The government issued data on factory output for July and the results were encouraging. Output rose 0.4% in the month, the first increase in nearly a year. Much of the credit was given to the automotive industry as the "cash for clunkers" program combined with pent up consumer demand moved vehicles off the lots. The results raise some interesting discussion.
Question number one – is the automotive industry really on the mend? The data highlights how important the automotive industry really is to the overall manufacturing sector of our economy. Assuming an average rebate of $4,000 and the fact that the billion dollars initially allocated for the program was consumed in July, a good estimate would be that 250,000 vehicles moved thanks to the program. Given that sales in the US in the first half averaged around 800,000 per month, this was a nice bump. However, according to Edmunds, June represented the most expensive month on record for incentives with an average of nearly $3,000 per vehicle. We have frequently lamented how the industry has conditioned customers to "wait for the rebate" before buying and now we have simply moved the rebate to a government program. A more long term (and less expensive) policy may be a federal mandate to overhaul state and local dealer statutes that limit how the brand owners can sell and market to consumers. The distribution system in automotive is cast in historical cement and no real progress will be made until it is transformed.
Question number two – is this part of an overall recovery? In 1984, seventy percent of the vehicles purchased in the US were produced in the US. Want to guess what the number is today? Seventy percent. The difference is that the brand owners producing in this country are not limited to the Detroit three. Also, China surpassed the US as the number one market for automobiles in the first six months of this year, helping to prop up the results of companies doing business there, most notably GM and Volkswagen. There was also optimism in China in the high tech industry where government issued vouchers provided money toward the purchase of consumer electronics, a critical part of that country's industrial base. However, one must ask if all this government stimulus in North America, China, and Western Europe is a temporary win in an attempt to shovel against the tide of the business cycle. IDC Manufacturing Insights was accused of being too optimistic in the doldrums of this recession, but we think it is wise not to get too optimistic at this stage in the recovery.
Question number three - are the jobs coming back? There is a lot of talk in the business media about a "jobless recovery" – that we'll start to see rebounding economic data, but won't see the jobs that were eliminated coming back. However, one must keep in mind that jobs always lag in a recovery. Even so, there is some truth in the permanent job loss sentiment when it comes to manufacturing. We believe that manufacturing firms, including the automotive industry, will use growing cash reserves to invest first in factory automation that will provide a level of flexibility and responsiveness to better serve the market. IT investments in customer relationship, product, and supply chain management will be favored over any overhaul or upgrade of core systems. All of this investment will deliver greater productivity gains than adding people back into the organizations. While some jobs will return, many of the absorbed losses won't be resurrected.
I'm interested in what you think about these three questions. Are there other questions we've missed? Are you optimistic or pessimistic about the recent data? Where are you seeing new investment going in anticipation of recovery? Join our community and be part of the conversation.