This article is published by the associated press on The New York Times of 4th September 2012. The article talks about the declining production levels in the manufacturing sector as a whole. This includes statistics on manufacturing businesses as well as construction industry. As expected, the drop in manufacturing has also led to a drop in employment levels and as such, firms and businesses have been employing workers at a lower rate. The article also attempts to give reasons as to why the drop in manufacturing numbers has occurred. The paragraphs that follow review the specific components covered in the article.
The article reports that factory activity in the United States of America shrunk in the month of august. Various reasons have been given to explain this occurrence; drop in new orders, the general global economy remaining sluggish and weak consumer spending in August. The index of manufacturing activity for the month was 49.6, which was a decline of 0.2 points compared to the number for the month of July (The Associated press, 2012). A senior United States economists attributes the fall in manufacturing activity to the slowdown in economic activity in Asia, the recession in Europe as well as tax increases and spending cuts that are about to come into force in the United States.
The immediate effect of shrinking factory activity is the loss of jobs for some of the factory employees. This is because factories and many businesses cannot keep employees who do not benefit them. If the output level declines and the number of employees remains the same, then it means that output per employee will have reduced. This does not make economic sense for the factories and therefore they decide to lay off some of their employees to balance the equation. Another reason that pushes businesses to lay off employees is the wage bill. A decline in output also means a decline in the profitability of a business. Given that most businesses use a markup on their cost to make a profit, they are forced to lay off some of the employees so as to reduce their cost and maintain their profitability. The article reports that employment levels fell, indicating that there was no growth in output, and that some companies may have started laying off some of the employees.
The recession in Europe is listed as a factor that has caused the drop in manufacturing activity in the United States of America. Europe is a big market for products manufactured by American companies and therefore, a recession there is bad news for American companies. A recession in Europe means products are more expensive there and so consumers may react by cutting down on their spending on commodities, or shift to cheaper options. If consumers cut down on their spending, it means the demand for a commodity has decreased. If the demand decreases and given the law of demand and supply, supply must also reduce. This may explain the decline in manufacturing activity in America. The recession in Europe may also cause consumers to shift to cheaper commodities. These may be from Asian countries like China, since it is cheaper to produce commodities in china than in America. This also forces a decline in output for American companies.
A slowdown in most Asian economies have also been mentioned as the reason for the drop in the manufacturing numbers in the U.S. Asia also represents a large proportion of the market for American manufacturers. A slowdown in these economies, therefore, has a negative effect for companies in America. The slowdown in Asia has mostly been attributed to the Euro zone crisis (Cookson, Rabinovitch & Hume, 2012). The European region is a big market for commodities from Asia, so the crisis has meant a decline in sales from Asian companies, a decline in income in Asia and consequently a decline in demand for commodities from America.
The impending tax increases and spending cuts have also affected manufacturing sector. More taxes for manufacturing companies will mean the companies have to charge a higher price for their products, which will most likely affect their sales negatively. Cuts in spending by the government means that subsidies given to manufacturing industries may be reduced or eliminated. This in turn means that the companies will have to bear an extra cost, which they may be forced to pass on to the consumer through higher prices. This affects them negatively because they will be competing with cheaper products in the market. China, for example, has waived some taxes for its manufacturing companies. This makes them price their products lower.
Data on the construction industry indicate a drop in residential construction, but a rise in single homes and apartment constructions. The details are best explained by the graph below:
References
Cookson, R, Rabinovitch, S & Hume, N (2012, Aug 1). Global Slowdown Bites Across Asia.
Financial Times. Retrieved from http://www.ft.com/intl/cms/s/0/a19b0786-db85-11e1-a33a-00144feab49a.html#axzz25tolopu61
THE ASSOCIATED PRESS (2012, Sept 4). Manufacturing Activity Declined in June. The New
York Times.
Retrieved from http://www.nytimes.com/2012/09/05/business/economy/us-factory-output-shrinks.html?ref=economy
