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Stormy weather continues across all industry sectors
As the recession deepens, the coming year will be the worst in decades for the U.S. economy, according to most economists.
Up to late summer, corporate hiring and capital spending cutbacks had been relatively mild. Companies conservatively added to their payrolls, plant and equipment, and inventories. Consumer spending plunged in mid-year, though, amidst escalating foreclosure activity, declining home values, loss of wealth and tightening lending practices.
Reacting to declining consumer spending, companies are slashing costs, reducing payrolls and cutting capital spending in order to preserve profits. The focus of the economy’s downturn is shifting from consumers to businesses.
The recession’s severity is eroding credit quality of households and business borrowers. The weakening economy and tighter credit conditions are now mutually reinforcing, with individuals and banks even more hesitant to invest and lend. The Federal Reserve is launching a three-pronged strategy to boost the economy by lowering a broad range of interest rates and foster easier credit conditions:
**In its traditional role as lender of last resort to banks, enhance liquidity by making loans of cash or Treasury securities in exchange for less-liquid collateral.
**Supply liquidity outside the banking system directly to borrowers and investors in key credit markets. One of the activities includes the upcoming program to buy up to $200 billion of asset-backed securities, debts backed by car loans, credit cards and student loans.
**The Fed has begun buying longer-term securities, most notably $600 billion in debt and mortgage backed paper held by federal agencies, such as the Treasury.
For the Feds, the key to this recovery is when will this new policy begin working?
Opinions vary among economists regarding their “best estimates” for the end of this recession. The cyclical peak of the latest expansion was December 2007. The 50-year average is 10.7 months, with the previous recessions in 1975 and 1982 lasting 16 months. This recession breaks the previous record.
Projections for the recession’s end vary from June 2009 (Wall Street Journal’s average of 54 economists) to fall 2009 (Moody’s Economy.com) to some doomsayers forecasting early- to mid-2010.
Aerospace and aircraft
This industry includes about 1,500 companies with combined annual revenue of $170 billion, but 20 companies account for 90 percent of industry revenue. The U.S. military budget and the overall economic climate drive demand, which affects airline traffic and demand for new commercial aircraft. Major products are aircraft, including commercial, military, private and business planes; aircraft components, including engines, fuselages, interiors, avionics; propellers and rotors, landing gear, electric and hydraulic control systems, and electronic systems.
Subcontractors specialize in producing assemblies for various systems, such as engines, fuselages, interiors, rotors, electronic and hydraulic control systems, avionics and guidance systems. The manufacturing process involves forming, forging, metal fabricating, painting and finishing activities. These activities require greater precision and higher grade materials such as aluminum, titanium, and special steel alloys, than in general manufacturing. The performance of a part is often more important than its price. Assemblies and systems are manufactured according to designs specified by the prime contractor developed in tandem by the prime and subcontractor.
New U.S. car and truck sales plummeted 13.1 million units, down from 16.5 million units in 2007. With financial markets in a free fall, consumers no longer had easy access to credit. Coupled with huge job losses, car sales plunged. Chrysler, Ford and GM suffered the greatest sales drop among the largest U.S. automakers. In response, car makers slashed auto production, leading to auto suppliers also reducing their output. Sales remain low.
Office furniture orders in the U.S. fell by 21 percent in November, the steepest drop since 2002, according to the Business and Institutional Furniture Association. Global economic woes forced West Michigan’s office furniture companies to cut production and jobs.
Office furniture companies continue to diversify into other markets, especially health care. Herman Miller purchased Brandrud Furniture, a Seattle manufacturer of patient room, treatment rooms and public spaces furniture. Steelcase purchased all the renewable energy credits produced by a new 10 megawatt wind farm in Panhandle, Texas. In honor of Peter Wege, Steelcase named the farm Wege Wind Energy Farm.
BIFMA is projecting a 13.1 percent decline in orders for U.S. furniture manufacturers this year.
West Michigan industry clusters
Harvard Business School’s Michael Porter defines clusters as “ geographic concentrations of interconnected companies, specialized suppliers, service providers and associated institutions in a particular field that are present in a nation or region.” Clusters arise because they increase the productivity with which companies can compete.
West Michigan leads the nation in many manufacturing sectors. In the Clusters of Innovation Project conducted by the Institute for Strategy and Competitiveness at Harvard Business School, geographically interconnected companies, specialized suppliers, service providers and associated institutions across the country were mapped, identifying regional clusters.
As the global economy has evolved, West Michigan area manufacturers have leveraged their core competencies by not only becoming “adopters” of technology but also “innovators.” The benefits of local companies embracing world-class practices are innovations, reduction in manufacturing costs, faster cycle times, working capital reductions, better quality, less waste, adoption of sustainable environmental practices, and efficiencies in overall supply chain management.
Innovation is the driver of the new economy. In order to accelerate commercialization of products, processes and services in West Michigan, The Right Place Inc. developed Innovation Works (www.rightplace.org/innovationworks), which provides an integrated system of resources designed to help people mine for inventions and new technologies, connect companies to ideas, and to coach individuals through commercialization.
Jenny Shangraw is cybrarian and information resource manager for The Right Place Inc.