Episode Show Notes
Episode 2 features Christopher Thornberg, Ph.D., Founding Partner at Beacon Economics LLC. Christopher discusses the current state of the economy and what he calls the “stimulus hangover.” In addition, Christopher covers key indicators of economic health, trends impacting the manufacturing sector, and what manufacturers should look out for in the future.
Christopher Thornberg, Ph.D., founded Beacon Economics LLC in 2006. Under his leadership, the firm has become one of the most respected research organizations in California, serving public and private sector clients across the United States. In 2015, Dr. Thornberg also became Director of the UC Riverside School of Business Center for Economic Forecasting and Development and an Adjunct Professor at the school. An expert in economic and revenue forecasting, regional economics, economic policy, and labor and real estate markets, Dr. Thornberg has consulted for private industry, cities, counties, and public agencies. He became nationally known for forecasting the subprime mortgage market crash that began in 2007 and was one of the few economists on record to predict the global economic recession that followed. Dr. Thornberg holds a Ph.D. in Business Economics from The Anderson School at UCLA and a B.S. degree in Business Administration from the State University of New York at Buffalo.
Highlights
00:00:00 - Introductions
00:02:12 - Key indicators of a healthy economy
00:04:37 - Discussion about the “stimulus hangover”
00:06:52 - Effectiveness of Federal Reserve’s attempt to lower inflation through interest rate policy
00:10:22 - Factor in higher interest rates for economic planning
00:13:53 - How consumer spending affects the economy
00:15:49 - Key indicators used to assess the health of the manufacturing economy
00:16:56 - Health of California manufacturing economy
00:18:40 - Biggest economic trends impacting the manufacturing sector
00:20:59 - Role of automation in manufacturing productivity
00:22:38 - Key indicators of how economies around the world might impact manufacturing locally
00:25:03 - Discussion about manufacturers leaving California
00:29:25 - Discussion about manufacturers moving within the state
00:31:57 - What manufacturers should know related to the current state of the economy as well as the next 6 to 12 months
Transcript
Gregg Profozich [00:00:00] In the world of manufacturing, change is the only constant. How are small and medium-sized manufacturers SMMs to keep up with new technologies, regulations, and other important shifts, let alone leverage them to become leaders in their industries? Shifting Gears, a podcast from CMTC, highlights leaders in the modern world of manufacturing, from SMMs to consultants to industry experts. Each quarter we go deep into topics pertinent to both operating a manufacturing firm and the industry as a whole. Join us to hear about manufacturing sector's latest trends, groundbreaking technologies, and expert insights to help SMMs in California set themselves apart in this exciting modern world of innovation and change. I'm Gregg Profozich, director of advanced manufacturing technologies at CMTC. I'd like to welcome you. In this episode, I'm joined by Christopher Thornberg, Ph.D. founding partner at Beacon Economics LLC. Christopher discusses the current state of the economy. And what he calls the miserablist narrative in today's media. In addition, Dr. Thornberg covers key indicators of economic health trends impacting the manufacturing sector and what manufacturers should look out for in the future. Welcome, Chris. It’s great to have you back again. You always have such great insights to share. I can’t wait for our conversation.
Christopher Thornberg [00:01:16] Great to be back, Gregg.
Gregg Profozich [00:01:18] Chris, I think it’s fair to say that there are numerous situations here at home and around the world that are impacting the economy. Continuing COVID-19 effects, supply chain issues, the war in Ukraine, et cetera, et cetera. As one reads the headlines, it’s easy to get confused. There’s a lot of press about the economy, and oftentimes there are conflicting messages from day to day. Now, we know that all the predictions are just that, predictions, educated guesses about the economic future based on a given set of indicators and trends. Our focus today is about the manufacturing industry. The question is: how can SMMs make sense of all the economic information and make the right decisions about their growth strategies, capital investments, et cetera for their businesses? Chris, we all hear stories in the media each day about the state of the economy, from fears of recession to interest rate policy and the Federal Reserve related to inflation. For context, before we start specifically talking about manufacturing, what is the state of the overall economy? What are the key things that you look for to say is the economy healthy, and what direction is it going?
Christopher Thornberg [00:02:12] Well, clearly, we’re in the midst of a little bit of an existential crisis at the national level. Every time you pick up the paper there’s somebody else discussing the recession that’s about to happen. Now, I don’t necessarily buy into these headlines, and I don’t think the folks out there listening to this should be buying into it as well. The track record of the forecasting communities to predict recessions is incredibly abysmal. They’ve missed the last three big ones completely and have called many a recession that didn’t happen. Thus, these kinds of dire headlines are not something you should immediately internalize. I can tell you that we don’t think there’s going to be a recession, mainly because we don’t see why there would be a recession. In my world I always think about recessions as being driven by some major shift in demand. Take, for example, the Great Recession. If you looked at where the economy was in 2006, it was clear it was on an unsustainable path. People were borrowing too much money. We were building too many homes. People were spending too much. Interest rates were too low. Wall Street was full of all sorts of weird financial products that didn’t make any sense. In other words, at some point the bottom was clearly going to fall out, and we were going to see some major changes in the underlying structure of demand, and that was going to cause a recession. That’s why back then, I called the recession. I look across our economy here at the beginning of 2023 and don’t see any of these big imbalances. I don’t see anything that could cause these kinds of rapid changes that would suggest to me that the US economy is going to go into a recession. We’re not on that particular bandwagon. Now, I understand where some of these dramatic headlines are coming from. After all, 2022 was marked by a big increase in the pace of inflation and then, of course, was followed by a big drop in interest rates. Certainly, we’re seeing some slowing in interest rate-sensitive sectors of the economy like housing, for example, but these are not, if you will, just exogenous negative shocks that are inherently going to put our economy into a recession. In fact, I would go so far as to say I don’t think we’ve ever had a recession that’s been driven by rising interest rates and inflation. These are nothing more than the consequences of the excessive stimulus they put into place over the course of the pandemic. I argue that 2022 is more or less, was the year of our, shall we say, stimulus hangover. They overdid it. Now things have to re-equilibrate in terms of prices going up, interest rates going up. We’re going through that process. It seems like we’re coming out the other end. I anticipate 2023 should be a great year.
Gregg Profozich [00:04:37] The stimulus hangover—is that a term you’ve coined, you guys have trademarked?
Christopher Thornberg [00:04:45] Maybe I should, now you mention it. But no. Let me explain what I mean by that. Let’s go back to the pandemic itself. Because if you think of these negative headlines right now, they’re nothing new. Indeed, I’ve been talking about how we continuously talk about the economy as being bad when it’s good. We’ve been doing that, really, since the end of the Great Recession. In 2019 the same folks who were calling a recession now are calling a recession. Back then, it was about the Chinese trade war. Then in 2020, these folks told us that it was going to be a Great Depression that was created by this pandemic, even though that was an entirely nonsensical prediction. Again, where would you come up with that idea? It’s a complete non sequitur. We’ve never seen a pandemic cause a major recession or a depression, and the idea that this one would never made any sense. You know the actual closures because of the pandemic cost us a little over a trillion dollars of economic output. Every dollar of economic output that was lost, Congress put back almost $6 of stimulus. That’s a crazy amount of money, and it’s not rocket science what happens when you do that. Economics, in many ways, was founded on the study of currency, and inflation, and these kinds of monetary factors within an economy. When you throw that much money at the economy, you increase the money supply by 40%, it inevitably is going to create, in the short run, a surge in investment, and asset prices, and consumer spending. It feels good, but ultimately, an economy’s ability to produce goods and services is determined by its technology, the number of people it has, the number of machines it has. You can’t create new output by throwing money at the economy. One thing you do is you push demand beyond the economy’s ability to actually supply it, so prices have to go up. The hangover part of this situation is prices start to go up, inflation increases, interest rates start to rise, and all that big increase in consumer spending and business investment start to back off again, and asset prices come down again. That’s 2022 In a nutshell. It was the stimulus hangover. We’re not quite there. We’re coming out of it. But again, underlying that stimulus hangover, the economy’s in pretty good shape.
Gregg Profozich [00:06:52] The Fed’s been attempting to lower the inflation rate through interest rate policy. How effective has this been, and how long are they likely to hold interest rates at the current levels? Do you think they’re still going up, or they’re going to be leveling out? They coming down? What’s your sense of that? I know it’s not an exact science.
Christopher Thornberg [00:07:09] Well, of course not. What’s interesting about this process is they created the inflation through quantitative easing. That is to say, they printed up $5 trillion in new money and bought government debt with it. More or less, they monetized most of that stimulus spending by Congress. When they decided they were going to fight inflation, they went a different route. They didn’t use quantitative tightening. They’ve done a little bit of that, but it’s been minuscule. The vast majority of the efforts have been raising up the federal funds rate. For those wondering, the federal funds rate is an interbank overnight lending rate. The deposits and the demand for loans in the banking system are not, sorry to say, equal across banks. Banks basically go back and forth lending. Those who have excess deposits lend to banks that have too few deposits. That all happens through those federal fund markets. What the Federal Reserve is doing there more or less is pushing up the interest rates in that particular market, which tends to cascade out into other types of interest rates in the overall financial system. It’s weird because it gave us inflation with A and they’re trying to take it away with B. Functionally speaking, they haven’t really done a lot. Yes, they’ve cooled off parts of the economy a little bit, but all the money out there, the only thing they’re doing is they’re slowing down the pace of inflation. They’re not going to actually stop the overall amount of inflation that has to take place because they’re not really getting rid of any money. In a sense, they’re just stretching out the inflationary surge rather than having it all happen at one time. I don’t think it’s going to make, shall we say, much of a long-run difference in terms of where the price levels end up. With that in mind, where’s the Fed going now? Well, look, they’ve done their job. We’re clearly over peak inflation. Things are cooling off. Parts of the economy that were excessively hot, like the housing market, is cooling off. As a result of that, I think a lot of this fear in the Federal Reserve of inflation is starting to fade. They have more or less been announcing what they’re going to be doing, and it seems as if they’re going to continue on the current path, which is pushing up the federal fund rate probably a hair below 5% and just leaving it there. Now, what does that mean for interest rates? Well, look, if you look at things like, say, the 10-year bond or mortgage rates, they’ve already settled out. They’ve already found a path that the market seemed comfortable with based on where they think Fed policy is going, where they think inflation is going. I think as long as there are no big surprises here—that is to say, the Fed doesn’t change course, or we suddenly don’t see another acceleration of inflation—I think you’re going to see exactly what they’re saying is going to shake out, and rates are going to pretty much stabilize. Do I think they’re going to come down again? No, not really, and I don’t think they should. Really, over the last decade, the US economy has seen excessively low interest rates, which can be distortionary. It can create problems in the economy. It certainly ties the Federal Reserve’s hands in terms of the kind of policies that they can put into place. I think we probably all should just expect interest rates to stay elevated where they are right now relative to, say, five or six years ago. But keep in mind that the interest rates we see today are still relatively low relative to any time prior to 2006. It’s not as if we’re in a high-interest-rate economy. We’re just in a normal interest-rate economy right now.
Gregg Profozich [00:10:22] I think if I remember… For those of us old enough to remember early 80s, wasn’t the interest rate somewhere in the 13%, 15%, 17%? I don’t remember the number exactly.
Christopher Thornberg [00:10:32] Oh, yeah, for sure. There was a point in time… If you’re a Gen Xer, you invariably had a father who would always go, “Oh, I remember 1982 when I was paying a 16% mortgage rate on my house.” As we got older, that number got higher too. I think by the time I was in my early 20s, that was up to 47% or something like that, typical dad acceleration of content if you will. Again, what was interesting about that is my father was a real estate agent. He had his own brokerage in Rochester, New York, where I was raised. I actually asked him one time, “What were the best years for you as a real estate broker?” He actually said, “1983, ’84, and ’85.” I said, “Wait a minute. Weren’t mortgage rates double-digit? Weren’t you complaining all the time about mortgage rates, how high they were? You’re telling me you made the most money then.” He said, “Yeah, but once they built that into their expectations, things are fine. If interest rates are high, you know what you do? You put down more money. There are ways of dealing with this.” The big thing, the big lift then, was not the issue of interest rates, but just after five, or six, or seven years of a lot of interest rate uncertainty, inflation uncertainty, economic uncertainty because of the big mountain of inflation, well, that had finally faded away, and people were back to living their lives, and buying homes, and doing that kind of stuff. Stability is more important in a lot of ways than, shall we say, levels.
Gregg Profozich [00:11:59] It’s only when I’m paying a 12% mortgage, and suddenly it drops to 6% that I want to refinance and do things. If it’s 12% and it goes to 11.5%, well, okay, maybe not. Thirteen, so what? If it’s hovering in a range stably.
Christopher Thornberg [00:12:14] We can even see that a little bit closer to home. We know in the last part of the last year that, real estate got really cold really quickly, and mortgage rates have peaked at just about seven percent. Well, the Federal Reserve has backed off, inflation has cooled off, the bond markets are coming down, and mortgage rates are now hovering a little above six percent. Even that drop from seven percent to a little above six percent is getting people back into the market. I’ve been talking to a lot of folks at the ground level who say, “Yeah, it looks like things are settled out, and people are showing up. They want to buy again. They’re out there looking again.” We just need some certainty inasmuch as you can get it, and then you can go out and again make your decisions.
Gregg Profozich [00:12:53] I think I hear you saying that we’re not going to see three-and-a-half percent mortgage rates anymore. We’re not going to see those kind of lending rates in the economy. If I’m a small businessperson, if I’m a manufacturer, if I’m a homeowner, or I want to be a homeowner, I should start discounting this new level of stability into my equation for my economic planning for my future planning.
Christopher Thornberg [00:13:12] Oh, absolutely. You just need to focus in on higher interest rates. I’ll tell you what, that does mean that housing is going to be more expensive. I think there has to be some repricing in the housing market just like in other asset markets like the equity markets, but again, that’s okay. Everybody complains that maybe the price of their homes is going to fall over the next six months. You’re still vastly up from where you were three years ago. Again, I don’t want to hear complaints.
Gregg Profozich [00:13:36] A little bit of a correction is a little bit of a correction.
Christopher Thornberg [00:13:40] Yes exactly.
Gregg Profozich [00:13:42] What are the key economic indicators that you focus on to assess the overall health of the economy? Is it one thing you look at? Do you look at five indicators? Where do you go?
Christopher Thornberg [00:13:53] I think you need to focus on a lot of different things. I don’t think there’s one, or two, or three big things. Obviously, I pay attention to consumer spending. Consumers are over two-thirds of the US economy. If the consumers are moving forward, they can lift a lot for the other third of the economy. That’s exactly what happened. We just got the January retail sales number out this morning. Lo and behold, after a couple of months at the end of last year, it jumped up pretty sharply in January. These are all seasonally adjusted numbers. What it meant was Christmas wasn’t quite as hot, but we also didn’t have the big post-Christmas sell-off the way we typically do, a big drop in sales. But however you look at it, consumers are out there, and they continue to do well. This is probably the big surprise. All those pessimists out there were telling us that consumers were getting crushed by inflation. Quite the opposite. It was excessive consumer debt that was pushing inflation. They had the story exactly opposite. Consumers still have money. They’re still sitting on cash. Cash balances in American households right now are almost $5 trillion, which is five times what it was before the pandemic. Americans still have tons of money. They’re still trying to spend it. They’re still traveling. That’s going to keep this economy moving even if we have, again, some, shall we say, less stellar figures coming out of our real estate market.
Gregg Profozich [00:15:16] Your last visit here earlier on in the pandemic, we were talking about the fact that… You mentioned that consumers still had money; they just shifted how they spent it.
Christopher Thornberg [00:15:25] Exactly.
Gregg Profozich [00:15:26 ] I couldn’t go out to a restaurant. I couldn’t go on vacation.
Christopher Thornberg [00:15:28] It was spending that was transferred, not spending that was canceled. That was a critical difference. That’s exactly why we had the big V. As soon as things started going again, as soon as people found some place to spend their money, they spent it, and things got up and running again. That’s different than the Great Recession, where we just had a giant decline in spending because people had been spending way too much. It was spending canceled.
Gregg Profozich [00:15:49] Is there a key set of indicators that you would look at in assessing the health of the manufacturing economy? Let’s get specific to small manufacturers now. We’ve talked in some broad terms now. For a manufacturing economy, what are the keys you have to be watching?
Christopher Thornberg [00:16:05] You got to look at the big drivers of demand. What’s happening, for example, in different types of business investment? Well, we know, for example, investment in housing is cooling off, but investment in business equipment is still doing really well. That’s good for manufacturing, that’s for sure. Exports. We had a good year for exports in 2022. That’s good for manufacturers. We know that for sure. Of course, last but not least, as I already noted, consumer spending. Where are consumers going? Again, those numbers seem pretty good. For me, if you think about manufacturing, you got to think about the sources of demand. What’s clear is the sources of demand for the products being produced by our nation’s manufacturers still remains pretty darn strong. Now, industrial production has cooled off a little bit in the last couple of months but a small amount from the high point it hit at the end of last year when it was at an all-time high level. Manufacturing still looks pretty darn good.
Gregg Profozich [00:16:56] Let’s talk specifically about that. California manufacturing economy. What can you say about it? What’s the health of it? What’s the state of it? What’s the latest trends?
Christopher Thornberg [00:17:04] Well, the latest trends are things are cooling off a bit coming into the second half of 2022, but still pretty close to an all-time high level. That comes from the state GDP numbers.
Gregg Profozich [00:17:15] ’22 or ’23?
Christopher Thornberg [00:17:16] At the end of ’22. We don’t have any ’23 data. It’s too early in the year to get anything good. We don’t even have the fourth quarter for 2022 yet for California. Things cooled off a little bit in the third quarter. But overall numbers still look pretty good, all said and done. We’ve continued to see good, strong numbers, which is odd because a lot of people don’t realize that California is still an enormous manufacturing powerhouse in the nation. We actually have more manufacturing output than any other state, including Texas, by a good margin. Our manufacturing sectors are doing pretty well.
Gregg Profozich [00:17:48] California is a manufacturing powerhouse. I haven’t seen any updated numbers since closures. There have been some since COVID. But two, three years ago, it was fair to say that there were more manufacturers in LA County alone than there were in 41 states statewide.
Christopher Thornberg [00:18:03] I buy that. I actually do buy that.
Gregg Profozich [00:18:06] It’s that big. There’s between 12,000 and 14,000 manufacturers in LA County at the time, and 41 states don’t have 12,000 to 14,000 manufacturers statewide. It’s a huge powerhouse.
Christopher Thornberg [00:18:16] I’ll tell you, back in 2017, California had about 15% of all US output. California is about 15% of the US economy. That makes a lot of sense. In 2021 it has actually jumped to about 16.7% of US output. We’re actually picking up market share. Again, as far as manufacturing goes, California still seems to be where it’s at.
Gregg Profozich [00:18:40] Awesome. Well, that’s good news. What are the biggest economic trends impacting the manufacturing sector? We want to start talking about things that can help the small to midsize manufacturer—and the large manufacturer—think about how to make decisions. The story out there is that there’s a recession coming; be careful. The economic news isn’t necessarily good all the time that we read. If I have to make capital investment decisions, if I have to make growth and expansion decisions, what do I look at to try to figure those things out? What are those indicators that would drive you?
Christopher Thornberg [00:19:12] Well, again, I argue that there’s not going to be a recession. With that in mind, it’s the standard long-road stuff. Where are your sources of demand coming from, and what do you see local on those particular fronts? When you think about California and our manufacturing sector… Don’t get me wrong. There are some negative trends. One of them is that California’s exports are not doing all that well right now. The global economy hasn’t recovered quite as much as the US has from the pandemic yet. But also, we got to keep something in mind, which is the dollar is really strong right now, which is a problem for manufacturers. Makes them a little less competitive on that international front. Exports have been picking up at some level, probably not as much as we would have hoped on the back of the pandemic, but they are recovering. Things are looking a little better. One of the good things for manufacturers is the fact that businesses are investing a lot in equipment right now. It’s interesting. Why are they doing that? Well, we have a two-edged sword in our economy right now, both nationally and locally. That, of course, is a lack of workers. The US economy, as of January, had a 3.4% unemployment rate. That is the lowest unemployment rate since, I believe, 1968, to give you some sense of things. That, of course, leaves us with a phenomenal number of job openings still. Now, why is this good for manufacturing? We understand why it’s bad for manufacturing. It’s obviously bad because, well, pretty darn hard to run a business when you don’t have enough people. But remember that a lot of other businesses have to deal with this by, of course, investing in machinery. How do I do more with less? How do I increase my use of capital, machinery, information technology in order to get over these labor shortages? That, of course, is giving a nice lift to manufacturing because manufacturing produces those machines that are labor-saving.
Gregg Profozich [00:20:59] Excellent, okay. The shift that’s happening there is more towards automation.
Christopher Thornberg [00:21:06] Exactly. How do I get my warehouse to use your people? How do I get my restaurant to use your people? Like you said, it’s all about automation.
Gregg Profozich [00:21:14] Even inside of manufacturing. We’ve got a number of clients at CMTC who bring us in to look at, “I can’t get people. Can I have robots do the jobs they used to do? Can I do automation somehow?” How do I get more efficient and do the same output with less number of people I now have, not because I got rid of anybody, because I can’t get them in the door?
Christopher Thornberg [00:21:35] Exactly. For all the calls of recession, most businesses will tell you, “My profits are fine. It’s my labor force I’m having a problem with.” You have to invest inside the manufacturing plant as well. Of course, those problems are profound in California, even more so than in other parts of the nation because of our housing shortage. The problem is already bad in California at some level. But then again, it’s now everywhere. Perhaps California manufacturers have a head start because they’ve already been dealing with labor shortages, and they understand you have to do things in a different way.
Gregg Profozich [00:22:06] California has been increasing productivity for a decade or two with the same or a shrinking workforce. It’s one of the higher productivity per worker states. A lot of that is automation and the use of technology to get to that next level.
Christopher Thornberg [00:22:23] A lot of it’s that, but a lot of it’s also that we produce a lot of information technology manufactured goods, which, of course, tend to be very capital intensive. The structure of our manufacturing output as well as, if you will, the automation, has to go into place in the labor-scarce place.
Gregg Profozich [00:22:38] You talked a little bit about exports. We talked a little bit about some of the challenges for manufacturers. Supply chain has been a challenge, and there are still issues around the world. Manufacturing in California doesn’t happen in a vacuum; it happens through a global supply chain. What are the key indicators that you looked at to understand how the economies around the world might impact manufacturing locally?
Christopher Thornberg [00:23:00] Well, first thing I do, of course, is just look at indicators having to do with trade disruption. The New York Federal Reserve has a nice global trade cost index or a global trade disruption index where they look at various sorts of things. It actually has come down pretty sharply from the chaos we saw a year ago. You remember a year ago when there were boats parked all the way down the coast trying to get into Los Angeles or Long Beach. Well, that’s faded. Number of boats is down. There’s fewer delays. We’re starting to catch up. Now, are we there? No, we’re still not there.
Gregg Profozich [00:23:31] I heard part of the problem was those boats moved to other ports around the nation.
Christopher Thornberg [00:23:35] Exactly. But part of it’s also that they’re starting to pick up. We’re finally getting on top of this thing, as the case may be, and clearing out the inventory. Things are clearing out a bit. A little bit of everything. Even more, going through airports or whatnot. A lot of importers realize, “Well, maybe I can’t do it on a boat. Maybe I’ll just suck it up and put it on a plane instead because there’s plenty of airports.” However it is, we seem to be getting over the hump. We seem to be catching up. Things are less bad now than they were a year ago. I think that trend will continue, Now, does that mean everything’s fine? No. It’s still lots of delays out there. Oh boy, two months ago, I picked up a rock from a truck, and it cracked my windshield. Took me two months to get a new windshield. You know they’re still behind. You know they’re still trying to catch up. A lot of things they’re still… You try to get a brand-new HVAC system for your new warehouse, it’s still going to take you six months to get the stuff in the door. Remember, a year ago is nine months, if at all. We’re getting there. We’re starting to catch up. Of course, China is starting to reopen a bit, and that’s going to be helpful. We know that they’ve decided to finally get over the dramatic COVID protocol and just deal with it. Things are doing a little better over there as well, and that’s certainly helping the situation. We’re over the hump on that one, but we’re not out of the woods. How do you like that for a mixed metaphor?
Gregg Profozich [00:25:03] Fair. I think it makes sense, and I think it’s fair. On your last visit here on Shifting Gears back in season two, we talked about specific shifts occurring in the California economy related to small and midsize manufacturers. I’d like to touch on those again if we can. First is manufacturers leaving California. Do you have a sense of what the latest trends are? Is it flattening out, or are they still going?
Christopher Thornberg [00:25:28] Well, it’s interesting because we hear a lot about companies leaving California. The funny thing about that is this is more story than reality. Very few companies “move.” The vast majority of changes in employment are establishments or companies closing and opening rather than moving, actually picking up and moving, as the case may be. We don’t have a lot of good data on moving businesses except for we’ve tracked down enough of it to know that it’s a tiny share of what’s actually going on, as the case may be. More broadly speaking, if you said, “Well, what are the trends in overall manufacturing?” for the most part, most sectors continue to grow faster in California than for the US overall. Not all. Some are moving in the opposite direction. For example, we’re falling behind on petroleum and coal products. We’re falling behind on furniture production. That is to say, our share of national output in those fronts is starting to go down. But other things, for example, computer electronic products, our relative share output is going up. Or you could look at some sectors like equipment, appliances. We’re capturing more market share there. Machinery manufacturing. We’re capturing more market share there. If you just look at the number of establishments in the state, well, we recently crossed 45,000 manufacturing establishments. To put that in context, a decade ago, we had about 40,000. If you wanted to look, say, for example, in Texas, they are at about 27,000 manufacturing establishments. Whether you’re looking at output, whether you’re looking at the number of actual establishments, we seem to be growing faster than the US overall. That says to me maybe there’s a couple high-profile headquarters moving. But obviously, the state of the state’s manufacturing sector seems to be just fine, thank you.
Gregg Profozich [00:27:27] I understand that, and I think that makes sense at a level, especially if something like what I’m about to say is going on, where some of the older industries are having a harder time adopting technology or meeting the environmental requirements in California would be phasing out, and the new ones are going to be the newer high tech things. Is that the phenomenon we’re seeing?
Christopher Thornberg [00:27:46] I think we are seeing some of those dirtier industries move out at some level. It’s hard to say because these are relatively broad classifications of industries, even within these industries, you may see coming and going. What’s often interesting about this, though, is you very often don’t see manufacturers move because of what I would call regulation. Really, they tend to leave on the basis of a lack of certainty or a lack of understanding. A lot of manufacturers will tell you, “Just tell me the rules, and I’ll deal with it.” What they hate is regulatory uncertainty. When you’re trying to make a plan, and you just can’t get a straight answer on what I could do or not do, because that’s when you get yourself into trouble. “I just made a $14 million investment in a new piece of machinery, and now the state’s telling me I can’t use it.” That’s where they get frustrated. I remember years ago, there was a steel manufacturer or I think a roller up in the Bay Area who was going crazy because they needed to get a new forklift to move some stuff around, and the state kept saying, “Well, you need to use an electric forklift.” They’re like, “You can’t. They don’t exist. There is no electric forklift in this size category. It doesn’t exist.”
Gregg Profozich [00:28:59] It doesn’t have the payload we need.
Christopher Thornberg [00:29:03] Exactly. “I can’t do that. You’re telling me to do something that’s not physically possible.” This is the stuff that makes manufacturers go, “Screw it. I’m going to go to Arizona.” It’s a matter of just having distinct rules and following them. Then you could pretty much keep things moving ahead on a decent level.
Gregg Profozich [00:29:25] Any ideas about movement within the state? Are we still seeing an exodus towards some of the central valley?
Christopher Thornberg [00:29:34] Oh, absolutely. You got to remember that the coastal areas… When you think about labor shortages, the coastal areas are particularly profound. Cost of land is particularly profound. You do have a circumstance by which if you’re a manufacturer, say—I don’t know—in the Bay Area, you’re probably looking at the East Bay, just because there’s more space, more opportunity to get a new factory going out there than there would be in very expensive San Jose or San Francisco. I did some work not too long ago where we looked at where were the big growth in manufacturing jobs in the state. The big ones were, as already noted, the East Bay, what we call the Oakland MSA: Alameda, Contra Costa County. Sacramento has been seeing a lot of growth over the last few years in manufacturing employment. San Luis Obispo is an interesting place in terms of overall manufacturing jobs. They’ve been doing better. A person would think, “Well, why? They’re making all that great wine,” but actually there’s a nice little technology industry in the central coast there that’s doing pretty well, as well, doing some high-tech manufacturing. Or even a place like Santa Cruz. Yet again, overflow, if you will, from the San Jose manufacturing core. They’re moving down there and doing a different kind of thing. Taking advantage of being, if you will, Silicon Valley adjacent but not actually being in incredibly expensive Silicon Valley. They’re moving a little bit farther afield—not surprising—but not really so much out of state.
Gregg Profozich [00:31:00] For southern California, moving towards the Inland Empire: Riverside, San Bernardino, or…?
Christopher Thornberg [00:31:05] Inland Empire for sure, although not as much as you might think. One of the issues of the Inland Empire is out there in particular, you find yourself competing with warehouses for people. That’s an enormous warehouse sector. I know that could be a bit of a problem for folks trying to locate out there. In fact, if you look at southern California, actually, Ventura, even though it’s significantly smaller than the Inland Empire, has actually had more manufacturing job growth over the last few years. Of course, the central valley, both Stockton and Fresno, have seen a decent increase in jobs as well. It’s more the second-tier markets that are picking up these jobs right now. But again, that shouldn’t be a surprise. Manufacturing typically occurs on the peripheral parts of an urban economy, not in the central core.
Gregg Profozich [00:31:50] The steel mill’s not in downtown.
Christopher Thornberg [00:31:53] Not anymore. It used to be a long time ago.
Gregg Profozich [00:31:57] Used to be. As we’re wrapping up and bringing our conversation to a close, any other key things that you think manufacturers should know related to the current state of the economy and the next 6 to 12 months?
Christopher Thornberg [00:32:11] I think the best thing you could do is turn off the miserablist nonsense. Remember that they’ve been telling us the sky has been falling consistently for a decade now. They haven’t been right then, and I don’t think they’re going to be right now. But with that in mind, the other thing to consider is the broader idea here that your labor shortages aren’t going anywhere. You really need to continue to think about how you do more with less in this particular world. A lot of manufacturing companies that have been around for a while will tell you their workforce is pretty old now. They’re getting on in years. They’re having trouble bringing in young folks. These are the companies that really could start to see a big exodus over the next decade and need to think ahead. You can’t just wait till the guy on that machine decides to retire to suddenly scramble around for some sort of solution. You got to be ahead on this stuff. You got to do a lot of workforce planning in this day and age.
Gregg Profozich [00:33:04] A lot of times, it does happen that there’s the as-designed spec, and then there’s the as-built spec. The operator knows how to make the thing work, and he may not have ever recorded it anywhere. That technical memory, that job knowledge, that knowledge of how to get it done, as that exits through natural attrition as people age out of the workforce, it’s important to capture that and be able to hand it onto the next generation of worker and also to figure out before they go how to use technology where you can to replicate them because there’s a shortage of workers. There just aren’t enough people in the economy.
Christopher Thornberg [00:33:41] One of the things I would tell all manufacturers is there is the recognition by our state economic development authorities, whether they’re fully public or the public/private partnerships that occur in many places, that manufacturing jobs are good jobs. They’re middle-skill jobs. You don’t have to have necessarily a bachelor’s degree, but you do need a little bit of training. They tend to pay well and provide a real career path. Now more than ever, these development organizations are recognizing that there’s an opportunity to help really low-skill workers who might be stuck, say, at a fast food job or stuck in some menial cleaning job to get some skills and build a career path. Any company that’s facing shortages of some of their skilled labor reach out to your local development folks. Talk to them. Work with local community colleges. Get the programs up and running. Tell the community what you need, and they will be there for you. Again, I go back to what I said. These are good jobs. We know it, and the help will be there for you to fill them.
Gregg Profozich [00:34:42] Between the economic development organizations to help connect you and to help finance the various things, don’t forget the workforce development boards, et cetera for training aspects as well as the community colleges. I think 114, 117 community colleges across California. I’ve toured a number of them, and we partner with a number of them. Fantastic training facilities in robotics, and advanced technologies, and mechatronics, welding, everything the manufacturer can need, HVAC, et cetera. Everything is there. There’s capabilities to train people in that. It’s just a matter of partnering up to get a pipeline of workers who have an interest in this industry and have the skills you need. Well, Chris, thank you so much for being with me today. A lot of good information. The miserablist narrative, I think you call it. Interesting idea there. Makes me feel a little better about the economic prospects instead of reading all the doom and gloom. The headlines are always sensationalized, aren’t they? They’re always trying to attract our attention, and they always overstate.
Christopher Thornberg [00:35:42] It’s particularly bad now. My one little satisfaction is we’re not the only forecasting arena where you see this problem. Used to be that the weatherman would come on and say, “Oh, we know there could be a storm tomorrow.” Now they go, “It’s going to be a bomb cyclone.” Isn’t that a storm? Apparently, this is happening everywhere. It’s not just economists who are having this problem.
Gregg Profozich [00:36:08] Fair enough. I’d never heard of a bomb cyclone or an atmospheric river five years ago. Those terms were not in my vocabulary. I know what they are now, though, somehow. It’s a storm. There you go. Chris, thank you so much for joining me today and sharing your perspectives, insights, and predictions with me and with our listeners.
Christopher Thornberg [00:36:26] Great to be here, as always.
Gregg Profozich [00:36:27] To our listeners, thank you for joining me for a conversation with Christopher Thornberg on Beware of the Economic Narrative. Thank you so much. Have a great day. Stay safe and healthy. Thank you for listening to Shifting Gears, a podcast from CMTC. If you enjoyed this episode, please share it with others and post it on your social media platforms. You can subscribe to our podcasts on Apple Podcasts, Spotify, or your preferred podcast directory. For more information on our topic, please visit www.cmtc.com/shiftinggears. CMTC is a private nonprofit organization that provides technical assistance, workforce development, and consulting services to small and medium-sized manufacturers throughout the state of California. CMTC’s mission is to serve as a trusted adviser providing solutions that increase the productivity and competitiveness of California’s manufacturers. CMTC operates under a cooperative agreement for the state of California with the Hollings Manufacturing Extension Partnership Program, MEP, at the National Institute of Standards and Technology within the Department of Commerce. For more information about CMTC, please visit www.cmtc.com. For more information about the MEP National Network or to find your local MEP center, visit www.nist.gov/mep.