When times are tough, you tighten your belt.
During the recent recession, plenty of folks put off major purchases, moved in with relatives and switched to store-brand groceries. Even those lucky enough to have jobs were worried about long-term prospects and preferred to save rather than spend.
So as several European countries teeter on the verge of economic disaster, it’s easy to imagine how the residents of Portugal, Italy, Ireland, Greece and Spain will react.
We know – we’ve been there. They’ll cut back on everything.
What’s maybe not so obvious is how their austerity measures will affect folks living in northeast Indiana.
Our financial markets are extremely integrated internationally, said Timothy Slaper, director of economic analysis for the Indiana Business Research Center at Indiana University in Bloomington.
But another connection is even more basic. Area manufacturers’ sales depend on customers, and Europe is home to lots of potential customers. When sales drop off, that typically translates to jobs lost.
Several area employers say they’re watching export data closely, looking for signs the recession now gripping so many European countries is spreading to the U.S. economy.
Keith Busse, chairman of Fort Wayne-based Steel Dynamics Inc., said the European countries now in crisis all have been good trading partners for North American companies. But that’s changed.
When an economy is flat on its back, they’re not buying as much, obviously, he said. Their focus is on retiring debt.
Busse is tracking demand in Europe, China and other international markets.
I can’t remember a time, he said, when I was as nervous about the global economy as I am today.
Almost 7 percent of Indiana’s $32.3 billion in exports went to customers in Portugal, Italy, Ireland, Greece and Spain last year – a combined total of $2.2 billion, according to data from the Commerce Department.
At first blush, the percentage seems insignificant. But considering how some companies have teetered between profitability and loss, losing even 7 percent of export sales could be enough to spark layoffs or plant closures, depending on how much an individual company relies on sales to customers in the affected countries.
Keep in mind, too, that some companies don’t export to those countries at all while other businesses have much more than 7 percent of their sales at risk.
Of course, that’s assuming customers in those five European countries stopped spending completely – which is unlikely. Some items, after all, are necessities.
Consider products made by Fort Wayne Metals Research Products Corp. The company sells to the U.S. and European medical device markets, markets that have fairly stable demand driven by life-saving procedures.
The local manufacturer makes the wires used in needles, surgical staples, pacemaker leads, defibrillator leads and heart catheterizations.
Despite fairly steady demand, CEO Scott Glaze projects a flat revenue year for the company.
All of the economies in the world are tied together, he said. The recession affecting most of Europe, he added, will dampen our ability to export.
Fort Wayne Metals is expanding its operation in Ireland, however.
The company employs about 650 locally and about 50 in Ireland, where the company is adding on to the building and the workforce.
We’ve never had a layoff in 40 years, and I don’t expect to have one now, Glaze said.
The orthopedics industry also enjoys steady demand for its products as people worldwide have embraced more active lifestyles into their 60s, 70s and 80s.
Artificial hips and knees, made by Warsaw manufacturers, often become necessities.
Some people might delay surgery because they can’t afford the co-pays or they don’t want to take the time off work for recovery. Workers in Spain, for example, might be reluctant to take time off work when unemployment is at close to 25 percent, according to data released Friday.
But those who go ahead with hip, knee and other joint replacements contribute to sales for the likes of Zimmer, DePuy Synthes and Biomet.
Kosciusko County’s orthopedic industry players combined to produce a $3.7 billion impact on the economy in 2009, creating 13,000 jobs or 43 percent of the county’s employment, according to a study conducted by the Indiana Business Research Center at Indiana University.
Garry Clark, spokesman for Zimmer Holdings Inc., said his employer doesn’t rely heavily, however, on sales in Portugal, Italy, Ireland, Greece and Spain.
Although necessities are still selling, other manufacturers’ goods fall firmly in the frills category.
Porter Inc., maker of Formula and Thunderbird boats, is a prime example.
The Decatur company’s sales have plummeted about 67 percent in the past five years. The family-owned company doesn’t release revenue figures. But the international share of that much smaller revenue number is now at about 10 percent, down from about 15 percent, said Wayne Porter, sales vice president.
As a consequence, Porter’s workforce has fallen to about 240 today. Five years ago, it was just short of 600.
The company’s sales to Portugal, Italy, Ireland, Greece and Spain were next to nonexistent last year, Porter said. People don’t need our product, so you’re (depending on) disposable income.
The boat-maker started seeing a falloff in European demand about three years ago, a sign of things to come.
Really it’s one giant world economy anymore, Porter said.
Maybe the only good thing that has come out of the recession is that Porter has gained market share as some of its competitors went out of business or closed some production plants.
Porter’s only plant is in Decatur.
Many of the region’s employers have diversified their customer bases as a hedge against regional recessions, such as the one most of Europe is experiencing.
Pyromation Inc., for example, has limited exposure to Europe’s financial mess.
The Fort Wayne company exports temperature sensors to customers in more than 45 countries. But Pyromation, which employs 175, does very little business with Europe, President Pete Wilson said.
The same goes for Franklin Electric Co., which booked only about 13 percent of its sales last year in Europe.
The Bluffton-based company designs and makes submersible motors and pumping systems used to move water and fuel. In April, the company started construction near Fort Wayne International Airport on a new headquarters expected to cost $32 million to $36 million.
Franklin Electric has experienced slower growth in Europe because of general economic uncertainty that is caused by the ongoing debt, austerity and fiscal issues surrounding the region, said John Haines, vice president and chief financial officer.
Some companies doing business in other parts of Europe – especially Germany – are more insulated from the recession, sources said.
Trelleborg Sealing Solutions’ largest worldwide operation is in Germany.
Rob White, finance vice president for Trelleborg Sealing Solutions Americas, said the division’s European business is concentrated in Germany, France and the United Kingdom.
We’re doing relatively well now in Europe, especially Germany, he said.
Trelleborg Sealing Solutions Americas is a division of Swedish conglomerate Trelleborg, which employs about 24,000 globally, including about 400 in Fort Wayne and New Haven. The parent company reported about $4.1 billion in revenue last year.
Trelleborg sells seals worldwide in the aerospace, automotive and industrial markets, among others. The average traveler might have seen one of Trelleborg’s rubber seals when passing through an airplane doorway.
The company’s revenues are down in Europe year-over-year, in the low single digits percentage. But Trelleborg is big enough to absorb even a 10 percent drop in European sales, White said.
But no international operation is completely safe from global economic turmoil.
If the dynamic were to change, he said, some kind of contagion-domino-thing that the major markets were choked off, that would be significant for us.
Some local employers are building alliances with Europe-based companies – but keeping production in the U.S.
For example, Steel Dynamics announced in April 2011 plans to form a partnership with La Farga Group of Barcelona, Spain, to make copper wire rods. The project represented a $39 million investment and the creation of 35 jobs in New Haven.
Despite Spain’s financial crisis, La Farga is a good, solid company not burdened by debt, Busse said.
It could hurt jobs (at La Farga’s operation in Spain), but it’s not going to affect their ability to be a good partner, the Steel Dynamics’ chairman said.
Last week, the company reported second-quarter earnings of $44 million, less than half of its profit for the same three months of last year.
Steel Dynamics and many of its competitors have the ability to make more steel than they’re able to sell right now. As a result, the local company has delayed a $1 billion project to build a new mini-mill to make flat-rolled steel. Southern Indiana was among the sites being considered.
We’d love to build that new steel mill, but we’re sure not going to build it until demand rebounds, he said. Not a (company) in their right mind would pull the trigger on a project to create new capacity.
Slaper, of the Indiana Business Research Center, said several economies that were recently robust are cooling off, including Brazil, Russia, India and China.
Local employers are seeing weaker demand from those countries, too. White thinks Trelleborg has been more affected by the economic slowdown in Asia than what’s happening in Europe.
Slaper said the slowdowns in Brazil, Russia, India and China mean those economies can’t offset lackluster growth in other parts of the world.
Manufacturers need strong demand to thrive.
Gross domestic product – the value of all goods and services produced in the United States – expanded at a 1.5 percent rate in the second three months of this year, the Associated Press reported Friday. Slaper said GDP growth has been anemic.
A widespread recession in Europe could shave up to a full 1 percentage point off U.S. economic growth, he said.
Slaper expects Indiana’s exports would decrease or remain flat if the bottom falls out of European demand.
About 25 percent of Indiana’s exports go to Europe, when stronger economies are included, more than triple the 7 percent of exports sold to Portugal, Italy, Ireland, Greece and Spain.
Indiana’s total exports grew by more than 42 percent in the five-year period ending last year, when the state recorded more than $32 billion in sales.
The Hoosier State was among the 15 U.S. states most dependent on export sales in 2011, according to a study released this month by the Indiana Business Research Center.
That heavy dependence on customers in ailing foreign economies does not bode well for the strong growth in our exports that we’ve seen in the last decade or so, Slaper said.