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Business & Financial

An Updated 2011 Outlook

Robert S. Reichard, Economics Editor

It’s becoming increasingly clear that when final 2011 numbers are tallied, domestic textile firms will end up in the plus column for the second consecutive year. Note, for example, that despite a less-than-robust economy, year-to-date U.S. mill shipments are still running a modest amount above comparable 2010 levels. And there’s every indication that this upbeat trend will continue through the remainder of the year and into early 2012. For one, there are the continuing positive reports from the Institute for Supply Management — a purchasing executive group that reflects the latest grassroots trends. Its latest monthly survey, for example, suggests that downstream apparel manufacturers will continue to experience modest growth. Also hinting at better days ahead are current predictions for a tolerably good holiday buying season, with apparel and other Christmas sales expected to top year-ago levels by anywhere from 3 to 5 percent. Still another near-term upward prod could come from recent declines in gasoline prices, which are off substantially from this past spring’s $4-plus-per-gallon peaks. For the average U.S. household, this means that $500 or more a year in extra cash will now be available for additional apparel and other small-ticket purchases. Given all of the above, Textile World now feels confident that this year’s combined textile and apparel shipments in dollar terms will end up some 3- to 4-percent above 2010 levels. That’s considerably better than the small 1-percent gain TW predicted at the beginning of the year.

BFgraph

The Productivity Factor
Meantime, some longer-term good news comes from continuing mill efficiency gains, which can be traced to still-significant capital outlays aimed at modernization, more flexibility and increased competitiveness. Looking at the past 12 months, for example, the combination of a 1-percent decline in overall mill employment and a 2.5-percent increase in mill production suggests a rather impressive 3.5-percent increase in output per worker. Nor can this be shrugged off simply as a one-year fluke. The fact is that gains averaging out in the 2- to 3-percent annual range have been recorded for many years now. To be sure, such advances may not seem all that earth-shaking. But compound these annual advances over, say, 10 years, and it means that domestic mill productivity is now running anywhere from 23 percent and 35 percent above what it was a decade ago. And that’s one of the reasons why — despite brutal import competition — most state-of-the-art domestic textile mills have managed not only to stay alive but also to prosper. Check the appropriate numbers, and the same productivity fillip is probably behind the fact that most big domestic apparel manufacturers have also been able to keep their heads above water. More important, talks with industry leaders indicate that hefty capital investing and the concomitant efficiency gains they bring are likely to continue. Their reasoning: It’s the only way to survive in today’s increasingly competitive one-world marketplace.

The Labor Cost Impact
This positive productivity factor can probably be best understood and appreciated by assessing its strong dampening impact on domestic labor costs. Again, latest government statistics provide the salient details. They show U.S. textile and apparel productivity increases over recent years pretty much balancing out worker wage hikes. The implication is clear: Labor costs per unit of output at these domestic facilities are no longer increasing, and in some cases, may even be edging down a bit. This is something that can’t be underestimated. That’s because these industries’ production processes are quite labor-intensive — accounting for a large portion of a mill’s and apparel maker’s sales dollar — 16 percent in the case of basic mills, 17 percent for more highly fabricated mill products, and a really impressive 37 percent when it comes to apparel makers. Equally significant is the fact that this flattening out in U.S. unit labor costs has been occurring at a time when pay costs incurred by overseas competitors have been accelerating. In the case of China, for example, wage costs have been rising at a more-than-10-percent annual pace over the past few years. And almost-as-big jumps are reported by many other foreign competitors. Bottom line: A trend that is beginning to narrow the overseas mill and apparel manufacturer cost advantage. Indeed, this is probably one reason why overall U.S. imports of these products on a square meters equivalent basis have peaked out this year — falling 1 percent overall and by nearly 2 percent in the case of China.

November 2011

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