01 January 2005
Automation-related industries to fare well
Businesses continue to look over shoulder at 9/11.
By Daryl Delano
The U.S. economy begins 2005 in pretty good shape—more than three years into an economic expansion and with GDP increasing at a solid rate—although it will face a number of formidable challenges in the year ahead.
But if government economic policy makers and business planners are able to skillfully navigate the dangerous shoals and rocky coastline of the global economic sea, then U.S. economic growth will continue—and perhaps be accelerating—as we move into 2006.
That the world economy depends mightily on the U.S.'s numbers is visible in the statistics that reflect huge imbalances in the world's largest economy—the U.S. gross domestic product is 20% that of the entire world.
Those numbers—an enormous budget deficit at home and a huge trade deficit with the rest of the world—reflect and encompass the facts that not only is the U.S. consuming the bulk of the world's products, the rest of the world is, in fact, financing that consumption by lending the U.S. the money to cover its cash shortfall.
Thus, the overall strength of the U.S. economy matters greatly to the automation, measurement, and control industry. And, more specifically, business prospects emanate from the trends in a number of economic indicators: business investment (both equipment and buildings), energy prices, consumer confidence, household income, job growth, inflation rates, etc. The weather, as well, plays a part in the fortunes of control-related businesses; heat waves highlight the shortcomings of the U.S. electricity generation and transmission grid, and hurricanes stimulate replacement demand (particularly in Florida, this past year) for a whole range of household appliances and business equipment.
In the short-run, the overall economy in general—and business investment trends, in particular—remain supportive of solid demand for the broad range of automation, measurement, and control products. As we move into 2005, though, there appears to be little question that consumer spending growth will be constrained by higher interest rates, higher energy prices, and the absence of fiscal stimulus in the form of further significant tax cuts. Housing starts and sales will, as well, undoubtedly ease—at least a little—from the all-time high levels recorded during 2003 and 2004. While not having much direct immediate impact upon the control industry, the ramifications of a slowdown in the nation's housing market will ripple throughout the economy and dampen overall economic growth. So it would be understandable—and even advisable—if businesses in the measurement/control sector approach 2005 somewhat cautiously and with more moderate expectations for growth.
General economic outlook
So we enter 2005—as we begin just about every New Year—with an unsettling degree of uncertainty about what the future holds. As always, our crystal ball is a little cloudy. But we think we can make out the basic outline of our immediate economic future—and it doesn't look radically different from the year that just ended. The economic fundamentals still appear to be reasonably sound. But just like at the beginning of 2004, we face a number of potentially debilitating risks and concerns.
The "most likely" scenario for the year ahead is the U.S. economy will grow by approximately 3.5%-4.0% over the course of 2005. The continued expansion will draw its strength from more near-double-digit growth in business investment, inventory replenishment, a more substantial improvement in export markets, and more moderate—but still solid—gains in consumer spending. The greatest weakness will come from the public sector, as federal/state/local government budget deficits severely limit growth in non-defense spending.
So, on balance, most indicators point toward 2005 being another "good"—but probably not "great"—year for the U.S. and global economies. Nevertheless, a host of uncertainties about the year ahead remain and may prove to have a pronounced effect on how 2005 unfolds. Will gargantuan budget deficits at the federal and state levels seriously undermine growth and investment throughout the private sector, in addition to the resultant dampening impact on the economy from reduced public investment? Will international tensions ease as the rebuilding of Iraq finally gets on track, or will tensions rise anew from some other threat to U.S. security (North Korea, Iran, or a new terrorist attack on U.S. soil)?
Problems on these or other unforeseen fronts could provide serious obstacles for the "most likely" economic scenario or possibly derail it. But we approach 2005 with the same sense of guarded optimism we had at the dawn of 2004, and with reasonable and realistic hopes that the current economic expansion (now more than three years old) can continue for another new year.
There's ample reason for concern that the massive budget deficits currently challenging federal, state, and municipal policy makers will ultimately cause the economic expansion to sputter and stall. But it's also possible—given the oft-demonstrated resiliency of the U.S. economic engine—that soaring business and consumer demand will overwhelm the dampening influences of budget problems and keep the economy strong for several more years to come. Time will tell what the long-term future holds, but for 2005, the economy is unlikely to be firing on all cylinders—although it should continue to move ahead in something akin to second gear.
Automation market trends
There are a small number of government and association reports that help us get the "pulse" of the market for automation, measurement, and control (AMC) instruments. But no one report is comprehensive enough to paint a complete picture of industry trends or the most likely future direction of the market.
The most recent Economic Census report on the AMC industry by the Commerce Department is available. We now know quite a bit more then we did previously about payroll, employment, capital spending, and other business-specific trends for U.S. manufacturers in the industry (for the details go to www.census.gov/prod/ec02/ec0231i334513.pdf). But, for an update since that benchmark report, we turn to the report on shipments, orders, and inventories that the Commerce Department compiles monthly.
The government's survey data showed a very positive trend for both industry shipments and new orders during 2004, but suggested the market was losingsome momentum as we approached the end of the year. Through the first 10 months of last year, the value of domestic shipments from measurement and control instrument manufacturers was running 13.2% ahead of the total for January through October of 2003. And the value of new orders received by the industry during January-October of 2004 was worth an estimated 14.0% more than during the first 10 months of 2003.
Good news ... but clouds gathered on the horizon as we entered the final quarter of last year. In two of the three months during the third quarter of last year, the over-the-year gain (i.e., the current month compared to the same month one year earlier) in new orders was less than one-third as strong as the 22.2% average recorded over the previous 10 months. And then during October—the first month of 2004's final quarter—new orders slipped to a level that was 2.3% below its year-earlier total. This was the first time since April 2003 that a given month's value of new orders received by U.S. measurement and control instruments manufacturers had fallen below its level 12 months earlier. This disappointing trend is likely to lead to a significant slowdown in the growth of domestic shipments from the industry during the months immediately ahead—but there is no compelling evidence that this will lead to an actual decline in the value of industry shipments during 2005.
So, on balance, things were clearly "looking up" for the industry during the year just ended. Among other positive indicators, we saw total industry employment reverse its three-year slide (amounting to more than 15% of the year 2000 job level) and post a modest increase of about 2.4% during 2004. And the value of industry exports—which plunged during 2001 and 2002, and eked out only a marginal gain in 2003—soared by almost 25% over the course of the past year. Imports also increased at a sharp rate during 2004—about 19%—but the overall balance of international trade for U.S. measurement and control instrument manufacturers improved last year for the first time since 2000.
The industry is likely to register some improvement in all of these indicators of business health during the year ahead as well—although gains aren't likely to match those realized during 2004.
Bottom line automation
The outlook for the automation, measurement, and control industry as a whole during 2005 depends largely, as always, upon the strength of the overall economy—which, in turn, depends upon levels of business and consumer confidence, job growth, housing starts, retail sales, and a host of other indicators of broad market trends. And—lest we forget—it depends upon the collective economic wisdom of our political leaders and economic policy makers, as well.
The newly-reelected President George W. Bush very early on vowed to spend the political capital he had presumptively earned as a result of his victory in both the Electoral College and in the raw popular vote.
But the President should be reminded—as he likely knows from his Harvard Business School experience—that capital (however accrued) isn't really something that should be spent. That would be squandering a hard-earned advantage—akin to the short-sighted act of eating one's seed corn. Rather, one should invest capital in those things most likely to lead to a brighter future for a broad cross-section of Americans. That is, this political capital should serve to lay the foundation for expanded health care initiatives, higher rates of new job creation, and toward ensuring the long-term viability of the nation's Social Security and Medicare/Medicaid systems. And all of this takes real money, or actual financial market capital—hard to come by at a time of record-high budget deficits and a record-low dollar-exchange rate.
Fortunately, in the short-run—i.e., during 2005—the budget deficit crisis isn't likely (by itself) to bring economic growth to a standstill. It represents an extra burden, an albatross around the neck of policy makers who need money to move forward their program priorities and to launch new initiatives. In the medium- and longer-term future, however, economic growth—and implicitly, the sustainability of housing starts and the demand for household appliances—truly depends upon successfully addressing the budget deficit problem.
Not too far behind on our worry list is what has proved to be an extremely difficult, prolonged, and expensive process of reestablishing civil order and rebuilding the infrastructure of Iraq. Should the situation fail to improve in the year ahead—and the elections scheduled for January 30th will tell us a lot about how likely it is that some semblance of peace can be restored, democracy established, and the "fog of war" lifted during 2005—then the debilitating effect on the national psyche could be serious enough to stall—if not derail—the economic expansion. And, of course, the additional money and manpower that would be required would further sap the domestic economy of resources needed to sustain business investment and to fund the President's policy priorities.
Other major concerns and downside risks to the consensus view about how economic conditions will unfold during 2005—with the order being no reflection of their likelihood—include the following:
- Terrorism—a "wild card" of immense proportions, given the nation's continued vulnerability to a host of threats (nuclear, biological, chemical, bombings, etc.) at home and abroad;
- Oil/Energy Prices—another "wild card", although a threat manageable to some degree by progressive and pre-emptive public policy initiatives;
- Inflation spike—because of disruption in oil markets, commodity shortages, a catastrophic weather event that cripples critical agricultural markets;
- Interest rate spike—a phenomenon that could come about independently, or in reaction to a spike in inflation;
- International trade disputes or severe competitive trade tensions—e.g., agricultural disputes with Western Europe, deepening concerns regarding the volume of imports from China and other Asia-Pacific nations;
- International political hot spots—North Korea, Iran ... a list that could grow longer as we move through the year;
So what does all of this mean for the business fortunes of individual manufacturers and distributors within the automation, measurement, and control market? It's impossible to say precisely, of course, but despite all of the legitimate concerns that keep economic forecasters and business planners up at night, it's important to note that almost all of the control-market-specific stars remain in alignment for continued growth during the year ahead. Not that there won't be some challenges for the industry. But there continue to be more positives than negatives for measurement and control-related businesses as we look through 2005, and the overall forecast is for partly cloudy (or, partly sunny, depending upon your perspective) skies to once again be the prevailing environmental condition.
Behind the byline
Daryl Delano (email@example.com) is an economic analyst and forecaster. He is president of Delano Data Insights and writes and edits the quarterly Measuring Markets newsletter for the Measurement Control and Automation Association (www.measure.org). His past includes editorial and economics related positions at McGraw-Hill, Reed Business, Cahners, and the U.S. Bureau of Labor Statistics.
Process control industry: Employment up, earnings down
The Labor Department estimates that U.S. manufacturers of process control instruments employed 60,800 individuals during September 2004—an increase of 4.3% from the total for September 2003. Industry employment is currently at its highest level in the past 26 months. Even with these recent gains (employment increased in every month from May through September of 2004), process control manufacturing employment remains about 15% lower than the all-time-high of 71,500 jobs recorded during January 2000.
The industry has added 2,500 payroll jobs during the past 12 months, though, and an estimated 2,000 of the new employees are production workers. This is particularly encouraging given the fact that as recently as June 2004, production-worker employment was continuing to run behind its level of a year earlier. But through September 2004, over-the-year growth in production-worker jobs had reached 6.4%—much better than the 1.9% increase recorded in the industry's non-production jobs total.
However, although jobs of production workers expanded at a healthy rate during the third-quarter of last year, the earnings of these workers has taken a surprisingly negative turn. The September 2004 average hourly earnings of production workers with U.S. process control instrument manufacturers—an estimated $16.18 per hour—was 4.1% lower than during the same month a year earlier. And the average weekly earnings of these workers dropped by an even-steeper 9.3% between September 2003 and September 2004 since the average number of hours actually worked each week fell from 39.0 to 36.9 between 2003 and 2004.
Total employment in the industry during September 2004 was within 400 jobs of the total recorded during September 1994—a remarkable show of stability within the context of a generally-declining manufacturing sector. The average hourly wage earned by production workers in the industry had increased by 29.4% over the same period of time—somewhat less than the 34.8% gain enjoyed by production workers throughout the rest of the nation's manufacturing sector, but in line with the cost-of-living increases experienced by American workers over the past 10 years.
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