By Austen Hufford and Patrick McGroarty
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (June 10, 2019).
Factories have shifted into low gear after a year of record
output and big job gains, putting additional pressure on a U.S.
economy that already is expected to grow more slowly this year.
American consumers and companies are buying fewer cars, trucks
and tractors and building fewer houses. That, in turn, is weighing
on demand for wheels and steel parts, washing machines and
paint.
Deere & Co., General Motors Co., 3M Co. and other companies
that make those goods are cutting output, slowing hiring or cutting
jobs as a result. That means manufacturers, which contributed more
than any other industry to the U.S. economy's 2.9% expansion last
year, could become a drag on growth. Many economists expect U.S.
gross-domestic-product growth to fall to 2.5% or lower this
year.
Navistar International Corp. executives said its biggest
customers are replacing only their oldest vehicles this year,
instead of expanding their fleets, after one of the busiest years
on record for the trucking industry in 2018.
"The U.S. economy is showing signs of slowing but remains very
healthy," Troy Clarke, chief executive at the truck maker, told
analysts on Tuesday.
Manufacturers in the U.S. in 2018 had their best year since the
recession. Industrial production was higher than ever, and
manufacturers rapidly boosted employment to nearly 13 million
across the sector, helping pull the national unemployment rate to
the lowest level in decades.
Now the diminished vigor of U.S. manufacturers is posing a new
threat to a U.S. expansion that this month is ending its 10th year.
Manufacturers added just 3,000 jobs in May, the Labor Department
said Friday, continuing a stretch of lackluster hiring this year.
Factory output declined in the first four months of 2019. IHS
Markit's index of sentiment among purchasing managers fell in May
to the lowest level since September 2009.
"Growth has slowed very sharply," said Chris Williamson, IHS
Markit's chief business economist. "Companies are more reticent to
spend, both on hiring staff and on business equipment."
Other sectors of the economy, such as health care and
information technology, have continued to grow at vigorous rates
this year. Manufacturing accounts for just 11% of GDP, according to
the Bureau of Economic Analysis. And many manufacturers say
business remains strong even if the robust demand they saw last
year has cooled somewhat.
"When you go from 85 miles an hour to 75, you're still
speeding," said Barry Zekelman, CEO of Zekelman Industries Inc. The
Chicago-based manufacturer is on track to ship about $2.8 billion
worth of steel pipes and tubes this year, he said, flat in dollar
terms from last year and up about 6% by volume.
But manufacturers' sales are pointing to weak spots in both the
health of the global economy and domestic demand. Global growth is
easing to the slowest pace since 2016, the World Bank said last
week. Discretionary spending on goods including motorcycles and
furniture has fallen.
"Do I need to buy that extra piece of machinery or equipment or
expand a warehouse? Maybe not. Maybe I'll wait and see a little
bit," Bruce Van Saun, CEO of Citizens Financial Group Inc., said at
a conference on May 30.
New challenges are looming at home and abroad. The Trump
administration's trade fights with China and other major trading
partners are exacerbating the impact of that slowdown for some
manufacturers. The dollar's strength relative to many other
currencies also is making some U.S. products less competitive.
"We're in a fight for survival," said Brian O'Shaughnessy,
chairman of Revere Copper Products Inc. Revere has cut the
workforce at its copper mill in Rome, N.Y., to 320 from 600 in 1990
in part because the dollar's strength has pushed production costs
in the U.S. far above those of rivals abroad, he said.
Domestic demand is also softening.
Building construction -- a generator of demand for appliances,
light fixtures and paint -- fell 1.2% in April from a year earlier.
The number of permits issued to build new homes dropped 5% that
month from a year earlier.
That has meant less business for Whirlpool Corp., which sold 7%
fewer washing machines in North America in the first quarter than a
year earlier. Paint maker PPG Industries Inc. said demand at its
stores in the U.S. and Canada was weak for much of the quarter,
too. Masco Corp. said lower demand for paints, windows and plumbing
products cut sales revenue in North America by 6% in the
quarter.
Michael Burdis, CEO of James L. Taylor Manufacturing Co. in New
York's Hudson Valley, said demand for his company's woodworking
machines has leveled off along with sales of the cabinets and
flooring that his customers make. "Their orders have sort of
plateaued like ours have," he said. He said orders could increase
next year if the housing-construction market becomes stronger.
Vehicle makers that buy engines and coatings from other U.S.
manufacturers are also ratcheting back demand.
Tariffs aren't always to blame. Boeing Co. slowed production of
its best-selling 737 in April after the MAX version of the aircraft
was grounded following two fatal crashes. New orders for
nonmilitary aircraft and their parts fell more than 50% in April
from a year earlier.
And farmers, facing challenges including record wet weather in
addition to trade tensions that have pushed down crop prices, are
buying fewer tractors. Deere in May cut machinery production by 20%
for the remainder of its fiscal year.
"Farmers have been hesitant, a little reluctant to buy
equipment," Andrew Beck, financial chief at farm-equipment maker
AGCO Corp., told investors on Wednesday.
That, in turn, is hurting sales of tires, steel tubing and other
components that Deere and AGCO buy.
Bill Hickey, a third-generation executive at Lapham-Hickey Steel
Corp., a Chicago-based processor and distributor of steel sheet and
tubing, said, "We've started to see a slackening of orders."
Navistar said backlog from last year's record-high orders means
that trucks purchased today won't be delivered until 2020,
encouraging some buyers to postpone purchases until they are more
confident the U.S. economy will continue to grow.
"It does provide the opportunity for some customers to say,
'Hey, let's take a wait and see,'" Mr. Clarke said.
Write to Austen Hufford at austen.hufford@wsj.com and Patrick
McGroarty at patrick.mcgroarty@wsj.com
(END) Dow Jones Newswires
June 10, 2019 02:47 ET (06:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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