Manufacturing slumps in Minnesota and across the country

Midwest manufacturing conditions sank to their lowest levels in three years in November amid trade wars, drooping sales and anemic hiring, but they were still better than the country as a whole.

The Mid America Business Conditions Index, a widely watched Creighton University report that tracks manufacturing conditions in Minnesota and eight other central states, fell into negative growth territory for the third time in four months. November's index slumped to a worrisome 48.6 from 52.6 in October.

Any index below 50 signals economic contraction, so economists were not excited to see November's decline — especially after conditions appeared to have rallied in October following disappointing indexes in August and September.

"Slow global growth and trade skirmishes and wars are negatively affecting growth among manufacturers in the region," Ernie Goss, director of Creighton's Economic Forecasting Group, said on Monday. Minnesota's index slipped to a tepid 50.9 in November from 51.3 in October.

The Institute of Supply Management reported a national index of 48.1, down from 48.3 in October. Bloomberg reported that Wall Street was expecting a bump up to 49.4. Of concern was weakness in inventories and new orders, which is a predictor of future conditions.

The markets were down widely on the news, as well as President Donald Trump's announcement that he would raise tariffs on steel and aluminum from Argentina and Brazil and his reiteration that if talks with China break down, U.S. tariffs on goods from that country would rise as well.

The nine-state region — which also includes the Dakotas, Iowa, Nebraska, Kansas, Missouri, Arkansas and Oklahoma — suffered one of its worst employment declines in years and saw significant declines in new orders, overall sales and exports during the month.

Factory heads and supply managers reported in surveys that they continue to be hurt by the inability to find new workers to hire. Goss said the region lost jobs at a pace of 0.1% for the year, while U.S. manufacturing as a whole saw job growth of 0.04%.

Marc Suarez, senior vice president of operations at Daikin Applied Americas, said Daikin's Faribault and Owatonna operations are both growing but are somewhat hamstrung by the inability to add staff quickly.

The heating and air conditioning equipment giant just bought, renovated and opened a $40 million factory in north Faribault. But adding the 200 new workers needed there is proving tough, Suarez said. The company is offering training opportunities and expanding its recruiting reach to the south suburbs.

"We are trying all sorts of new things to attract talent," he said. "Some of our growth is outpaced by our ability to bring in direct labor. We would grow even faster if we were not constrained by tight labor."

To get workers in the door, Daikin is offering "tremendous" training to job applicants interested in learning metal machining, Suarez said. Daikin also put hiring ads on all of its trucks and factories and is expanding recruiting reach into Lakeville, Apple Valley and other Twin Cities suburbs.

Creighton economists said other manufacturers are also changing up recruiting methods to attract more workers. But hiring is not their only concern.

The Midwest factory managers also said the trade war with China and uncertain trade policies with Mexico and Canada have affected business and boosted the price of supplies needed to operate their factories. The policies have also affected the companies' ability to sell abroad.

Regional export orders in November fell to an index of 39.1 from 44.7 in October.

At the same time, import orders jumped to an index of 52 in November as factory heads ordered raw materials and other supplies ahead of a new round of U.S. tariffs that take effect later this month for Chinese goods.

Goss noted that many factory heads acknowledged the pain of the tariffs, but many said they support the tariffs because they hope they will eventually lead to better and fairer trade policies down the road.

"Despite the negative impact of the trade war on jobs, 60% of supply managers in our survey support continuing, or even expanding, trade restrictions and tariffs on imports from China," Goss said. "As one supply manager responded, 'Tariffs should be applied to combat unfair trade practices or due to adequate domestic supply.' "

Even so, some 77% of those surveyed said they will pass along the increased cost of the tariffs to consumers.

The Midwest manufacturers also injected a dose of optimism. Supply managers were upbeat about the next six months, registering a business confidence index of 52.9. That was up substantially from October's very weak 47.3, Goss said.

"I expect business confidence to depend heavily on trade talks with China, and the passage of the nation's trade agreement with Canada and Mexico, or USMCA," Goss said. "Quick passage of USMCA is very important for the regional economy and business confidence."

Suarez said tariffs have "negatively" affected Daikin, which builds large heating and AC systems for office towers and factories across North America.

"What tariffs have done is drive our supply chain organization into high gear," he said.

Daikin will definitely see cost increases, and it has tried several strategies, including having suppliers absorb some of the costs and looking for alternate suppliers.

Dee DePass • 612-673-7725