Commodity price surge, tax extension intensify December manufacturing boom

BY MORRIS R. BESCHLOSS
PVF & economic analyst emeritus

In my constant contact with manufacturers, distributors and contractors in the construction and energy sectors, specifically, I’ve been pleasantly surprised at the business boom that developed in December at the manufacturing and distributor level.

What was particularly unique about this turn of events was that December is usually the month of inventory reduction, especially at a time of turgid business conditions, as we are now experiencing. Further investigation disclosed the following factors that had last December seemingly reversing traditional business patterns:

1) The expectation that Bush-era tax cuts would be maintained for two years, while further perceived anti-business federal government initiatives would be held in check by the overwhelmingly Republican House of Representatives. This provided private businesses, in particular, with the time frame necessary to develop intermediate term planning.

2) An expected avalanche of price increases from both domestic and foreign sourcing of components and finished goods will add substantially to the cost of manufactured goods. With inventories at distribution levels currently cut to bare bones, a veritable run on copper, steel or rare metals-based products is now proceeding to take advantage of what may be price increases of as much as 10% or more.

Although demand for these products is now at relatively low levels, a substantial increase in long-delayed projects in power generation, pipelines, oil refining upgrading and natural gas expansion, etc. is expectantly awaited.

Despite the fact that manufacturers and distributors had to pay year-end taxes on inventories, the value of such material reserves in the New Year is expected to more than make up for the year-end outlay.

3) With U.S. exports benefiting from a competitive dollar and a massive demand for U.S.-made products from a booming Southeast Asia, manufacturing revenues are on an upsurge. The buying reaction by distributors and, to some extent, contractors, underscores the belief that projects held in abeyance in 2010 will burst forth in 2011 and beyond.

Construction spending remains in depression

The most shining pillar of America’s growth since the end of World War II had been "construction." From the low-cost housing of Levittown, built originally to house the families of returning GIs to the glistening condominium towers of America’s big cities, the superior residential, commercial and industrial construction to shelter and serve America’s booming population growth made the U.S. economy and its underpinnings the envy of the world.

The implosion of this American bedrock has become the most painful and telling of the extent to which America’s superpower economy has fallen from grace.

Current statistics provide a searing reminder. Although U.S. construction spending bounced off the bottom in September and October, it is operating at spending levels last seen 20 years ago, when the American population was substantially smaller than today. After reaching a peak of an annualized $1.2 trillion in March 2006, overall construction spending had reached a new low of barely $800 billion annualized in August of 2010. Even this relatively subdued number was only made possible by a recent flurry of repair, maintenance and upgrading spending.

Abetting the extended length of the residential subsector’s construction doldrums is the inventory accumulation of unsold homes and condos, remaining at the highest levels since the fall 2008 financial crash. With foreclosures continuing unabated, in spite of recent improvement, there are no indications that this backlog will be substantially reduced any time soon.

The diversion of the world’s finest talent accumulation of residential construction technicians, professionals and marketers to specific commercial and industrial projects has absorbed some of those previously active in the homebuilding and maintenance arena. All in all, the demise of America’s housing grandeur has proven disastrous for tens of thousands of specialists, who had committed their life’s work to America’s once-leading economic sector.

The one bright light expected to appear in 2011 is the comeback of commercial and industrial activity. Vacancy reductions, as well as capacity utilization, are on the comeback trail.;

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