look like. One school of thought suggests it will be a v-shaped, sharp recovery. The argument behind this is that this downturn came quickly and was sharp, so companies turned things off quickly. Thus, inventories are plunging. Companies have cut back production more than current demand dictates to keep demand and supply balanced, so inventories are low and getting lower. Pent up demand combined with extremely low inventories will produce a sharp v-shaped recovery when it happens.


There are others that argue for more of a u-shaped recovery, a more gradual growth when things start to rebound. The theory here, in part, is that companies are so burned by this downturn that caution will continue to rule the day.


I tend to be an optimist, but on this one I’m not so sure. In theory, I think the fundamentals are in place - especially the longer this downturn lasts (and by any measure this will be a long one by historical standards) - for a v-shaped recovery. What has me worried is the psychology. I think people have really had their confidence rocked on this one and I think all business and consumers are going to tip-toe back into spending as things start to recover. Jobs play a major role on the consumer side and I sense companies are going to be slow to rehire, similar to the last recovery.


Of course, all of this is crystal ball. If I knew for certain, I would probably be vacationing someplace warm right now.


What do you think? Are we in for a v-shaped recovery, a u-shaped or some other scenario I haven’t covered?


Randy Littleson (rlittleson@kinaxis.com) is a Vice President for Kinaxis (http://www.kinaxis.com/), provider of the on-demand RapidResponse (http://www.kinaxis.com/supply-chain-response-management-products/index.cfm) service that empowers multi-enterprise manufacturers with the collaborative and integrated demand-supply planning, monitoring, and response capabilities.

[Riletom]

That is a hard one...I suspose that due to the depth and suddeness of this downturn that we will see a very gradual U shaped recovery. I believe this will be the case and will be driven in part by inventory.

There has been such a rapid reversal of manufacturing activity that, at this time, we are probably living off of our own fat, so to speak by drawing down inventories.
As we continue to draw down the inventory levels there will be the physcological aspect of the recovery. Manufacturers will be very reluctant to add head count, at least at first, and will be very, very conservative on the hiring side coming into the recovery.

I suspect becasue of the circumstances around this downturn that we won't see any real employment growth until we are well up the back side of the U recovery pattern.

Lastly, as in just about all downturns, we won't realize that we are in the upswing until we are well into it. This will also help contribute to the lag in mfg. employment activity during the first stages of the recovery.

[rbrooku]

Let’s talk about the recovery. I do believe there will be a recovery. This is a terrible down cycle, but all down cycles are eventually replaced with a recovery.

Let's use metalogic and talk about the assumptions that underlay the premise "all down cycles are eventually replaced with a recovery". First is that humanity will continue to thrive and not either die out or have a massive die off. This assumption seems likely, but is no longer a guaranteed conclusion. Second is the length of time that is assumed. If the economy goes from bad to worse the length of time could become decades, in which case any "recovery" would be difficult to define as such. Third is what constitutes a recovery, and by that do we mean a return to roughly the same level of economic activity as before the downturn began? If we mean a return to parity and not just an increase instead of continual decrease, then we have to consider the over inflated nature of the world economy before the bubble burst and the downturn began. This assumption has a significant possibility of not happening, though it does not appear right now as a likely possibility. That could change if the downturn accelerates this year, which is a distinct possibility.

[rbrooku]

...due to the depth and suddeness of this downturn that we will see a very gradual U shaped recovery. I believe this will be the case and will be driven in part by inventory.

I must disagree with this assumption. We have been in recession since December of 2007, and the only thing that was "sudden" was the acceleration of the recession as people were forced (the "credit crises") to somewhat admit the degree of illusionary asset creation that had preceded the downturn. As a matter of point here in the discussion we have not yet fully comprehended the amount of capital that has disappeared in the real estate market. That is why it is a possibility the downturn could even accelerate this year rather than slow down or reverse.

The somber tone of Obama's speech was a simple recognition of this state of affairs so we should all stop acting surprised at the situation. Of course this means that, sooner or later, there is going to have to be a government effort to actually take over the bad loans instead of simply throw money at financial institutions. There will be no recovery until after this happens.

[Randy Littleson]

Some great comments. I have no illusions about how serious the challenges are (and agree Obama is working to "enlighten" people that are not getting this as well as buy himself time)...nor that they appear to be getting worse.

I also agree that the toxic assets are one of the roots of this problem and they have yet to be substantially addressed (why, I don't know).

Despite all of this, I continue to believe a recovery will happen (although nobody can predict precisely when). What does a recovery mean - to me it means a return to growth. As noted, I don't believe this requires a return to the same situation as prior to this crash. In fact, I hope not. There were fundamental and structural issues that were wrong and created this current situation (too much borrowing, spending without limits, loans to unqualified people, etc., etc.). In fact, I think it would be a disaster if we came out of this WITHOUT seeing fundamental changes in the balance of things. To go through all of this pain without seeing structural imbalances get fixed would be an absolute shame.

Speaking of manufacturing and how it ties to this - for what it's worth - just heard one "talking head" on TV talking about the industrial sector being a leader coming out of this (again, whenever that happens).

Good comments - thanks for sharing your views on these challenging issues.