Turnaround expected late this year
A survey conducted by the Paranet Group, a Brookfield-based network of manufacturers in southeast Wisconsin and Illinois, shows that manufacturers expect to experience a business recovery later this year.
The Paranet survey, conducted in January, revealed that 98% of companies responding believed that the economy will turn around for manufacturing in the second quarter of 2002. Manufacturers, however, are not counting their chickens before they hatch. Only 38% have budgeted for an increase in sales dollars. Moreover, 28% expect sales to stay flat, and 34% expect to see a decrease for 2002.
Some economic factors leading to the optimism are revealed in Census Bureau data that seems to indicate a recovery under way as early as December.
Census Bureau data for December revealed that at the end of last year the economy was already on the uptick in some manufacturing sectors. A report on wholesale trade released Feb. 8 showed a drop in merchant wholesalers’ sales of 0.4% from November to December of last year, compared to no change the previous month.
Position in food chain determines outlook
Smaller companies surveyed responded differently to the Paranet than their larger counterparts.
In previous research efforts by the Paranet Group, some smaller respondents reported a slowdown as early as 20 months ago, apparently sensing the trend earlier than did larger manufacturers. Those smaller companies tended to be suppliers to large OEMs — which were reducing their own inventories. The large OEMs, meanwhile, were not necessarily aware that other large manufacturers were also scaling back their orders from suppliers.
As smaller manufacturers were hit first by the downturn, it is the smaller firms that are projecting the most rapid increase in sales. More than 67% of survey participants predicting an increase in sales are companies with less than $75 million in revenue. Among companies that forecast a decrease in sales, however, 65% reported over $100 million in revenue.
"Typically the smaller manufacturer is the supplier to the large customer," Paranet Group President Linda Kiedrowski said. "Over the last two years, the larger manufacturers were scaling back their orders. This decrease was noticeable among smaller customers 18-20 months ago."
While larger manufacturers have in many cases not seen an increase in sales, inventories have gotten low enough that, according to Kiedrowski, they need to be built up to a safe level.
Census Bureau data showed the inventory-sales ratio for December at 1.29, a bit lower than the 1.30 figure during the same period in 2000. The ratio typically rises substantially in recessions as manufactured goods languish in warehouses. The low ratio means that when sales pick up, production will likely rise at the same time.
"The larger companies are not predicting a huge increase in sales – but they do expect to see an increase in the economy," Kiedrowski said. "They are not budgeting for a large increase themselves, so that cuts to how confident they really are about the economy."
Some industries were hit harder by the downturn than others, according to Kiedrowski.
"Entertainment lighting companies that supply amusement parks and prisons did very well," Kiedrowski said. "People that serve the medical industry continued to do well. Electronics and auto – they saw the biggest downturn. Some still thought they were doing well until the end of last year – and then they hit a brick wall."
March 1, 2002 Small Business Times, Milwaukee
