Manufacturers bide time, bite their nails

  • Article by: DEE DEPASS , Star Tribune
  • Updated: September 24, 2008 - 8:52 PM

The economic slowdown and credit crunch have crimped some U.S. manufacturers, and they're putting expansion plans on hold.

When the telephone rang last week, it wasn't good news for Fabcon Inc., the Savage concrete wall maker that outfits Lowe's, Home Depots, offices and warehouses across the country.

A few customers worried by the sagging economy responded to Wall Street's developing crisis by pulling the plug on jobs in Chicago and the East Coast.

"They say that until the financial markets stabilize and [they] are able to get financed, we are just putting the [building] project on hold," said Jim Houtman, Fabcon vice president for marketing. "A lot of business [customers] are like, 'Well, I really don't know what my business is going to do, so I really don't want to invest,'" he said. "People are real jittery."

U.S. manufacturers are waiting anxiously to see if Wall Street's meltdown will freeze credit and chase off customers already shaken by the rocky economy. The wait-and-see approach isn't making for happy talk on the factory floor, even for companies such as Fabcon, which has a strong balance sheet and no need to borrow money from the markets.

Executives are struggling with Wall Street's volatility, sagging market caps and high commodity prices. (Oil again jumped past $120 a barrel this week.) The shocking demise of Lehman Brothers and the near-death experiences of American International Group, Merrill Lynch, Freddie Mac and Fannie Mae just generated more uncertainty, which the government's $700 billion rescue plan has failed to subdue.

"It looks like a meltdown on Wall Street," said Hank Cox, spokesman for the 10,000 member National Association of Manufacturers. "Like everyone else, we are all watching this with bated breath," he said.

"Our primary concern is that this could lead to a tightening of credit. Manufacturing is very capital intensive. Our guys spend a lot of money on advanced equipment and software to compete in the world," Cox said. "Even the smallest manufacturer will have millions of dollars in capital equipment and they are constantly upgrading it. So manufacturers are just in a perpetual dance with their bankers."

Some firms have cash

On the upside, manufacturers have cut capital spending and hiring since 2003, said Cliff Waldman, economist with the 550-member Manufacturers Alliance/MAPI.

"That means they probably have enough funds on their own to fund capital improvements without going out to the capital markets. That's the good news," Waldman said. "The bad news is this financial earthquake has the potential to knock the U.S. and global economies on [their] side."

For two years, retail demand softened, inventories rose and production slowed, prompting factories to cut shifts, jobs and capital expenditures, he said.

"That suggested to me that the economy had already slipped from an extended slowdown into an actual recession. So this financial crisis has the potential to ... take what was clearly an emerging U.S. recession and a global downturn and just make it worse. That is the bad news for manufacturers," he said.

Houtman said Fabcon's customers are pinched by tight credit, reluctant tenants and a lack of confidence in the market. When consumer confidence falls, retail spending drops, and companies stop building new stores, warehouses and factories, he said.

Fabcon's business is off 15 percent this year, "And I think its going to get a little worse over the next several months," Houtman said. Fabcon recently dropped plans to build its fifth factory and hire 40 new workers.

Polaris Industries had the misfortune to hold its company's "Investor Day" on Monday as Congress and the nation were learning about the proposed Wall Street bailout.

"I had spent the bulk of the day having meetings with investors," said CFO Mike Malone. "People were very edgy,"

Malone told analysts that Polaris is not changing its 2008 earnings estimates and will see growth from increasing ATV demand in Europe and new products such as its side-by-side ATV. Even so, Polaris' stock price has dropped 11 percent since Friday.

Despite the economy, Erick Ajax, co-owner of E.J. Ajax, said his Fridley metal stamping business had the best year of its 65 in business thanks to a burst in exports to Saudi Arabia, China, South Korea, Mexico and Canada. He remains "cautiously optimistic."

The company, which makes freezer door hinges, handcuffs, machine and building materials, expects to hit $10 million in sales this year. This week it closed on a $200,000 loan with Wells Fargo to expand its Fridley building.

Warren Buffet's announcement this week that he will inject $5 billion into Goldman Sachs gave Ajax a boost of confidence. "We think this is going to be another temporary blip in the radar screen for the economy," he said.

Fred Zimmerman, retired University of St. Thomas manufacturing professor, hopes Ajax is right, but said: "I am worried about manufacturing because the demand is likely to drop."

Dee DePass • 612-673-7725

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