The 2009 recession has been replaced by the 2010 recovery, but so far it’s been hard to tell one from the other. If this is the year of recovery, what will that mean for manufacturers?

The four main factors that will affect the recovery this year are already familiar to decision makers in manufacturing - they are the elements that companies must always adjust to. The first factor is credit and its availability, the second is the threat of inflation, the third is the timing and growth of demand, and the fourth is the impact of various governmental programs and efforts.

LOOSENING CREDIT

The issue of credit has been at the forefront of many manufacturers’ concerns since the credit market locked up in the third and fourth quarters of 2008. The ability to borrow has been severely constrained as many of the traditional lenders have vanished, and the banks that remain have become much more conservative than they were in the past.

The good news is that the latest surveys from the National Association of Credit Managers show that credit is starting to loosen up. By the middle of 2010, the lending environment is expected to look a little closer to the normal that existed in the pre-boom years.

LOW INFLATION

The threat of inflation affecting commodities like steel and oil is not expected to be a major factor through 2010. The estimated rate of producer price inflation is between 1.5 and 2 percent for the year. Many think it will be much lower than that. Oil prices should stay in the $65- to $80-a-barrel range, and metals prices will be below the levels of 2007 and 2006 - depending on what happens with China’s production and demand.

There is still a considerable amount of money in the system, and if it starts to cascade out, there will be problems. But on the positive side there should be little wage inflation.

GROWING DEMAND

The third factor - demand - is perhaps the most vexing. When will demand come back in a consistent manner? And will demand factors recover in time to promote production? There has been some boost in inventories recently, but this has been a reaction to the fact that the overall rate of inventory had been so low. The consumer has started to come back but remains cautious and more frugal than in the past. There is not much encouraging to say about the automotive sector yet, but there are some signs of life in aerospace and energy.

GOVERNMENT INVOLVEMENT

The government’s impact on the manufacturing sector may be the hardest factor to predict. The biggest change from the past few years is a much expanded role for government. This increased involvement can be good news or bad news for manufacturers. In many cases, manufacturers will deal with a little of both.

The stimulus money that was supposed to have been spent in 2009 was mostly not allocated. It now looks like fully 50 percent of it will be spent in 2010. Thus far the money spent has mostly been directed at relieving the budget crisis in various states. But there is intent to direct more of the money to infrastructure projects in the future. There is also the possibility of new funds directed at rebuilding the transportation sector - around $80 billion as suggested by the House of Representatives. Although the stimulus plan has not had the impact it was expected to have, there is still time for it to make some difference to the economy.

Other aspects of governmental engagement are not expected to be as salutary to manufacturing. The rush to find ways to correct the mistakes of the banking sector has led to regulations that will restrict lending and make the credit challenges worse. Additionally, there are provisions in the health care legislation that could prove to be very expensive and negatively influence hiring decisions.

There are also plans for other programs that will have major negative implications for manufacturers. If “cap and trade” legislation is passed, it could impose severe fines on companies that have emission issues and could make energy more expensive as utilities are faced with compliance issues. Even if Congress fails to act and pass this legislation, the Environmental Protection Agency stands ready to impose these rules unilaterally.

While this list could go on, the biggest problem for many businesses is the uncertainty swirling around the government’s actions.

SLOW RECOVERY

In general terms, 2010 will be better than 2009. Gross domestic product growth will be in the range of 2 to 3 percent - and that is far superior to the negative numbers registered in the last year. Inflation will be down, unemployment should start to stabilize, and the ingredients for a slow and methodical recovery will be in place.

Publication date: 05/17/2010