NY Times, March 20, 2009
Rapid Declines in Manufacturing Spread Global Anxiety
By NELSON D. SCHWARTZ
Since it was founded by his great-grandfather in 1880, Carl Martin
Welcker’s company in Cologne, Germany, has mirrored the fortunes of
manufacturing, not just in Europe but around the world.
That is still true today. In a pattern familiar to industrial businesses
in Europe, Asia and the United States, Mr. Welcker says his company,
Schütte, which makes the machines that churn out 80 percent of the
world’s spark plugs, is facing “a tragedy.”
Orders are down 50 percent from a year ago, and Mr. Welcker is cutting
costs and contemplating layoffs to prevent Schütte from falling into the
red.
That manufacturing is in decline is hardly surprising, but the depth and
speed of the plunge are striking and, most worrisome for economists, a
self-reinforcing trend not unlike the cascading bust that led to the
Great Depression.
In Europe, for example, where manufacturing accounts for nearly a fifth
of gross domestic product, industrial production is down 12 percent from
a year ago. In Brazil, it has fallen 15 percent; in Taiwan, a staggering
43 percent.
Even in China, which has become the workshop of the world, production
growth has slowed, with exports falling more than 25 percent and
millions of factory workers being laid off.
In the United States, until recently a relative bright spot for
manufacturing despite the steady erosion of blue-collar jobs, industrial
output fell 11 percent in February from a year ago, according to
statistics released Monday by the Federal Reserve.
“Manufacturing has fallen off the cliff, and it’s certainly the biggest
decline since the Second World War,” said Dirk Schumacher, senior
European economist with Goldman Sachs in Frankfurt.
The pattern of manufacturing and trade ominously recalls how the
financial crisis of 1929 grew into the Great Depression: tightening
credit and consumer fear reduced demand for manufactured goods in one
country after another, creating a downward spiral that reduced global trade.
“Plunging manufacturing suggests that as bad as things were in the
fourth quarter, they are at least as bad now,” said Robert J. Barbera,
chief economist at ITG, a New York research and trading business. “This
is a classic adverse feedback loop. It won’t quickly correct itself.”
That means more workers can expect to lose their jobs around the world
in coming months as manufacturers continue to cut production, especially
as global trade contracts.
In fact, trade is shrinking even faster than production. Germany’s
exports down are 20 percent from a year ago, Japan’s have plunged 46
percent, and in the United States, exports fell at an annualized rate of
23.6 percent in the fourth quarter of 2008.
Mr. Welcker says he has never seen anything like it. For parallels, he
has to hark back to the Great Depression and World War II, when
Schütte’s factory was destroyed.
After focusing on Germany and Europe in the decades after the war,
Schütte thrived recently as globalization opened new markets in Eastern
Europe and Asia. In the last five years, Schütte’s sales soared to about
100 million euros ($131 million) from 58 million.
The sudden reversal in global manufacturing suggests that Americans
should not expect economic relief from abroad soon, despite a slightly
more optimistic mood on Wall Street lately and President Obama’s call
for more stimulus spending by foreign governments.
While manufacturing equals about 14 percent of gross domestic product in
the United States, it totals 18 percent worldwide, and accounts for 33
percent of G.D.P. in China, according to the World Bank.
That means that China, Brazil, India and other fast-growing emerging
market countries that have escaped the worst of the fallout from the
credit crisis will increasingly suffer, dragging down demand in more
advanced Western economies even as government-led stimulus packages kick in.
The damping effect works both ways.
Despite the misperception that America no longer makes anything, falling
demand for goods made in the United States, including jet engines,
locomotives, medical equipment, pharmaceuticals and some high-tech
products, will hurt American growth prospects.
“Manufacturing makes up about two-thirds of U.S. exports, and
contributed more to G.D.P. growth over the last 20 years than any other
sector of the U.S. economy,” said David Huether, chief economist for the
National Association of Manufacturers in Washington. “Our share of
global manufacturing output has remained steady at 20 to 23 percent over
the past decade.”
Elsewhere, even relatively healthy industrial companies like Toyota are
also slashing production, which contributed to Japan’s huge export decline.
Toyota halted work at its 12 auto plants in Japan beyond its normal
break in February and March. It also cut its production forecast for the
year ending March 31 by 20 percent, to slightly more than seven million
vehicles, and has warned that it will post a net loss of 350 billion yen
($3.6 billion), its first in decades.
In Europe, new figures for January manufacturing are due Friday, and
they are expected to show that the decline is still worsening.
Although the problems of manufacturers supplying the auto industry and
other so-called big iron manufacturers of products like locomotives, jet
engines and power turbines have gotten the most attention, makers of a
variety of other products, including handicrafts, clothes and jewelry,
are suffering too.
India’s manufacturing sector, which accounts for about 16 percent of
G.D.P., recently recorded its first quarterly production decline in more
than a decade.
Since last April, handicraft exports have fallen by 55 percent to $1.35
billion, and textile makers estimate they have slashed half a million
jobs. Banks, meanwhile, are restructuring loans for diamond makers and
polishers.
And despite tax cuts and a $64 million stimulus package announced in
February, Indian textile makers are pushing for more government help.
“We’re competing with countries like Bangladesh, where wages are lower,”
said Rakesh Vaid, the chairman of Usha Fabs, a Delhi textile
manufacturer. “We’re competing with China where the currency is well
managed, and Vietnam where the industry is getting strong support from
the government.”
At Schütte, which has 550 workers and is emblematic of Germany’s bedrock
Mittelstand sector of family-run businesses, perilous times are part of
the company’s history.
Mr. Welcker recalls family tales of trucks filled with cash to pay
workers during the hyperinflation of the Weimar era, and how after
G.I.’s crossed the Rhine in 1945 near where his factory stands today,
“not one stone stood atop another.”
Today, he is thankful the situation is nothing like those days. “But the
speed of the decline in orders,” he said, “is the worst we’ve ever seen.”
Heather Timmons contributed reporting from New Delhi and Hiroko Tabuchi
from Tokyo.
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