Outlook for Industrial Companies: Better Luck in 2010
Experts predict a rough year ahead for industrial companies, but several see signs that the turnaround may start in 2010.
John Bell (Apr/May 09)
Industrial companies in 2009 are facing their bleakest market since the early 1980s, one more result of the ongoing recession. Moreover, most industry analysts see no glimmer of improvement on the horizon until 2010 at the earliest.
The Institute for Supply Management says manufacturing activity in February failed to gain for the 13th consecutive month. In addition, the overall economy contracted for the fifth consecutive month. Manufacturing was marked by a rapid decline and ISM survey participants appeared to be generally pessimistic about recovery in 2009, although some expressed hope that the government would help their industry. ISM says none of its 18 manufacturing industries reported growth or increased employment.
This gloomy scene persists despite a variety of economic stimuli being offered by the federal government, including the American Recovery and Reinvestment Act, better known as the $787 billion economic stimulus package. Robert Bach, senior vice president and chief economist at Grubb & Ellis, says, "Hopefully it will affect industrial companies by improving business conditions and consumer confidence with added money flowing into the economy."
Others believe that the stimulus package is somewhat of an unknown factor at present because it hasn't yet had time to work its way through the economy, and that tax benefits to industrial companies will come sometime in 2010, when the program gets into infrastructure financing.
For now, according to Peter Quinn, senior managing director of the industrial operations and global supply chain group at Cushman & Wakefield, the program will have minimal impact on industrial growth because there's really nothing directed specifically at industrial. He says the two main concerns now for industrial companies are where capital is coming from and how to recast their debt, and how to make their supply chains more effective in a down economy. "It's hard for them to plan for the future because they don't know what the rules of the game are," he says.
In reference to infrastructure spending, Ross Moore, senior vice president and director of marketing and economic research for Colliers International, says, "It will be good for industrial by slowing down the bleeding, but it still won't put us in positive territory." Eugene Reilly, president of the Americas division of AMB Property Corporation, believes job growth is ultimately the biggest demand driver for industrial growth. "If two million new industrial jobs are created, there'll be two million square feet of net industrial absorption," he says. He is critical of the economic stimulus package, noting that it's not focused on economic recovery. He concedes, though, that infrastructure spending down the line will be a help to industrial companies.
Hugh Kelly, principal at Hugh Kelly/Real Estate Economics and a clinical associate professor of real estate at New York University, says the largest part of the stimulus package for 2009 and 2010 is tax breaks designed to stimulate consumer spending. "It'll affect retail spending, one of the primary industrial drivers," he says.
Evaluating Supply Chains
Supply chains are a primary concern of industrial firms as they seek to bolster their competitive positions in a down economy. Do these supply chains need overhauls to make them more effective?
Quinn says supply chains are driven by consumer demand and when that changes, companies have to scramble to make them more efficient. "Supply chains have become more elongated in recent years which could prove to be a costly mistake," he says. Moore takes a different stance, saying that right now, supply chains are in a state of flux until people have some sense of where the global economy is going.
In its Industrial Market Trends Fourth Quarter 2008 report, Grubb & Ellis says that when gas prices were high last summer, industry rumors indicated that companies planned to reconfigure their supply chains using more but smaller distribution centers in order to reduce energy costs. These discussions shifted to the back burner as the economy worsened and oil prices plunged from $147 per barrel last summer to around $40 per barrel earlier in 2008. When the economy returns to health, Grubb & Ellis says energy conservation is likely to return to the front burner, which could have an impact on the manufacturing map here as well as overseas.