Take Five: Can Wisconsin manufacturers weather global slump?

The stock markets in the United States, Europe, and Asia have been sliding based on China’s faltering economy, the slump in commodities, and dampened prospects for global growth. While the U.S. economy remains relatively strong, there are growing fears that the global slowdown will cause our economy to contract.

In this Take Five interview with Buckley Brinkman, executive director and CEO of the Wisconsin Manufacturing Extension Partnership, we explore whether Wisconsin manufacturers are positioned to weather this storm. Brinkman had just returned from an exporting event in Chicago, which was keynoted by William Strauss, senior economist and economic advisor for the Federal Reserve Bank of Chicago, when we spoke with him. Here are excerpts.

IB: You’re just back from an event in Chicago, where we assume you had some time to converse with other attendees. What were the conversations like regarding the global economic slump and how that’s likely to impact us in the rest of 2016?

Brinkman: From the manufacturers who I spoke with in the room, they are seeing a lot of the same trends that we’ve seen for the last year or so. One is that the progress is steady, though not overwhelming, and very volatile. One of the people who I talked to down there is from a contract manufacturing firm and a pretty high-end one. He was saying they finished off 2015 rather soft, but what it looked like to them was that their customers really overshot the target, inasmuch as they were projecting the year to be a little stronger than many thought it would be. So he saw a soft end to 2015 but he was seeing a good start to 2016.

IB: Even with the stock market down?

“It’s going to be more of the tortoise economy.” — Buckley Brinkman, executive director and CEO, WEMP

Brinkman: Yes, even with that. It’s really interesting. I was reading the front page of USA Today the other morning, and they were talking about how the collapse of oil prices is really having a devastating effect on the economy. I think that’s a really energy- and mining-sector opinion.

IB: Consumers aren’t complaining.

Brinkman: No, they are not, and one of the points that Bill Strauss made yesterday (January 14) was that the decline of energy prices and the availability of energy should help the rest of the market absolutely take off. It’s something that’s a real boost to the rest of the market and a boost to consumers. If you are spending $2 a gallon for gas, there is a lot more money in your pocket then if you’re spending $4 a gallon for gas.

IB: When we talked last fall, you indicated that Wisconsin manufacturing is in a strong position but manufacturers are dealing with some peaks and valleys in the markets they serve. What’s your take on how well positioned Wisconsin manufacturers are to weather this particular storm?

Brinkman: “It’s really difficult because manufacturing is going to be one of the sectors that feels it the most. One of the pieces of data that we shared yesterday is we [in the United States] have one of the strongest economies in the world. The flip side to that is that it’s no great shakes. When we’re sitting here at just over 2% growth, that’s not a strong number.

It [GDP growth] was a 4.8% growth rate for about six years coming out of the 1981 recession. We’re certainly not at that point now. We’ve been averaging in the 2% growth range and it doesn’t look like it’s going to be much different.

IB: So are we pretty well positioned to handle this? The global economy hasn’t looked this shaky in a while.

Brinkman: The big question is what’s really happening with China’s economy. The short answer is nobody really knows. They say they’re going to get 6% growth this year and you bet they will get 6% growth but how real those numbers are is anybody’s guess. Some of the exchange issues and some of the unemployment issues that you see in China suggest otherwise.

The thing about Wisconsin’s manufacturing economy is that it’s fairly well positioned in terms of diversity. We aren’t dominated by one particular segment of manufacturing. There are 36 driver-manufacturing industries in Wisconsin that cover a full portfolio. The second piece is one of our largest segments is food and people still have to eat. I don’t want to be too bullish but I also don’t want to be too pessimistic.

(Continued)

IB: Wisconsin’s foreign trade has been picking up in recent years, as we’ve seen pretty solid growth on an annual basis for the past decade. Is that run of growth in jeopardy based on what you know about 2015 foreign trade activity?

Brinkman: It would be naïve to suggest that anytime the dollar strengthens by 17% that the same [export] growth rate can continue. At the same time, we’re getting smarter about our exporting. There are a lot of companies that have gone from being accidental exporters, where they get orders over the transom or over the Internet, to where they are actually targeting markets where they have the advantage. We have a lot of exporters that are being a lot smarter about it and we have a lot more people engaged around that issue. At the same time, you’re fighting a pretty big headwind when you start talking about a very strong dollar.

People are a lot smarter about where they are sourcing goods and how they are doing it for a longer period of time. The idea that you have a world market and you are chasing the lowest cost input, the lowest-piece cost, has been belied when you start calculating total cost of ownership. When you start talking about how much it costs to have a 12,000-mile-long supply chain, all of a sudden that cost advantage gets whittled away on a price- per-piece basis. The decisions are being made in a much longer-term fashion.

IB: How, if at all, should the federal and state governments or the Federal Reserve respond to these economic trends, whether it’s halting further interest rate hikes, or perhaps tax reform that makes our corporate rates more competitive, or at the state level devoting any revenue surpluses to transportation infrastructure needs?

Brinkman: The last one is the one I’m most interested in, just in finding a permanent solution. We keep applying these Band-Aids and everybody understands the issue, understands the problem, and understands how to solve it, but to solve it in a permanent way is not politically feasible. At least no one has stood up and said let’s raise the gas tax or let’s find a long-term sustainable and relevant method of funding the infrastructure improvements.

About 50% of the goods in our state pass through the Zoo Interchange [in Milwaukee] every year, but instead of getting it done in two years it’s going to take us almost six years. When you talk to Transportation Secretary [Mark] Gottlieb about the effective use of highways or the reliability of our state highway system, we’re losing ground.

IB: You’ve commented about how other people feel about what’s going to happen this year. Look into your crystal ball and tell me how you think the national economy is likely to perform this year.

Brinkman: It’s going to be more of the tortoise economy. I think we’ll have a mid-2% kind of growth year, which isn’t robust but isn’t disastrous. I think the offsetting factors are that energy prices are going to remain low and that’s going to continue to be a boost to the economy and it’s going to offset much of the hampering of the strong dollar, so I think it’s going to be another tortoise this year and it’s going to be very uneven. There are going to be segments that are very strong, and they’re going to be segments that still struggle. The mining segment shows no signs of life.

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