Orange County manufacturers continue to defy expectations and plan to expand output, if not payrolls.
That’s the takeaway from data measured by Chapman University’s quarterly survey of purchasing managers produced by the A. Gary Anderson Center for Economic Research.
It’s the 38th consecutive quarter the survey has reported respondents’ expectations of increased manufacturing production.
“The economy is running very strong. With strong demand it is not surprising that production is up,” survey Director Raymond Sfeir said.
“The new tax cuts for both individuals and business” are a boost, he said.
Managers’ expectations on production levels, new orders, commodity prices, hiring and other activities are folded into a composite index, which registered 67.6 for the fourth quarter, a healthy leap from the third quarter’s 61.2 and well above 50, which is treading water.
Local manufacturing activity is now pacing better than the state, whose index registered 65.0, according to the survey.
It’s the latest sign of good news for OC’s economy.
OC’s gross domestic product grew by more than $26.1 billion over the past four years, and the county saw business growth of 5% over that time, according to a news report from financial technology firm SmartAsset.
No. 5 Nationally
OC manufacturing has shown surprising staying power. The county still ranks fifth in the U.S. for manufacturing jobs, according to “Orange County Focus,” a research brief filed this year by Chapman’s Center for Demographics and Policy Research.
Longtime Sfeir colleague at Chapman Jim Doti agrees that the strong economy and plenty of cash on the sidelines with new incentives to invest in plant and equipment is driving the once written-off local manufacturing sector to its strongest activity in two decades.
“Booming economy. Investment is going to be very strong,” said Doti, Chapman’s president emeritus. “There’s a lot of liquidity out there for businesses to meet increasing demand … and it’s also national in scope.”
The Milton Friedman disciple also created Chapman’s Annual Economic Forecast Conference, a first in its time using the econometric model to make local predictions.
Doti will release his 41st forecast on local manufacturing and home sales, along with regional and national GDP and interest rates on Dec. 13 at the Segerstrom Center for the Arts in Costa Mesa.
But some perspective on the jobs front on the redoubtable OC manufacturing sector: In 2000, OC’s employment was 216,950, about 15% of all jobs. By the end of last year, that was 158,642, down to 10% of the workforce, a loss of more than 58,300 jobs, or 27% of the 2000 employment base, according to Sfeir and the Anderson Center.
And the latest figures from the state Employment Development Department reveal the pickup in manufacturing activity is occurring without job growth.
August’s total of 154,500 jobs in all manner of manufacturing—both durable and nondurable goods, and from food to apparel to high value-added electronics, medical devices and transportation equipment—was down 4,700 year-over-year, or 3%.
Doti, for one, focuses keenly on jobs.
“Data that I look at for manufacturing in California, in part due to Los Angeles, is dropping—[manufacturing jobs] durable and nondurable. And it’s that loss that explains that net outward migration” (see related story, page 92).
“But make no mistake, some manufacturers are doing very well … but overall we’re not.”
Naturally, automation and efficiencies are holding down job growth as owners increase output and on the front end, investment.
Tax cuts have put more capital in their coffers, as has repatriation of multinationals. “About $500 billion repatriated so far” of a potential $2.5 trillion in foreign cash coming home, Doti said. “It’s not only going to workers. It’s also to finance investment … there’s going to be a big increase in real GDP.”
Sfeir agrees. “Investment is expected to increase due to this and lower business tax rates. It is to be seen how high the growth rate in investment will be,” he said.
Indeed, of all the components in the composite index, production staged the biggest rally, increasing from 63.5 in the third quarter to 82.8 in the fourth, indicating a substantially higher growth rate.
The latent features of the Tax Cuts and Jobs Act of 2017 surely goose that number: “Companies will take advantage of accelerated appreciation and this will decrease their taxes in the year they make the investment,” Sfeir said.
Wall of Worry
Like stock traders buying at the top into rising interest rates, the Anderson Center purchasing managers survey elicited plenty of concerns, even as companies ramped up production.
Some of the most-cited issues include:
• Tariffs with a capital T, notably those imposed on China, and some on Canada, for raw materials, which include metals such as aluminum and steel; electrical components; food-processing equipment; and even electronic traffic signs and batteries.
It adds up to higher costs as manufacturers seek other sources, and to delays in deliveries:
“Uncertainty regarding tariffs on imported raw materials is making it difficult to project pricing,” said one manager in apparel.
“We are continuing to experience commodity price increases due to resin shortages and tariffs. Our semiconductor business has experienced a rapid slowdown,” said another manager whose company deals in rubber and plastics.
• A recurring theme is the difficulty in finding workers in middle-skill manufacturing jobs, including technicians and construction workers. Orange County is at full employment, and many of the workers in those segments are 25 to 44, precisely the age cohort that’s been leaving OC due to high costs since about 2000.
“Our most pressing problem is finding qualified employees. The government is paying people too much to not work, so people are not learning skills and looking for jobs,” said a manager at an electrical equipment business.
Find any economist and ask about solutions to close the wealth gap and increase the ranks of the middle class, and he or she will either begin with a sermon on retraining the modern workforce, those without college education, in the jobs OC manufacturers are offering but can’t fill; or they’ll simply say the solution is to raise salaries.
Nonetheless, complaining about higher labor and regulatory costs of manufacturers here is akin to a university dean bemoaning campus politics—it’s been here; it’s not going anywhere. The tariffs are new but perhaps ultimately ephemeral.
Meanwhile, a number of respondents focused on strong demand for military equipment, electronics and more efficient industrial equipment.
That’s the case at Southland Industries, a manufacturer of mechanical, electrical and plumbing systems that recently opened a new and much larger office and manufacturing facility on Western Avenue in Garden Grove; it’s about 208,000 square feet.
Southland employs about 500 locally and did nearly $400 million in OC sales last year, according to Business Journal estimates. It provides mechanical engineering and other services for large construction projects, hospitals and universities among its clients.
Business continues to be strong, and the company keeps hiring and preparing for more growth, Southern California Division Leader Payman Farrokhyar told the Business Journal this month at an open house at the new facility.
The company’s new digs have a variety of employee-friendly perks, including a makeshift brewery, all designed to attract new employees and keep its current ones happy, Farrokhyar said.
The purchasing managers at nondurables companies waxed most sanguine in the survey.
“A very good, borderline excellent, year for us,” one in the food industry said. The nondurable goods industries index increased from 60.5 in the third quarter to 74.2, indicating that the growth rate in the food and beverage and cleaners industries would be much higher in the fourth quarter.
“Food is very cyclical,” cautioned Sfeir.
The durable goods industries index—home appliances, cars, furniture, medical equipment—increased from 61.4 to 65.3, hit hardest, no doubt, by the imposition of tariffs and rising materials costs.
Natural Assets
California and especially Orange County continue to outperform the country in manufacturing output. The fourth-quarter Purchasing Managers Index in the U.S. came in at 59.8, down from the 61.3 recorded by the Institute of Supply Mangers in the summer. Despite the high-tax and regulatory environment, not to mention pesky rules, such as the oft Anthony “Maglite” Maglica-derided 95% U.S. components rule for manufacturers here to label their goods “Made in California.”
But led by our plentiful ports, penchant for innovation and advantageous climate that made the Land of Milk and Honey the nation’s breadbasket—despite a tenuous dependable flow of water—the state keeps exceeding expectations in manufacturing.
A PMI value over 50 indicates growth, and a value below 50 indicates a decline. Purchasing manager respondents to the survey here numbered 360 statewide, 105 of them in OC.
