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Manufacturing Survey Sees More Growth

For the 39th consecutive quarter, Orange County manufacturers will expand output as they anticipate increased orders, according to a quarterly survey of purchasing managers conducted by Chapman University’s A. Gary Anderson Center for Economic Research.

Managers’ expectations on production levels, new orders, commodity prices, hiring and other activities are folded into a composite index, which registered 63.1 for the first quarter of 2019, down from the fourth quarter’s 67.6.

Despite the drop, the survey is “positive in general because we’re still over 60,” Survey Director Raymond Sfeir said. “But the growth rate is slowing.”

A value over 50 for the index indicates growth and a value below 50 indicates a decline.

New orders and production are getting slower, Sfeir said.

Manufacturing activity in the county is pacing better than the state, where the index registered 61.2, per the Chapman survey.

We’re No. 5

Manufacturing here has been resilient.

The county still ranks fifth in the U.S. for manufacturing jobs, according to Orange County Focus, a research brief filed earlier this year from Chapman’s Center for Demographics and Policy Research.

What’s more, employer payrolls are back above the near-term lows of 2010, albeit 12% below the peak in 2007, according to the National Association of Purchasing Managers.

While manufacturers here see business activity decelerating, but still comfortably above neutral, it reflects what’s happening in the broader national economy.

Growth in real gross domestic product for 2018 will slow from about 3.1%, the best in the past decade, to 2.4% this year, according to the Federal Reserve Bank.

Similarly, in Chapman’s 41st Annual Economic Forecast Conference in December, Sfeir and fellow Chapman Economist James Doti predicted 2.4% economic growth in the U.S. this year, along with 1.7% job growth in OC.

Last month’s forecast also predicted some real estate-related slowdowns in OC for 2019. Residential building permits are predicted to drop 7% to 8,900 units and single-family home prices are projected to rise just 2.9% in 2019, down from a 5.6% increase in 2018.

“Things are a little bit uncertain … people not being paid [federal workers] and [with] the sharp increase in interest rates [in 2018], it’s unclear what’s going to happen to consumption in 2019. Some department store sales this Christmas weren’t as good,” Sfeir said.

The quarterly survey of manufacturers covers about 25 industries. Makers of nondurable goods such as food and beverages collectively see business slowing, pushing the index down from 74.2 to 66.

“Transit time will continue to increase due to new freight regulations and there’s a shortage of drivers and equipment,” said one purchasing manager of a food maker.

Producers of durable goods, from cars to consumer electronics to medical devices, gauged their overall prospects at 62 for the first quarter, down from 65.3.

Respondents from companies in the electrical equipment and components business cited a slowdown in customer purchases from China, affected by both currency exchange rates and the trade war.

Yes, the trade war.

“Especially for manufacturers in industries like metals and machinery, the trade war [with China] is even more important and challenging than rising wages and more regulations in California,” Sfeir said.

Trouble With Tariffs

China is the world’s largest manufacturing economy. The U.S. is second.

Starting last summer, the Trump Administration slapped tariffs on more than $250 billion of Chinese goods, alleging unfair trade practices, specifically theft of intellectual property.

China has retaliated with levies on more than $100 billion of U.S. exports.

“We import gloves and other safety supplies from China so there is a great deal of uncertainty,” said a local purchasing manager at an apparel maker.

“Some have lost international contracts, and they’re scrambling to find new suppliers other than China,” Sfeir said. “That supply change [to China] has been worked out over two decades now, so that [new] transition is going to take a long time. Some are switching to Vietnam, Indonesia, Malaysia, but it’s not easy to do.”

Fountain Valley-based Pedego Electric Bikes managed to make that transition (see related story, Dec. 10 issue).

“Pedego was big enough to afford to move, yet small enough to be nimble,”co-founder and Chief Executive Don DiCostanzo told the Business Journal last month. It moved manufacturing to tariff-free Vietnam and Taiwan, but still must import some parts and components from China.

“These are interesting days trying to figure out tariff charges here and there,” said one purchasing manager of an electronics manufacturer. “It’s difficult quoting electronic components where tariff costs are added after the orders are placed. It’ll probably all end up fine later but in the meantime, it’s messy.”

Some respondents credited the tariffs on Chinese and other exports for “restoring equilibrium” to their markets.

A few local respondents noted labor concerns. Orange County’s jobless rate is 2.8%, so job seekers are scarce. And managers here continue to grapple with a shrinking workforce in some middle-skill, manufacturing jobs: technicians, construction workers, etc.

Others cited the increase in the state’s minimum wage to $12 an hour, effective Jan. 1. Only Washington, D.C. at $13.25 is higher.

The Survey

Purchasing manager respondents to the survey totaled 375 statewide, including 105 for the OC review.

Sfeir started the local survey in 1988, the state survey in 2002—the only such gauges of regional manufacturing in the country.

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