In manufacturing Midwest, signs of trouble amid good times
A Wisconsin town shows the disparate fortunes of global and U.S. consumer markets as the economy starts slowing.
MANITOWOC, Wis. - Sachin Shivaram, the chief executive of Wisconsin Aluminum Foundry, started to worry this summer when orders for his brake housings and conveyor belt motors first grew scarce. Within weeks, what began as mild concern snowballed into a business drought that has seen bookings plunge by 40%.
In August, Shivaram, 38, reluctantly laid off two dozen workers, hoping to recall them when the outlook improved. It hasn't.
"Things are not good. We didn't anticipate this level of deterioration," he said. "Orders are down across the board."
The sudden slump at this 110-year-old company illustrates the economic erosion that is challenging President Donald Trump's signature promise to restore a lost era of American manufacturing greatness. Even as the $21 trillion U.S. economy continues growing, and unemployment hovers at a half-century low, factory activity has contracted for two consecutive months, according to the closely watched Institute for Supply Management index.
Many consumer-goods makers are still humming. But manufacturers that serve global markets are being buffeted by trade wars and profound uncertainty over the future.
Already, plants in several Midwestern states that will be crucial to the president's reelection campaign are shedding workers. Manufacturing employment is down by almost 9,000 in Pennsylvania over the past year and 6,800 in Wisconsin. Michigan, Indiana and Minnesota also have lost factory jobs, though in Ohio assembly lines continue to add them.
The president's tariffs on China, Canada, Mexico and the European Union - and those trading partners' retaliation against the United States - are sapping manufacturers' strength, economists said. Through August, Wisconsin companies' exports to China of $822 million were 25% less than in the same period in 2018, according to the Census Bureau.
Tramontina, a Brazilian cookware maker, closed its local plant last month, idling 125 workers, with company officials blaming tariffs and other cost pressures.
Trump this year has boasted of having "a magic wand" that conjured a gain of 482,000 factory jobs since he took office. Long a central part of the American ethos, such employment carries importance beyond its relatively modest share of the economy: Factory jobs pay higher-than-average wages and benefits, according to the Bureau of Labor Statistics, and usually do not require a college degree.
But manufacturing employment today actually represents a slightly smaller share of total non-farm payrolls than in January 2017, meaning the president's "America First" stance has done little to alter the economy's fundamental composition.
Manitowoc traces its manufacturing lineage to the 1940s, when a local shipyard produced 28 submarines for the war effort. Today, almost one-third of the local labor force works on a factory floor, nearly four times the national average.
Inside Shivaram's brick facility, little has changed in a generation. Piles of powdery black sand, used to make molds that produce various parts, line one wall.
Much of the work here is done with sweat and muscle. Burly men wearing ear protection and safety glasses haul carts bearing heavy truck transmissions and oil industry parts.
This spartan operation is typical of the often unseen blue-collar foundation of the Internet Age economy, where brute force, not gigabytes, reigns. Working with molten aluminum means constant heat and noise. "It's hard work," Shivaram said.
The trade war this year has rocked the foundry with a one-two punch. The president's steel and aluminum tariffs inflated Shivaram's raw-material costs, forcing him to raise prices and lose business to rivals outside the United States. "I got an email from a customer today that said, 'I've got prices from three continents that are cheaper than you,' " he said. "It's highly frustrating."
At the same time, China's response to Trump's tariffs has zeroed in on American farmers. That's dented exports of commodities like soybeans and wheat, which in turn has hurt equipment sales by foundry customer John Deere. Likewise, a heavy-equipment maker is buying less from Shivaram because its orders from China have evaporated.
Robert Lighthizer, the president's trade negotiator, says the trade war's short-term pain is worth the gain from forcing China to modify its state-directed economic model and start treating foreign companies the same as domestic ones. But 18 months after the conflict commenced, there has been little progress on those fronts. Many here remain supportive of the administration's goals, but Shivaram questions the cost.
"Nobody I talk to says, 'Yeah, this is OK. We're taking one for the team.' I just find that point of view ill-considered and absurd," he said. "I don't want to lose my company in the name of what the president is doing. It doesn't seem like there's an endgame in sight."
Just one block away, a rubble-strewn lot offers a reminder of how a company's fortunes can shift. For roughly a century until 2003, the Mirro Aluminum Co. was one of the town's biggest employers, producing cookware and the Sno-Coaster saucer-shaped sled that was popular with children in the 1950s and 1960s.
Today, this manufacturing city on the shores of Lake Michigan remains vibrant. With the state's jobless rate at 3.2%, layoff victims easily find new work and employers' main complaint is a shortage of workers.
Eck Industries, another foundry that produces parts for the military and specialized industrial uses, is running flat-out six days a week, said Jeff Friday, the vice president of operations.
To reduce its need for labor, the company has re-engineered some operations using old Honda and Boeing equipment acquired at auction. "It's the result of having a really robust economy, and who's going to b---- about that?" Friday said.
Some area companies are relocating workers from Puerto Rico and traveling to military bases on the East Coast to lure retiring veterans to the Midwest, said Tim Schneider, CEO of Investors Community Bank.
Robust consumer spending is helping to power local companies that make aluminum awnings, plastic parts for medical devices, energy-efficient lighting and canned vegetables.
"The trade war should worry me more, but it doesn't," said Tom Brixius, owner of a small metal-fabrication shop. "We're up 25% this year compared with last year. We're doing very well."
Still, the U.S. economy is slowing: Most forecasts call for growth in the current quarter of about 1.5%, roughly half the pace in the first three months of 2019. Factory output hit its post-crisis peak in August 2018. The ISM manufacturing gauge has fallen for six straight months and stands at its lowest level since the end of the last recession in June 2009.
Manitowoc is a microcosm of the U.S. and global economies. Reflecting weakness in Europe and China, manufacturing is sagging even as the consumer-led services sector powers ahead. That disconnect between global ills and domestic health can't last forever, economists said. Either interest rate cuts by global central banks, and perhaps renewed pump-priming by Chinese authorities, will arrest further factory deterioration, or a worsening trade war will drag down the consumer.
"It's a horse race between weakness in manufacturing and strength in the consumer sector," said Nathan Sheets, chief economist of PGIM Fixed Income in Newark. "The other part of the economy is doing well. The global part of the economy is getting hit by the trade war and European slowdown."
Even executives at companies that are thriving note the darkening outlook. Manitowoc-headquartered Orion Energy Systems, which is profitable, has told investors it expects to double revenue this year. Including temporary employees, Orion has about 350 workers, up from about 220 one year ago.
But Bill Hull, the chief financial officer, is a native of Youngstown, Ohio, who still recalls "Black Monday," the 1977 day when thousands of steelworkers lost their jobs.
"I feel like we're heading into uncharted territory," Hull said. "I'm optimistic about our business, but I am concerned about the overall economy."
Though no one anticipates anything like the 2008 crisis, memories of the worst recession in 70 years shape current strategies. Managers may prove less willing to allow unsold inventory to accumulate as orders slow, said Buckley Brinkman, executive director for the Wisconsin Center for Manufacturing and Productivity. No one wants to be caught with unpaid invoices if demand vanishes.
That approach could mean any future recession arrives more suddenly than in the past. "The spigot will just be turned off immediately," Brinkman said.
In the depths of the financial crisis, business got so bad for Kaysun Corp., a maker of injection-molded plastic components, that it adopted a four-day workweek. CEO Ben Harrison, who dealt with stress by participating in Ironman triathlons, recalls arriving at work one day to find only four cars in the parking lot.
A decade later, he remains extra vigilant about hiring and investment spending. "Everybody remembers the recession and dark days for the global economy and for the U.S. economy," he said. "That is a tough memory to shake."
In a June 2016 speech 30 miles from Pittsburgh, Trump quoted George Washington and Alexander Hamilton to tout the virtues of a strong domestic manufacturing base. He decried the massive U.S. merchandise trade deficit as a drain on economic growth and made seven promises that he said would end an era of "economic surrender."
As president, Trump kept all seven, including confronting China and renegotiating an existing North American trade deal. But the trade deficit he labeled a threat to American prosperity is bigger than ever. And manufacturing output declined in each of the first two quarters this year, according to the BLS.
Glen Tellock, CEO of Lakeside Foods, gives the president credit for trimming unnecessary regulations and for using the bully pulpit to encourage manufacturing in the United States. But he criticizes the failure thus far to secure congressional approval of a new North American trade deal and the uncertainty resulting from Trump's helter-skelter management of the tariff war.
"We as business people can't adjust as fast to the changes that are made with an executive order or even rhetoric," he said. "Business supports a businessman in the White House. You don't like the peaks and valleys. It's hard to manage a business like that."
Back at the foundry, Shivaram agrees his current difficulties pale alongside the crisis, when an entire month could pass between orders. The company has no debt, and though several customers have told him their spending on new equipment is frozen, he recently greenlighted the biggest capital expenditure in the foundry's history.
But he also rewrote the terms of a pending acquisition to provide more financial leeway in case the economy worsens. And he worries about how fast things have gone sour.
"It feels like we're just caught in the bad part of the economy," he said. "Are we going to have a recession? It feels like we are in one now."
This article was written by David J. Lynch, a reporter for The Washington Post.