Atlas shrugged? Manufacturing seems worn out

WASHINGTON (MarketWatch) — There are signs that the manufacturing sector, which has led the economic recovery, is about to take a breather.

“It seems like the [factory] sector is stuck in neutral,” said Guy Berger, an economist at RBS in New York.

Several factors appear to be at work, economists said. Smurfit-Stone Container Corporation’s facility in Coshocton, Ohio.

Weakness in the global economy is cutting back exports. And factory owners are uncertain about how the outcome of the November election and what it means for taxes and government largesse.

“Japan is going nowhere, Europe is in recession, and we’ve got our own problems,” such as stalemate over tax policy and government spending, said Josh Shapiro, chief U.S. economist with MFR Inc.

Shapiro is concerned that there are no obvious heirs-apparent waiting in the wings to pick up the slack and propel the economy forward.

Housing seems to finally in recovery mode but it seems doubtful it can pick up the load.

Without an obvious source of strength, Shapiro sees a 50% chance of a recession in the next 12 months.

“I think things are more dangerous than a lot of other economists think,” Shapiro said.

Another economist forecasting a high probability of a recession in the next year is Chad Moutray, chief economist for the National Association of Manufacturers, the trade group for the factory sector.

Not to diminish what you've said there, because I agree with you. I've taken many a drive along that route in the last 15 years.

But they call that part of the country the "Rust Belt" for a reason. There are many reasons why it has lost its importance as a manufacturing hub over the years, and a lot of these reasons have nothing to do with the economic forces that are driving our overall national decline.

I'll give three examples that have their own separate roots and consequences, but have also combined to completely transform the face of U.S. manufacturing from a geographic perspective:

1. The growth of containerized shipping and changes in the shipping industry. The economies of scale in container shipping have effectively made it cheaper to transport some things by ship from thousands of miles away than by truck from 250 miles away. The growing size of cargo ships also means that the Great Lakes and St. Lawrence Seaway aren't accessible by vessels that have become the industry standard in maritime shipping.

2. Consolidation in the U.S. railroad industry. Since the privatization of Conrail in the early 1980s, the railroad industry U.S. has undergone a major transformation in the last thirty years. There are now only a handful of Class I rail carriers in North America, which means freight can be transported by rail over long distances faster, and at lower costs, than ever before.

3. The elimination of steel as a primary manufacturing material. Things that used to be built primarily of steel are now being built out of plastic, fiberglass, and other composite materials. The supply chains and logistics patterns for these materials are very different than what a steel-based manufacturer would use. Most of this nation's "Rust Belt" manufacturing centers grew where they are now because they had good access (mostly by barge, small ship, and railroad) to the two major commodities used in steel coking: iron ore and coal.

When you combine these three items, you find that having a manufacturing plant located in a place that has good direct (nearby) or indirect (via a Class I railroad) access to a port for delivery of components and some raw materials is preferable to having it located in a place where raw materials are shipped by barge or truck. Also, proximity to refineries (for plastics manufactured out of an oil base) and reliable, inexpensive electrity is a big plus. This country has seen tremendous growth in manufacturing for autos and large airplanes in recent years, but these plants are now being built primarily in a swath across the South from Texas to North Carolina.

The "Rust Belt" will continue to rust away even if the U.S. maintains and improves upon its position as the world's largest manufacturer.

There’s still a lot of metal used in the US. I have to wonder if EPA regulations figure into the near total demise of the US steel industry. Steel is cheaper from other countries becasue they don’t have to add in the cost of EPA regulations.

And their energy is cheaper for the same reason. There’s no better way to kill an economy than by raising the cost of energy, 90% of the recent cost increase of electricity is directly attributable to government mandates - mandates that don’t exist in China for example.

The US economy is staggering because of the government shooting it in the feet way too many times.

I can't vouch for the accuracy of the information, but someone posted a great statistic on another thread this morning -- indicating that the U.S. steel industry produces almost as much steel today as it did in 1950.

The difference today is that we use a lot fewer workers to produce it, and the uses of the steel are much different. I suspect structural steel for bridges and buildings now makes up a much larger portion of our production, and manufacturing components for consumer products (cars, for example) a much smaller portion.

You overlooked my other point about manufacturing in the South. If the EPA is killing U.S. industry, then why are foreign companies like Toyota, Airbus, Hyundai and Kia opening plants right here in the U.S. even now?

“I can't vouch for the accuracy of the information, but someone posted a great statistic on another thread this morning — indicating that the U.S. steel industry produces almost as much steel today as it did in 1950. “

That may be true, but what percentage of the total is US steel? I work at a coal fired powerplant, I've seen what comes in here, the majority of metal (not just steel) we get is not US made, it's actually unusual if it ever is US metal. There was an interesting failure of steam piping failure at a new Chinese power plant. The had specified certified US steel but instead got chinese steel from a US firm. interesting discussion about it here; http://www.eng-tips.com/viewthread.cfm?qid=172967

“You overlooked my other point about manufacturing in the South. If the EPA is killing U.S. industry, then why are foreign companies like Toyota, Airbus, Hyundai and Kia opening plants right here in the U.S. even now?”

More and more those are assembly shops, with sub assemblies and parts manufactured outside the US. Boeing for instance used to manufacturer everything in house, not so, for quite a few years too. Even military equipment components have been manufactured in China - complete with malicious elements built in them. Read Aviation Week and Space Technology... now Gulfstream went bankrupt, and is will be owned by a Chinese company. pretty cheap way acquire some of the most cutting edge technology in aviation today.

I know some of the jobs exported to China are coming back but we're too close to the cliff now, in my opinion way past the point of no return with the nearly 16 trillion dollar debt.

Atlas is shrugging.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.