U.S. manufacturers struggle to keep workers in face of weak demand

[June 12, 2020]  By Timothy Aeppel and Rajesh Kumar Singh

(Reuters) - Cheryl Wellman was able to bring back most of her furloughed workers last month with the help of a special government loan.

Now she's laying them off again.

Wellman, president of Integrity Metals LLC in Romeoville, Illinois, which makes metal parts for big companies including General Electric Co. <GE.N> and Honeywell International Inc. <HON.N>, was hoping for a surge of orders as the pandemic shutdowns lifted and companies moved to restock shelves. She also hoped the disruptions of recent months would pull more businesses back to U.S. shores, creating new opportunities for smaller suppliers like Integrity, which has 20 employees. But neither of those things has happened yet, she said.

Integrity was able to rehire with the aid of just over $200,000 from the Paycheck Protection Program, or PPP, which offers forgivable government-backed loans. The Small Business Administration has approved 4.5 million of these loans averaging $113,000 in size for a total of $512 billion as of June 10.

Some of the strength in the U.S. payrolls report for May - which included a startling 225,000 manufacturing jobs added - was the result of companies taking part in this program.

The problem now is that demand in many industrial sectors, from oil and gas to construction equipment, remains depressed, and that underscores the subdued response key policymakers such as Federal Reserve Chair Jerome Powell have shown over the big upsurge in hiring in May.

"It is a long road. It is going to take some time," Powell said in a press conference on Wednesday after the Fed's latest meeting, cautioning that while encouraging, the surprise 2.5 million jump in jobs in May remains a single data point for now. Data on Thursday showed more than 20 million people remain on unemployment benefits even as new claims fell for a 10th straight week.

FULL RECOVERY YEARS AWAY

To be sure, some U.S. factories are booming.

Detroit is rushing to build trucks and SUVs, for instance. And Polaris Inc. <PII.N>, the maker of all-terrain vehicles and motorcycles, recorded record sales in April and May, CEO Scott Wine told Reuters. "All our plants are running at full capacity," he said.

Chad Moutray, chief economist at the National Association of Manufacturers, said he thinks the worst of the downturn is behind us, but that demand will remain weak as companies fret about the potential for another virus surge and the political uncertainty of an election year. "I don’t see us getting back to pre-recession levels of output until 2022," he said.

 A worker disinfects a work bench with a bleach mixture at the end of a shift at Green Circuits as the company, an essential business, adapts to operating during the outbreak of the fast-spreading coronavirus disease (COVID-19) in San Jose, California, U.S., April 2, 2020. Picture taken April 2, 2020. REUTERS/Stephen Lam

He notes that while manufacturers added an impressive number of jobs for a single month in May, the sector is still down 1.1 million jobs from its pre-crisis level in February.

The impact is most visible in some of America's biggest industrial names. Both Caterpillar Inc. <CAT.N> and Deere & Co. <DE.N> are expected to see about a 30% drop in revenues in the current quarter, compared to a year ago, according to analysts. Both companies have curtailed work at U.S. factories.

This filters out through the economy as companies conserve cash by cutting costs and capital spending. Weaker demand for machinery means less demand for basic metals and electronic components. U.S. Steel Corp. <X.N> has idled 4.5 million net tons of flat-rolled and 1.9 million net tons of tubular steel capacity. Similarly, miners have slashed their 2020 capex estimates by 20%.

One business that sits at the foundation of many supply chains is metal foundries like Bremen Castings Inc., in Bremen, Indiana, which cranks out castings used in an array of industrial and transportation equipment.

Bremen used its PPP loan to keep its workers on the job through the shutdowns. Even as business wilted, its workers continued to get paid for full-time work.

They won't be so lucky in the months ahead.

"We see weakness across the board in all our markets," said J.B. Brown, president of the family-owned business. The company's workforce has shrunk over the past two months, down 18% from 245 to 202 workers, through attrition. The company didn't replace people who left or were fired.

But this Friday, Brown plans to post a sign in the factory, warning workers that they will soon face reduced shifts, due to the lack of work. They'll be able to apply to a program offered in Indiana that allows workers to make up for lost wages.

(Reporting by Timothy Aeppel and Rajesh Kumar Singh; Editing by Dan Burns and Andrea Ricci)

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