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How Bad Will It Get Before It Gets Better?

By Amy Radishofski, Features Editor, Manufacturing.netThe economy is faltering and businesses and consumers are struggling. Read on to find out when we can expect a turnaround.

The U.S. economy, and perhaps the global economy, is in a recession. The stock market has been on a roller coaster ride, and the number of unemployed Americans keeps rising.

With that pessimistic global picture, is it any wonder that the manufacturing sector has been contracting?

“Manufacturing has encountered a ‘perfect storm’ in 2008,” said Clint Adamkavicius, Frost & Sullivan’s Senior Manufacturing Industry Analyst. “It began with the housing sector, and then spread to finance and credit, and now to manufacturing.”

The question on the minds of both businesses and consumers is just how bad will things get? While you’d have to be a psychic to know that for sure, you can make a guesstimate based on the ups and downs that the industry has been experiencing.

The Bad News

“The U.S. is facing a sagging housing market, compounded by an abnormal issue with the financial and credit markets; a government bailout estimated at $7 trillion; and a left-leaning Democrat President-elect,” Adamkavicius noted.

Another major issue facing the U.S. is the domestic auto industry, which has been making headlines lately. Some emerging markets (i.e. China) are drying up, and General Motors and Chrysler are desperately trying to get government loans. The automakers are running out of cash -- fast.

“After a home, a car is the second largest purchase a person makes in their lifetime,” Adamkavicius said. “Consumers are wary of making that kind of investment right now.”

In these uncertain economic times, should the Big Three automakers in Detroit crumble it could be devastating in terms of job losses.

“There would be a major loss of confidence and jobs if the automotive industry collapsed,” said Rich Spitzer with TrendPointers. “However, if there is a bailout, the sentiment would be merely ‘We escaped that one…’ It would have much more of an impact if it failed -- the industry is too psychologically fundamental to our country to go under.”

Change Is Coming

In a bizarre form of good news, it became official that the U.S. economy is, in fact, in a recession.

“Although the current economic situation has the potential to get worse before it gets better, we’ve noticed a surge in optimism,” Spitzer said. “People are more optimistic now that it is officially a recession -- there’s no more uncertainty, no more wondering.”

As far as when will things get better, Spitzer expects that could be as early as March of next year.

“Sentiment changes in stages, you can’t just flip a switch,” he said. “The first turnaround could happen in March, with something more substantial in April. First you have to get the news out, but then you have to get the people to believe it. The economy has confusion, confidence (or lack thereof), and credit working against it. People don’t know what the news holds for them tomorrow.”

“From what I am seeing, I estimate that manufacturing will see the beginnings of a turnaround by mid 2009, with increased growth rates in Q4 2009 to Q1 2010,” Adamkavicius added. “Unemployment could reach 10 percent, but I am estimating somewhere in the 8 to 9 percent range, given that one or more of the Big 3 do not collapse -- if that were to happen we could see 10 to 11 percent unemployment until end of 2010 and into 2011.”

The economy may also get some good news in terms of a new administration coming in headed by President-elect Obama.

“President-elect Obama has made it very clear that he wants to increase the number of jobs in the U.S.,” Adamkavicius said. “Whenever any President in history has made this a focus, the major market winner has been the manufacturing sector.”

“There’s a lot of hope and incredibly high expectations behind Obama,” Spitzer added. “Even opponents want him to succeed because of what the alternative could mean. Plus, it has been a highly organized transition.”

“Thus far, the economic structure of this country is still sound. Goods and services are still getting to market and are still being accepted by end-users,” Adamkavicius said. “We are not seeing wide-scale collapse of major market segments as we have in the past -- with the exception of the automotive industry. If we can maintain current levels until the market comes back up, we’ll be fine. However, if things get worse, we could see double-digit unemployment.”

Adamkavicius adds that he doesn’t believe the bailout will reach the full $7 trillion. He estimates that it could be between $900 billion and $1.5 trillion, which would have less of an impact.

“At $7 trillion, which is over half of this nation’s GDP, the total U.S. market would quickly devalue and inflation would reach levels not seen since the 1970s,” he said. “Being in a global market, those manufacturing facilities that are able to survive would do quite well because their products would be at a lower price than even the Asian manufacturers. However, raw materials and energy costs would be very high, which could severely impact many companies.”

Remaining Competitive

“Everyone wants to plan ahead,” said Spitzer. “Any edge you can get has an impact on planning, tools, labor, etc.”

To improve your edge, Spitzer suggests tracking B2B news instead of the mass media outlets.

“The mass media can tell you what is going on at the moment, but business media is more forward-thinking and can provide clues as to what is going to happen next,” Spitzer said.

Adamkavicius adds that companies can improve their bottom line by turning to the Web while they wait for a turnaround.

“There is a lack of consistent Internet participation by companies, even though it could lead to increased sales in areas like Europe. Companies need to have an online catalog,” he said. “They need to be set up to play in a global market. They need to be flexible.”