Manufacturers Are Less Optimistic Than Last Year

2006 National Manufacturing Week survey shows rising materials and energy costs to be biggest challenges to U.S. manufacturing.

The 2006 National Manufacturing Week survey of manufacturers in the U. S. shows that 44% expect manufacturing to trail the overall economy in 2006, up from 34% in the previous year’s survey, and that a substantial majority expect the economy to grow more slowly – less than 2.9% – in the year ahead, than most economists predict.

"Most economists expect the overall economy to do better than that, including our own" said National Association of Manufacturers (NAM) President John Engler. "It’s not that manufacturers are unduly pessimistic, but they are contending with unprecedented challenges that affect their outlook."

On the brighter side, Engler said that more than half of the respondents expect to increase capital spending in 2006 and to increase employment, and that almost three-fourths of them now report they are exporting to other countries. "These are all positive signs," he said.

Engler said the biggest challenge besetting U.S. manufacturing are rising external costs associated with health care, materials and energy, which manufacturers are unable to transfer to product pricing. "External costs burdens are having the biggest impact on manufacturers — lowering their profitability and tying up more funds that would otherwise be spent on investment, research and development, and new product lines. These costs are a significant and long-term problem for our nation’s manufacturers and our economy."

Tony Raimondo, Chairman and CEO of Behlen Manufacturing Co.,Columbus, Nebraska, and a member of the NAM Board of Directors, said that energy was looming ever larger as a serious cost factor in his industry. "The government encourages us to rely more and more on natural gas for energy, and then makes it virtually impossible to access more supplies of natural gas. The result is the highest natural gas prices in the world.

"We have also got to get a handle on health care costs," Raimondo said. "We’re looking at double-digit cost increases every year on what is already a major cost item. This survey shows that the cost of ‘non-wage compensation’ is having the greatest negative impact on manufacturers today, and by far the biggest item in that category is health care."

Engler noted that as the manufacturing sector continues to expand, manufacturers are more reliant on a high-performance workforce, and that qualified workers are getting harder to find. "We began seeing this issue a few years ago and it is becoming more pronounced in subsequent surveys," Engler said. "Half of the respondents currently have unfilled positions because they can not find qualified workers, and 70%of the new jobs that survey respondents anticipate creating will be for either skilled production workers or highly educated professionals. The need for highly-educated professionals specifically has nearly doubled from 2005 and we anticipate it will continue to grow in the future.

"If the U.S. is to preserve its position as a major economic power in the 21st century it must stay out in front of the innovation curve, and it will need a much better-prepared workforce to do so," Engler continued. "Like every modern nation, the United States is deeply involved in globalization. Technology and competition will only increase America’s need to have access to highly skilled professionals. But our schools and training programs just aren’t doing the job."

Ronald D. Bullock, CEO of Bison Gear & Engineering Corp., St. Charles, Ill., underscored Engler’s comments with a personal comment on his quest for qualified manufacturing employees. "I recently filled an engineer’s position that had been open for 18 months," Bullock said. "Right now, I have at least five empty slots, some of which have been empty for months. I need more people to keep up with demand, but I can’t just hire anyone off the street. This is complicated work. We need people with strong backgrounds in math, science and computers."

Bullock also echoed Raimondo’s comment on the impact of rising health care costs. "In any discussion among manufacturers, health care is always a major topic of concern," he said.

Engler noted that one way manufacturers are competing more effectively with the rest of the globe is by increasing their exports, with an "astounding 73%" selling abroad. "The NAM has been working with the Bush Administration and Congress to level the international playing field for U.S. exporters," Engler said. "On a more personal level, we are working with the Commerce Department to help small and medium-sized manufacturers sell their products abroad. Manufacturers in America who don’t sell outside the borders of the U.S. are shutting themselves out from more than two-thirds of the world market, and the rise in exporting is a win for manufacturers."

The NAM survey showed that 54% of respondents expected their exports to stay the same in 2006 and 41% expected them to increase. "We are seeing a much stronger commitment toward exporting than in previous years," Engler said. "This is a positive trend. Manufacturing accounts for most U.S. exports, and offers our best hope for chipping away at the trade deficit."

The survey of 3,000 NAM members of all sizes in diverse industries and geographical areas generated a response of 349 responses or 12%. The survey results are available at www.nam.org/nmwsurvey.

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