Manufacturing Tuesday: Week of 12.08.08

(10 am. – promoted by ek hornbeck)

Damn, talk about a pretty intense week!  The auto sector looks like it just…just might get saved.  Still, it looks as if the issue of over capacity is being looked on, which means job cuts.  Sadly, that seems to be the theme of this week’s manufacturing update. Well actually there is something on health care…think of it as “nyceve lite”. They say it gets darkest before the light, well this must be a long tunnel then.  ISM is saying that ’09 will suck as bad as 2008.  Well before I dispense with the unfortunates, it’s time for the Numbers!

The Numbers

This week we cover three indicators (well the first two are released together, so 2 and a half you could say), Productivity & Unit Labor Costs, and Factory Orders.  The first is a basic measure of efficiency of labor used.  Labor costs are the rate of growth (or decline) of what it costs to make each unit of something.  Factory Orders are new orders of durable and non-durable goods.

Productivity and Unit Labor costs, an indicator that reflects the quarter, showed more signs that we are in a recession.  As one can see in the chart above, Productivity is still on the rise.  Actually…the damn chart shows only a year over year results.  But if you look at that last line, from Q1 to Q3,  you’ll see it rising.  The latest figures for Q3 came in at 1.3%, revised higher from the previous 1.1% growth rate and above the 0.9% consensus.

Unit Labor Costs show the cutbacks in the workforce.  The latest shows a decline from the previous quarter.  For Q3, ULC came in at 2.8%, below the consensus of 3.6%, which was what labor costs were the previous quarter.  As the economy sinks further, I would speculate, that this number will come down further. Looking at that chart again, during the First W Recession back in ’02, Unit Labor Costs actually went into the negative!  If this is as bad as everyone saying it is, expect it to reach or surpass that negative 2.0% we saw back in Q1 of 2002.

Factory Orders, which the indicator lags for a month, representing October, came in lower.  No surprise here, as demand is dried up as fast as credit did that month.  Don’t let the Kudlowites fool you, economies are demand-driven, not this supply-side nonsense they like to peddle. Lowering the tax rates to zero would not increase demand for products if customers thought they wouldn’t be able to afford it.  Commonsense, right?  You need demand for something for it to sell, not for supply-siders!  The latest figures show Factory Orders further sinking into negative territory, with October’s numbers coming in at – 5.3%.  So how big is this?  Consensus was for – 2.8%, so they knew it would be bad, but not almost twice as bad.  Lastly, for September, Factory Orders were at – 2.5%!  

File this under “no surprise”

For those not in the know, this past Summer, Anheuser-Busch was purchased by InBev.  It was noted that the “merger” (as they called it..yeah right!) would create excess capacity for beverage making, amongst other redundancies.  Now IndustryWeek is reporting that the new AB Inbev will start shedding jobs to meet that overcapacity situation.  

Dec. 9, 2008  — Newly merged brewing giant Anheuser-Busch InBev said on Dec. 8 it would cut 1,400 jobs in the U.S. as part of its recently closed takeover of Anheuser-Busch. The Belgium-based company also said it would not fill 250 U.S. positions and that 415 contractor jobs would be eliminated.

“To keep the business strong and competitive, this is a necessary but difficult move for the company,” Anheuser-Busch President David Peacock said.

The cuts, which will affect about 6% of the company’s U.S. workforce, would come at both Anheuser-Busch’s St. Louis corporate headquarters, at breweries and its distribution network.

– excerpt from “AB Inbev to Cut 1,400 U.S. Jobs“, IndustryWeek, 2008.

Of course, they are saying it’s because of the economy, but even insiders were saying US job cuts were going to happen back when the damn acquisition..er…merger was announced.  InBev has facilities all over the world, and despite claims that American beer will continued to be made in the US, I suspect they will start to utilize some wage arbing.

We’ve all seen this movie before.  Right now it’s just 1400, but this is probably just the start.

Toyota to some US states: Sorry, we’re hurting like Detroit, gotta let you go.

If you thought it was just the Detroit 3 (formally the Big 3) dying on the economic vine, think again.  In the US, car sales have gone from 17 million+ per year to about 10 million. It turns out it wasn’t just domestic automakers who were geared for higher numbers, but the “transplants” (as they are being dubbed) also made similar mistakes.  Now the fallout is happening on latter’s side with massive job cuts.

Many of the cuts will come in the form of “nonproduction days.” Some plants will be going through this for 10 days next month, this comes with such initiatives being inacted this month. Virtually all of Toyota’s plants are non-union, so it remains to be seen what these workers can do to make ends meet.  In reality, these are nothing more than layoffs.

Toyota will idle assembly plants for additional days in December and January in Georgetown, Kentucky; Princeton, Indiana; and Fremont, California, spokesman Mike Goss said.

Toyota, like its smaller rivals, has been caught out by the collapse in demand for cars and trucks in the United States, a downturn that accelerated in October and November amid tightening credit and deepening consumer uncertainty.

– excerpt from “Toyota cuts North American Production“, Reuters, 2008.

Manufacturers have been scrambling to adjust production because of the sales decline. Honda Motor Co. added to production cuts in North America last month. In November, industrywide sales fell to their lowest annual rate since October 1982, according to Autodata Corp. Toyota’s November sales fell 34% from a year earlier, with sales of cars dropping 31% and trucks and sport-utility vehicles declining 37%. Sales of its Camry sedan were down 29% for the month.

At Toyota’s plant in Georgetown, Ky., where the Camry, Avalon, Solara and Venza sedans are built, the company added seven nonproduction days over the next two months, for a total of nine days. In Indiana, it will add six nonproduction days to the Sienna line and one day to the Sequoia line, which is already running at a reduced rate.

– excerpt from “Toyota Plans Further Production Cuts“, WSJ.com, 2008.

Caterpillar getting squashed by economic foot

Along with the automakers, Cat is also looking to tighten it’s belt as it’s customers are doing the same.  The company had noted that customers were facing financial problems related to the credit crisis.  In October, CAT lowered it’s earnings estimates and posted a decline in quarterly earnings.

Caterpillar did not say how deep the cuts would be, but the reductions will not affect the company’s regular employees. Contract workers are hired through outside agencies.

Caterpillar, a component of the Dow Jones Industrial Average, is the world’s largest maker of heavy construction and mining equipment. It employs around 112,000 people, excluding contract workers.

The company is also reducing costs in other ways, including reduced travel and external meetings and events.

– excerpt from “Caterpillar says cutting contract costs“, Reuters, 2008.

Illinois already facing an economic downturn, the Peoria-based company’s misfortune and cost cutting would hamper things further.  For Cat, seeing how other manufacturers are faring, particularly the automakers, the company probably is trying to be preemptive to stay in the black.  For it’s part, the company is still earning money, despite the recent announcement. Still, looking forward, perhaps their moves highlight more how they feel where the economy is going compared to what the talking heads are saying.  

Steel mills operating at less than half capacity.

Last week we told you how ArcelorMittal was cutting jobs.  Now we’re getting another picture on the state of the steel industry.  According to Platts’s story, the American Iron & Steel Institute is stating that steel capacity in the United States is operating at less than half of what it can make.  Lower demand for metal is global, with even the Chinese cutting back on massive scale.

Steel mills operated at an estimated 49.5% of capacity versus an

estimated 50.2% in the previous week and 88.1% a year ago, as mills

continued to cut production to meet dwindling demand. The weekly capacity

utilization rate is “the lowest since February 1983,” analyst Michelle

Applebaum commented in a recent Steel Market Intelligence report.

    Aggregate production for 2008 is now falling behind last year’s pace,

lagging by more than 3.5 million st or nearly 4%.

    US steel mills produced 97.13 million st of raw steel for the 49 weeks through December 6, compared with 101 million st in the same period a year ago.

– excerpt from “US steel mills operating at less than capacity“, Platts, 2008.

Industrial production in this country has been on the decline for a while.  As show in the chart below, every industry is hurting.  Industrial Production made a new low, and is expected to head lower.

Now this echoes another similar story about aluminum diecasting in this country.  How much steel is used in American cars, I’m not sure.  But what is used, the demand from the automakers is shrinking if what’s happening to the diecasting industry is an indicator.

The US aluminum diecasting industry is in “nothing short of a crisis”

mode at the moment amid a struggling automotive market, said credit insurer Euler Hermes.

Tony Clary, vice-president, industry manager, told Platts that any sector of the industry with exposure to the automotive market should be “extremely worried at the moment” as automotive sales have hit their worst level since the 1950s. Overall automotive industry sales dropped 35% in November. Ford actually beat the industry, reporting a sales drop of 30%, but General Motors reported a 41% drop and Chrysler’s fell 42%. Nissan’s sales dropped 44%, Toyota fell 35%, and Honda fell a similar amount.

“We cannot continue to operate at these levels or the entire industry is going to go down,” Mike DiGiovanni, GM’s director of market analysis, said in a statement, acknowledging that the steep drop in sales in October and November was devastating to the company’s finances.

– excerpt from “US aluminum diecasting industry is in “crisis” mode: Euler Hermes“, Platts, 2008.

The question now begs what is the calendar showing in terms of time left for the biggest customers for these metal firms?  Should GM declare bankruptcy because it could not get the funding it needed in time, this will have a big impact on steel and aluminum companies; more pressure on the jobs market.  Of course, these metals companies will also face problems come cutbacks in demands from the likes of Caterpillar, who we noted above is cutting back on all fronts.  

Once more, this all has to do with demand, not supply-side economics.  Just yesterday, Larry Kudlow was saying that what was needed for these firms were tax cuts.  I’d be willing to wager that what companies like Cat would like instead, would be an increase in demand for tractors, or for GM to see folks buy cars.  You need to get money into peoples pockets, and right now, given the desert that once was the credit market, the government is going to have to step in.  Public works projects are what is needed.  Steel and aluminum that is not being purchased by the likes of GM or Caterpillar, could be purchased instead for infrastructure.  

Tax cuts? For whom?  Unless you’ve got a good safe job, most folks are on the edge of financial abyss.  We talk about excess capacity in motorworks and metals facilities, reassign the end product for government projects.  Can we make those plant that made trucks now produce new vehicles for public mass transit?  Steel and such for bridges. Well, you get the idea.

The Cobra Gap

Now here’s another reason to get universal health care.  Honestly, reading this, the story of these folks tugged at my heart. I’ve been down a similar road and know what it is to be without health insurance.  What we have here is one mother of a hole in coverage.  

Known as the Consolidated Omnibus Budget Reconciliation Act of 1985, it gave employees continued access to their employer health plan after they leave that job.  The COBRA is good for about 18 months (someone let me know if I’m wrong here).  The hope is that you will find new employment and that new job will give you a new health insurance plan.  But here comes the problem.  What happens if your employer goes bankrupt?

That is what is being highlighted in a special Wall Street Journal piece.  In it, they cover employees who worked at this baking company, who suddenly found themselves with both no job and no insurance.  Actually, the article also highlights a bit about those who worked for a trucking firm as well.

Similarly, Nadine Deck says she was out on disability with a chronic breathing disorder. When Archway shut down, she stopped receiving disability checks. So she turned to unemployment and received checks over four weeks. But the government stopped paying, saying she couldn’t collect while on disability. The government now wants its $900 back, she says.

“The government is bailing out banks, but who’s going to bail out little companies like Archway and help us?” asks Ms. Deck, 55, who worked for 23 years at the cookie company as a packer and machine operator.

Ms. Deck has missed three mortgage payments on a two-story bungalow where she lives with two children. A social agency is helping with the utility bills and the state is paying for her epilepsy medicine.

Some employees say they have had to cut back on costly prescription drugs. Ms. Esbenshade, the cookie packer who had her gallbladder removed, says she didn’t buy her six-year-old daughter’s asthma medicine after Archway closed, because she lacked $100 to pay for it. They have since received a state-issued medical card to help cover the cost of the medicine.

Darlene Miller, a 57-year-old packer, no longer has insurance to cover $300 a month for medications for high blood pressure, thyroid problems and a heart condition. So she is cutting each pill in half.

– excerpt from “For Workers, Medical Bills Add to Pain as Firms Fail “, WSJ.com, 2008.

Keep in mind, what I just posted above is just a small piece of the article. I ought to warn you, if you suffer from high blood pressure or anger easily, do not read that story.  Folks, I don’t have to mention how bad our economy…no…our society has gotten in terms of taking care of ourselves.  Some are making out well, but the rest of us?  It’s as if we’re all playing financial Russian Roulette, one trigger away from financial death.  The move towards universal coverage needs to be sped up.  One year is what I’m hearing how long it could take.  For these folks and I dare say many many more, that is too long of a time.  WE NEED UNIVERSAL HEALTHCARE FOR OUR FOLKS NOW!

Cross posted on The Economic Populist and Venomopolis.