Manufacturers in America's heartland appear to be avoiding the slowdown that's affecting their counterparts in other parts of the country, according to the latest results of two widely read barometers of business activity.
While the national economy seemed to suffer a sharp slowdown in manufacturing -- reporting its lowest reading since September 2009 in a survey of hundreds of businesses -- a similar survey conducted by Creighton University of a nine-state mid-America region that includes Minnesota was more upbeat.
International trade was a key driver of the Creighton study's higher growth rate. "The cheap dollar and a global economic expansion combined to boost sales and new orders from abroad," said Ernie Goss, the Creighton professor who oversees the survey.
Another difference, Goss said, may be the predominance of farm-related manufacturers in the Creighton study. "The middle of the country includes companies like Monsanto and Deere & Co., which are doing well because of the strong farm economy," he said. "The question is how long we can expect the farm economy to keep pulling the rest of the economy along."
The Institute for Supply Management (ISM) Wednesday reported that its monthly index plummeted from 60.4 in April to 53.5 in May. Although a reading over 50 indicates growth, the steep dropoff helped send markets to their worst session since last summer as concerns grew about how firm the recovery really is.
Creighton's overall index climbed from 57.7 in April to 60.2 in May.
Fuel, raw materials costs
Both surveys noted a continuing rise in the cost of fuel and raw materials, although the increases in May weren't as severe as earlier this year. Nearly 60 percent of the ISM survey's respondents reported paying higher prices for commodities in May. "Inflation is evident everywhere in virtually every material purchased," said one paper products firm responding to the ISM survey.
The ISM survey also didn't get a boost from exports, which registered lower growth as did every other component of the index.
Troy Duncan, manufacturing industry leader at Grant Thornton's Minneapolis office, said many of his clients are struggling to maintain profit margins in the face of higher raw material costs. On Wednesday, one client, Minneapolis-based Valspar Corp., announced price increases of up to 8 percent for some product lines effective Aug. 1. It's part of an effort by the paint and coatings manufacturer to offset rising raw material costs.
"There are a lot of internal initiatives by companies to trim costs, anything that could be considered a discretionary expenditure," Duncan said. He said one client recently put a stop to international travel unless the trip is approved by top management.
The Creighton survey's index for Minnesota was 63.2, up from 60.9 in April and the 22nd month of growth. Although higher agricultural commodity prices are hurting some Minnesota food producers, other durable and nondurable goods producers report rapidly improving business activity, Goss said.
Jaime Nolan, executive director of the Minnesota Precision Manufacturing Association, said she continues to hear from companies that are expanding and hiring workers. "One of their biggest problems is being able to find skilled workers, like welders," she said.
One member, Oakdale-based Haberman Machine, has added 12 new workers and rehired three others since February, according to Controller Kimberly Arrigoni. The company, which does precision machining work for a variety of industrial customers, has 48 employees, up from about 33 during the depths of the recession.
"We're still looking for skilled workers," she said. "When the right people come in the door, you tend to listen."
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