Friday, September 29 2017
By Dr. Chris Kuehl, the economic analyst for the Fabricators & Manufacturers Association, International (FMA) and managing partner of Armada Corporate Intelligence
To the majority of the population, manufacturing itself is pretty mysterious. We know that everything we touch and use is manufactured in some way, but the process is something that takes place behind closed doors, and when people are asked to describe manufacturing they usually describe assembly rather than actual manufacturing. The fabrication sector is that much more mysterious to most. The classic definition of metal fabrication is producing the component metal parts that combine with other metal parts to form larger machines. By its very nature, the metal fabrication business is made up of smaller specialty companies that can do this kind of detailed work. The world of manufacturing tends to be divided between the large companies which essentially assemble components and the small and medium-sized companies that make them.
This division makes describing the role of the metal fabricator in the economy tricky. The simplest measure would be to identify the companies that are in metal fabrication, then add up their numbers – the people they employ and the revenues they earn. But that is only half the story. Speciality metal fabrication companies help make much larger companies as successful as they are and has a great deal to do with the number of people those large companies employ and the revenues and profits they earn. Without the metal fabricator these larger companies would be forced to try to develop these parts themselves and this would reduce their productivity significantly at the same time that it would increase their costs of labor and production.
According to government statistics and classifications the metal fabrication sector includes these sub-categories:
As of May 2017 it was estimated that there are 1,431,310 people employed in the sector and roughly one million of these are directly involved in the fabricating process (the rest are supervisory and support people). The breakdown as far as which sectors employ these workers is as follows:
The average hourly wage for the sector is $24.21 but there is quite a bit of variability according to what the work assignments are. The highest paid are the first line supervisors and managers with an average annual salary of $61,130. Machinists are making $41,700 and the others are looking at annual salaries between $32,000 and $39,000.
Over the last few years, one of the more consistent concerns regarding manufacturing and the economy as a whole is a decline in productivity. Although there have been measurable declines in manufacturing, construction and transportation the national sectors that have seen the most serious erosion since the recession have been education, health care and the government itself. The decline in productivity in metal fabrication has been significant but not critical at this stage. The labor productivity index is down 2.0 percent from 2015 to 2016 and was down 2.2 percent from 2014 to 2015. The output index saw a steeper decline with a 4.0 percent reduction from 2015 to 2016 and a 3.1 percent decline from 2014 to 2015.
The prime reason for the decline in productivity has been an acute labor shortage in the sector. The fact is that the metal fabricating workforce has been aging quickly as older workers have not been replaced by younger entrants. The Baby Boom generation is retiring at a rate of 10,000 per day.
As machinists make up the largest percentage of skilled workers in the fabricating industry, we can do some mapping and extrapolating to show the impact of this sector on the country as a whole.
A further breakdown of where jobs indicate that urban and suburban areas are the most likely to employ the greatest number of machinists. The top ten areas for employment include Chicago, Los Angeles, Houston, Detroit, Minneapolis, Seattle, Milwaukee, Cleveland, Anaheim/Santa Ana and Greenville.
One of the more vexing aspects of the fabricating sector is that a vast majority of these companies are privately held – consistent with the fact they are small and medium sized. This makes it difficult to determine just how successful they are from one year or quarter to the next. It is not possible to access public records on revenue and profits. One can extrapolate from the data that is available on the companies they supply as it can be assumed that success in the auto sector will translate into success for the companies that supply auto parts. However, knowing when companies specifically succeed or fail is often not known until something dramatic takes place. Prospects for the Future The fabricator is a dependent participant in the manufacturing cycle as they are reliant on the decisions made by the larger companies they supply. They are very rarely in control of their own destinies. If there is a slowdown in the auto sector there is not much they can do about it, and furthermore they know that the bigger entities will be putting pressure on them to reduce costs. The cycles of the overall economy are critical as far as planning is concerned.
Days after the election of Donald Trump, there were many expectations as far as reform was concerned. The ACA was going to be repealed and replaced in a matter of days, tax reform would follow next and there would be a trillion dollars for infrastructure repair along with the rollback of regulation. Now the challenge is to determine which of these changes will occur and how long it will take.
There is no such thing as an average manufacturer when it comes to setting priorities like this. Each company has its own unique challenges – for some it has been the health care law that has been the most serious impediment and for others it may be regulation or taxes and for many it is something else like access to credit or qualified workers or export markets. All of these are important of course, but some will have a higher priority than others.
Nobody can accurately predict the machinations of politics these days. One would have assumed that repealing and replacing the Affordable Care Act would have been relatively easy. We now know that this is not going to be easy by any stretch of the imagination and without changes here the chances of tax reform dim as well. At best this will be an end of the year accomplishment and that is certainly not guaranteed.
The three issues that will be most likely to be addressed sooner than later are these (and I issue the standard disclaimer that conditions can and will change that could alter that timetable). The first is investment in infrastructure but the amounts will be nowhere close to the trillion dollars that were suggested. The actual investment may be somewhere in the $300 billion range and will focus on high visibility projects in states that are important to next year’s election.
The second major change is a somewhat unexpected one. The unveiling of a new apprentice program as not expected and details are being developed. This would go towards the systems that exist in Europe and could have an impact on the chronic labor shortages faced in the manufacturing sector.
The third major change will likely be many changes when it comes to trading relationships. The U.S. will likely go ahead with steel tariffs of some kind, restrictions on softwood imports from Canada and some tariffs on goods from Mexico although a wholesale rewrite of the Nafta rules is not likely. The U.S. will likely not be able to pass a comprehensive “border adjustment tax” but there will be more restrictions on imports and more boosts for exports. The trade wars that looked likely are not as imminent but there will be moves to alter some of the relationships that no longer serve the U.S. very well.
Manufacturing is crucial to the success of the U.S. economy and always has been but there are very few sectors that have undergone such wrenching change in such a short period of time. It is a sector dependent on technology and robotics and one that hires far fewer people now. It is no longer the place that people start a career and learn a trade – they need that knowledge just to get in. It is a sector more dependent on the rest of the world than anything in the service sector can ever be. It is at the forefront of globalization for better or worse and that presents challenges unlike any sector has had to deal with in past years. There is a great future for the sector but that future will depend on very wise and nimble decisions being made.
About the Author:
Introduction written by Dr. Chris Kuehl, the economic analyst for the Fabricators & Manufacturers Association, International (FMA) and managing partner of Armada Corporate Intelligence. Dr. Kuehl is the author of Fabrinomics, a biweekly economic analysis e-newsletter produced exclusively for members of the FMA. For more information, log on to fmanet.org/fabrinomics.
Armada Corporate Intelligence executives function as trusted strategic advisors to business executives, merging their fundamental roots in corporate intelligence gathering, economic forecasting, and strategy development. To learn more about this service visit armada-intel.com. FMA members have access to Armada’s Executive Intelligence Briefing Service, delivered weekly via email, at a reduced cost.
About Fabricators & Manufactures Association, International:
Founded in 1970, the Fabricators & Manufacturers Association, International (FMA) is a professional organization with nearly 2,500 individual and company members whose mission is to advocate for the growth and sustainability of the North American metal processing, forming and fabricating industries. FMA brings metal fabricators and equipment manufacturers together through technology councils, educational programs, networking events, and FABTECH. The publications of FMA include - THE FABRICATOR**, The Tube & Pipe Journal**, STAMPING Journal**, Practical Welding Today**, Canadian Metalworking, Canadian Fabricating & Welding, and The Fabricator** en Espanol. FMA also has a technology affiliate, the Tube & Pipe Association, International (TPA).