Productivity/Expensive Job Losses

Productivity/Expensive Job Losses

A Wall Street Journal article Saturday titled 'Secondary Sources: Bankruptcies, Education, Death of Manufacturing' discusses one person's view with respect to 'What's Next for (U.S.) Manufacturing'.  Coincidentally, last Friday I had a discussion with the President of a small firm in Toronto that supplies very high-end packaging equipment to 'Fortune 500' chemical and food manufacturers.  Most of his customers are in the U.S.  His potential order intake continues to be quite good, and he expects to close a goodly number of orders over the next three months.  He has, of late, noticed delays in some U.S. projects, but has found those projects are not being either dropped or canceled, but rather are being postponed 'until next year'.  He attributes such postponements to companies (or individual processing plants) having exhausted their capital fund budgets for this fiscal year, but currently expects the projects his company has been working on to be 'top of the list' in the 2011 capital budgets of those companies now postponing orders - time will of course tell whether those order ultimately do get booked.

So why is this small company having the current success it has, particularly in the face of a comparatively strong Canadian $?  The answer is that the equipment engineered and supplied by this company results in two things for the manufacturing plant that buys it - efficiency of packaging throughput (more packages can be filled per hour), and labour savings (one or more plant workers are no longer needed for each new Cdn$75,000 packaging machine the plant installs).  For example, one U.S. order expected this month for Cdn$250,000 will result in plant efficiency and (substantially in this case) labour savings to the plant purchasing it equal to or greater than Cdn$250,000 in the first 10 months after it is installed.  So in that case, productivity will go up, the 'payback' on the equipment purchase will be substantial, and 3 - 4 U.S. manufacturing jobs will be permanently lost.

I know this small company well, and have followed its activity closely for many years.  As a result of that, and information derived from my consulting clients, I have for some time have been focused on the phenomenon of 'increased manufacturing productivity resulting from equipment technology improvements with resulting permanent job losses'.  This is 'operating level' detail I think may largely be lost on many politicians and theoretical economists.  In the case of the latter, I have little doubt 'they get' the theory, but question whether they have ever seen it in practice, or for that matter understand the 'internal rate of return' criteria large companies demand of their plant managers.  In this regard, based on my experience you can 'take it to the bank' that a 10 month payback on a $250,000 equipment purchase would be regarded a 'extremely good' by most manufacturers.

The loss of a 'few jobs' to technology in a manufacturing plant is something that didn't matter to nearly the same degree when the U.S. had a larger 'manufacturing economy'.  Then, some if not all of  manufacturing jobs lost to technology could be and were replaced by other manufacturing jobs.  Today, I think the permanent loss of these jobs matters hugely.

I draw a number of what I believe to be several important conclusions from all this:

·        first, for me this emphasizes the dichotomy between U.S. (and Canadian and other developed country) fully benefited wage rates and those of developing countries;

·        second, and perhaps most importantly, going forward I see U.S. (and other developed country) manufacturers increasingly looking to productivity increases and labour savings through technological change as a way 'to stay in business'.  This is in part why I think the U.S. unemployment rate is of  a 'crisis nature', and will continue to be so;

·        third, I am not expecting the U.S. unemployment rate to drop.  In fact I think it is far more likely to continue to deteriorate than it is to improve over the next months and years;

·        fourth, I think any additional U.S. Government Stimulus aimed at increasing employment in the near term is 'throwing good money after bad' for at least two reasons.  One, it won't address what I see as the fundamental issue of non-competitive fully benefited labour rates, and two, Government spending is unlikely to be efficient; and,

·        fifth, I continue to expect 'very rough economic waters' ahead.  I only hope the fog doesn't get so thick Politicians lose their way entirely (although I am not so sure that already hasn't happened), and that there isn't a huge iceberg directly in front of the ship.  In this regard I am reminded that in the last month a huge piece of a Greenland glacier 'calved' and currently is floating around somewhere in the North Atlantic.

Comments on my views on this topic will be appreciated at info@stockresearchportal.com.

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