Worldwide oversupply hurts manufacturers
The industrial production index stood at 132.5 in February, indicating production rose 32.5% from its 1992 base year.; Here are three other indicators of where the economy is headed.
By Elizabeth Baatz -- Modern Materials Handling, 5/1/1999
U.S. manufacturers may be starting to recover from last year's Asian economic crisis, but excess worldwide capacity continues to threaten. Consider this fact: In February 1999, factories in the U.S. operated at only 79.5% of capacity. That was the lowest capacity utilization rate since June 1992. Meanwhile, industrial production's momentum faltered only a bit in early 1999 (chart, right).Facing a glut of everything from semiconductors to aluminum cans, the U.S. and the world economy will continue to face the pressure of realignment in the next two years. Downsizing and consolidations, two watchwords for the 1990s, will be familiar trends as the new millennium begins. The only other way out of the worldwide oversupply crisis would be to see strong, demand-driven growth. But in the manufacturing sector, prospects for surging growth look slim. From a 3.7% growth rate in 1998, U.S. factory output growth is expected to slow to 2.1% in 1999 and 1.6% in 2000.
While manufacturers cope with excess supplies, falling prices, thin margins, not all is doom and gloom. Productivity growth among U.S. manufacturers is soaring thanks to investments in high-tech equipment. Growth in manufacturing productivity rose 4.1% in the final quarter of 1998, reflecting a slight rise in factory output and a sharp drop in hours worked. As workers produce more products for each hour worked, businesses can afford to raise wages and benefits without raising prices.
A positive productivity trend is crucial for manufacturers these days. With the U.S jobless rate falling to 4.4% in February 1999 and some economists predicting the unemployment rate will fall below 4% for the first time since the 1960s, competition for workers is stiff. Last year, about 350,000 manufacturing jobs disappeared in the U.S. But more than three million new jobs were created in fields like computer programming and management consulting. Manufacturers recruiting young talent face an uphill battle.
Demographic trends will be working against U.S. manufacturers as well. The U.S. labor force is growing at less than 1% annually and by the year 2013, labor force growth will be zero. Labor cost escalation has been the one cost area to bedevil manufacturers in the 1990s. If productivity growth slows, then labor costs and labor shortages could be the next big challenge.
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