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Business & Financial

A Modestly Improving Outlook

Robert S. Reichard, Economics Editor

T he third quarter is ending on a cautiously optimistic note. Latest reports on orders, production and shipments suggest domestic mill activity is running considerably above year-ago levels - probably up more than 10 percent in the case of basic textiles like yarns and fabrics and about 5 percent for more highly fabricated textile products. That still leaves mill activity far under pre-recession levels, but the new trend does indicate some encouraging industry recovery. Indeed, the latest gains are pretty much in line with the all-industry advance noted over the same 12-month period, and there is little to indicate any change in this trend as the year draws to a close. Also on an upbeat note: The rising cost pressures of the past year seem to be slowing down. Thus, cotton tags - even in the face of flood damage to the Pakistan crop - should begin to top out, as the 2010 global crop still looks to be running a bit above last year's level.

Nor do man-made fibers present any problems - with ample capacity and somewhat lower-than-anticipated petrochemical feedstock costs likely to put a brake on any future price advances. Finally, moderately higher pay rates are being offset by still-rising productivity, thus keeping unit labor tabs pretty much unchanged. Bottom line: Combine all these cost trends with the production and sales gains noted above, and profits are finally beginning to bottom out.

BFchartredo

Revised Industry Trend
Meantime, Uncle Sam is making some important changes in industrial production and factory utilization rate numbers. They reflect both new updated data and a shift to a 2007=100 index base. The base shift means the new numbers shown in the Textile Barometers table on page 13 reflect percentage changes from 2007 rather than from the previous 2002 base. Example: The latest textile mill production index for basic mill products is put at 81.1, meaning that output now comes to 81.1 percent of the 2007 average level. Put another way, output has fallen 18.9 percent from 2007 average levels. Similarly, in the case of the textile product sector, the latest index reading, 79.1 percent, indicates a 20.9-percent fall since the 2007 benchmark period. This change to a 2007 base makes a lot of sense, as it facilitates comparisons with industry activity levels prevailing just before the big recession hit back in 2008. The new revision also suggests the industry declines of recent years haven't been quite as precipitous as previously thought. Equally encouraging: the new readings, in addition to confirming that mill output is beginning to turn around, also indicate a bottoming out in mill utilization rates - with the latest 69.0 reading now considerably above the disturbing 57.5 percent low point hit last summer.

Capacity Continues To Shrink
The revised mill numbers noted above also provide more up-to-date information on the industry's changing production potential. If nothing else, they clearly show just how much U.S. textile and apparel firms have been downsizing in recent years. In the mill area, the new numbers indicate capacity has declined 9 percent compared to two years ago, more than 20 percent from four years ago, and 37 percent vis-à-vis 2000 levels. Meantime, capacity in downstream apparel, hit even harder than textiles by recent import surges, has dropped 17 percent from two years ago, nearly 50 percent from four years back, and 72 percent from 2000. All this, however, isn't quite as negative as first blush might indicate because the reductions have left these industries in  a lot better shape - in large part because most of the paring has involved old and, more often than not, relatively obsolete facilities. The resulting increase in industry productivity tells the story. Thus, efficiency has increased at a 2- to 3-percent annual rate over recent years - large enough to enable most domestic firms to survive and even remain tolerably profitable in today's hotly competitive market. The one big downside to these productivity gains has been the sharp declines in the textile and apparel workforces. Indeed, assume a low-end 2-percent average annual rate of productivity gain over the past 10 years, and more than 200,000 textile and apparel industry jobs were probably eliminated owing to increased efficiency. That's close to 30 percent of these two industries' overall job shrinkage over that period.

September/October 2010

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