MAPI Forecast: Inflation-Adjusted GDP Growth Will Slow

In the face of continuing weakness in the housing sector, growth in the U.S. economy is expected to be slower than previously anticipated, according to a new Manufacturers Alliance/MAPI quarterly report.

The Manufacturers Alliance/MAPI Quarterly Economic Forecast predicts that inflation-adjusted GDP growth, 3.3 percent in 2006, will slow to 1.9 percent in 2007 before regaining some strength, rising to 2.5 percent in 2008.

The most recent forecast represents a pullback from the May 2007 report, when MAPI envisioned GDP to grow by 2.3 percent in 2007 and by 3.0 percent in 2008. By supplying major assumptions for the economy and running simulations through the Global Insight Macroeconomic Model, the Alliance generates unique macroeconomic and industry forecasts.

The housing downturn will likely be more severe, more widespread, and last longer than most analysts expected," said Daniel J. Meckstroth, Manufacturers Alliance/MAPI Chief Economist.

"Financial institutions are reluctant to take on mortgages. Problems in subprime lending are affecting prime loans and have set off a general re-pricing of risks in financial markets.  ; The housing collapse is worse than we thought and will reduce GDP growth next year.  ; Manufacturing is buttressed, however, by somewhat better prospects in the trade sector. Exports are expected to perform well in relation to imports and moderately reduce the trade deficit.

Manufacturing production growth will decelerate this year, trending downward from 4.7 percent growth in 2006 to 2.0 percent growth in 2007. Concurrent with the overall GDP, however, MAPI forecasts industrial production to rebound fairly significantly, increasing 2.9 percent in 2008. Still, these figures are down from the previously forecast 2.1 percent growth and 3.3 percent growth, respectively, in the May 2007 forecast.  ;

One segment that should maintain decent growth in manufacturing is computers and electronic products. Inflation-adjusted spending for this sector is forecast to rise a solid 10.8 percent in 2007 and 11.8 percent in 2008. Production in non-high-tech industries, however, will grow by a far more modest 0.9 percent this year and by 1.7 percent in 2008.

Large percentage gains in spending, at least relative to the overall economy, will come in the high-tech sectors. Inflation-adjusted expenditures for information processing equipment are expected to rise 7.1 percent in 2007 and 6.1 percent in 2008, continuing to grow several times faster than the general economy.

Nevertheless, inflation-adjusted investment in equipment and software should decelerate to 0.8 percent growth in 2007 before posting 4.4 percent growth in 2008& mdash; both are well below the growth rate that would be considered normal at this stage of the business cycle.  ;

Spending on non-residential structures also is forecast to increase both years, with a healthy 9.4 percent rise in 2007, but only an additional 1.0 percent growth in 2008. The outlook is mixed, though, for two other areas. The forecast calls for industrial equipment expenditures to increase 1.6 percent in 2007 before declining by 1.7 percent in 2008. Conversely, MAPI expects a reverse pattern of fluctuation in spending on transportation equipment, with that component seeing a 10.6 percent decline this year before experiencing 7.8 percent growth in 2008.

Export growth should outpace that of imports by wide margins through the remainder of this year and next. Inflation-adjusted exports should rise 6.8 percent in 2007 and 9.1 percent in 2008, while imports are expected to increase 2.3 percent in 2007 and 4.3 percent next year.

The forecast for the unemployment rate remains low, at 4.6 percent in 2007 and 4.8 percent in 2008.