THE RECOVERY: HALF EMPTY OR HALF FULL’

Are we in a recovery or not? When our ?leading economists? blather on about it, everything becomes as clear as mud:

?The recovery is shaping up to be stronger than expected and there is little risk the economy will slip back into a recession,? reported a survey of 46 leading economists in the April 26 issue of USA Today. ?However,? the report added, ?most still say the rebound will fall short of the sharp, V-shaped upturns that often follow severe slumps, and the 9.7 percent jobless rate will fall slowly.” To further clarify their uncertainty, the paper added that ?stock strategists say it is perfectly normal for gains to get harder to come by after the market’s initial bounce off of major lows.”

Another 67 economists (did this include the same leading economists mentioned above?) were recently surveyed by Bloomberg News and they announced that ?consumer spending probably accelerated in the first quarter . . .? (emphasis mine) The New York Times reported that “after the worst downturn since the Great Depression, signs of recovery are mounting ? albeit tinged with ambiguity.”

Which camp are you in? Well, as in so many things, it all depends.

On one side, Daniel J. Meckstroth, the chief economist of the Manufacturers Alliance/MAPI (Arlington, VA), says manufacturing grew at an annual rate of 7 percent between February and April, a recovery that appears to be building faster than the broader economy. ?A recovery is clearly well under way, and the industrial rebound is stronger than that in the general economy,? he noted. ?Since the beginning of the year, manufacturing has added about 100,000 jobs. Production grows faster than sales when firms move to less liquidation and then to rebuild inventories.?

Nineteen of the 27 industries tracked by Meckstroth showed substantial increases in new orders or production from a year ago, including iron and steel production, which grew by 101 percent in the three months ending in April. In fact, the MAPI report anticipates that manufacturing will improve throughout the remainder of the year, led by 54 percent growth iron and steel production, and 42 percent growth in industrial machinery.

Then there?s the other side, where the small businesses that account for about half of our gross domestic product ?are still not ready to expand staffs and boost capital spending? according to William Dunkelberg, the chief economist of The National Federation of Independent Business (Washington, DC), in an interview with Reuters. He reports that although ?seven of the 10 business index components rose, job creation and capital expenditure plans barely gained and remained at recession levels.?

Dunkelberg continued that ?the recovery in optimism we currently see is very weak compared to recoveries after 1982 or 1975. The May Optimism index is a shade better than April, but remains well below the other recovery trajectories.” His NFIB survey showed that, through the end of May, more small businesses experienced weakened sales than those that had improved sales. ?While more small business owners expect conditions to improve in the next six months,? he added, ?their biggest concern is weak sales. Until that turns around, they will not be inclined to hire new staff or invest in new equipment.?

Dunkelberg noted that, once again, widespread price cutting was reported ? the 18th consecutive month in which more business owners reported cutting average selling prices than raising them. He concluded that ?uncertainty was feeding reluctance by small business owners to hire and take on new risk? and that the survey results ?reflect dissatisfaction with current economic policies and concerns about the impact of the European debt crisis on the U.S. economy.?

To stir the proverbial stick in the mud a bit more, I?d like to share another report on manufacturing. But this time, instead of listening to our leading economists, let?s hear what the chief financial officers of the manufacturers themselves have to say about what?s going on.

John Vita, the national director of communications at Grant Thornton LLP (Chicago, IL) completed a biannual survey in April of U.S. CFOs and senior comptrollers at 92 manufacturers. Of these, 49 are public companies; the others are private firms. These manufacturers are not small, independent shops: 53 percent report annual revenue of $1 billion or more; only 5 percent report less than $100 million. I believe the following excerpt of their insights sheds a bit more light on what we can expect in manufacturing in the near-term. Think these through with me:

Over the next six months, do you expect the U.S. economy to:
Improve ? 47 percent
Remain the same ? 47 percent
Worsen ? 7 percent

Over the next six months, do you expect your company?s financial prospects to:
Improve ? 60 percent
Remain the same ? 36 percent

Worsen ? 4 percent

Over the next six months, do you expect prices or fees charged by your company to:
Remain the same ? 59 percent
Increase ? 34 percent

Decrease ? 7 percent

Over the next six months, do you expect your headcount to:
Remain the same ? 50 percent
Increase ? 25 percent

Decrease ? 25 percent

When do you believe the U.S. economy will come out of recession?
2011 ? 50 percent
Second half of 2010 ? 26 percent
Later than 2011 ? 18 percent
First half of 2010 ? 5 percent

The best way to create jobs is:
Cut corporate tax rate ? 40 percent
Cut personal income tax rates ? 31 percent
Tax credit for new hires ? 17 percent
Government stimulus programs ? 9 percent
R&D credits ? 4 percent

Is your company reducing average costs per employee in any of these employee benefit and compensation areas?
Salary raises ? 27 percent decrease; 55 percent same; 17 percent increase
Bonuses ? 38 percent decrease; 50 percent same; 12 percent increase
Stock options/equity based compensation ? 33 percent decrease; 66 percent same; 1 percent increase
401(k) match ? 23 percent decrease; 74 percent same; 3 percent increase
Health care benefits ? 26 percent decrease; 68 percent same; 6 percent increase
Life insurance benefits ? 8 percent decrease; 90 percent same; 2 percent increase
Disability benefits ? 8 percent decrease; 91 percent same; 1 percent increase
Average percent ? 23 percent decrease; 71 percent same; 6 percent increase

Which types of pricing pressure are you most concerned about? (You may select more than one)
Raw materials ? 71 percent
Employee benefits (e.g., health care, pensions) ? 56 percent
Energy ? 32 percent
Insurance ? 10 percent
Other ? 5 percent

Are you having difficulties accessing credit in general?
No ? 81 percent
Yes ? 19 percent

Compared to this time last year are you more or less worried about your organization?
Less worried ? 56 percent
About the same ? 38 percent
More worried ? 7 percent

In the coming year, do you believe your aggregate state effective tax rate will:
Increase ? 62 percent
Remain the same ? 29 percent
Don?t know/not applicable ? 8 percent
Decrease ? 1 percent

With regard to international taxation, you are most concerned about:
Transfer pricing ? 36 percent
Overall global compliance burden ? 25 percent
Repatriation of offshore earnings ? 24 percent
Risk management in developing countries ? 13 percent
Mergers and acquisitions ? 3 percent

Is your company currently taking any actions in anticipation that federal tax rates will change?
Yes ? 71 percent
No ? 29 percent

What types of actions? (Check all that apply)
Reorganization of business structure ? 51 percent
Acquisition of capital assets ? 23 percent
Acceleration of dividend payments ? 21 percent
Other ? 21 percent
Disposition of capital assets ? 18 percent
Modification of terms on installment sale(s) ? 10 percent

Does your company plan on taking any action in anticipation of the current administration?s international tax proposals?
No ? 68 percent
Yes ? 32 percent

What types of decisions or actions? (Check all that apply)
Foreign tax credit planning ? 38 percent
Cash repatriation ? 35 percent
International reorganization ? 30 percent
International supply chain changes ? 30 percent
Other ? 23 percent

If you?d like more information on this survey, call John at Grant Thornton at 312-602-8955 or email him at [email protected].

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Mike Riley is the editor of Fabricating & Metalworking magazine and the author of Backfield In Motion (Derek Press, 2007). Share your views with him on how you are preparing for the recovery at 205-681-3393 or [email protected].