ANALYSIS-U.S. manufacturers continue innovating amid slump

* Industry-funded R&D tends to track manufacturing output

* Pipelines seem full of products for inevitable rebound

* Boeing's woes a reminder that development rarely easy

By James B. Kelleher

CHICAGO, July 5 (Reuters) - U.S. manufacturers have taken a beating in the current downturn. Outside of housing and finance, it is hard to think of an industry that has suffered more.

Every measure of the sector's health is flashing red -- from profits and output to plant utilization and employment.

Word from individual manufacturers suggests spending on research and development is falling, too -- though probably not as dramatically as other vital signs.

That's a good thing. Only once during the four most recent recessions -- in 2002 -- has industry-funded R&D fallen faster than industry output, according to figures from the National Science Foundation and the U.S. Federal Reserve.

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"When companies are having a tough time, they cut back on everything, including R&D," said David Huether, chief economist at the National Association of Manufacturers. "But normally the pullback isn't nearly as big as the drop in production."

Analysts say it is critical that producers stick to the script and preserve R&D as much as possible. Because once the recovery begins, they will need lots of innovative products in the pipeline if they hope to continue competing against cheaper foreign rivals who, increasingly, cannot be beat on quality.

"Globalization has changed everything," said Debra Van Opstal at the Council on Competitiveness. "So as we come out of the recession, what we want is a really fast deployment cycle of new products and services."

Fortunately, a slew of recent product announcements, many of them focused on sustainability, indicate the industry's commitment to R&D continues.

HARD TIMES

How bad is it out in factoryland? In a word, ugly.