Manufacturers Alliance Report: Economic Growth to Slow to 1.3% in '08

The housing collapse and a consumer-based recession, particularly affecting the automobile, housing and most recently the services sectors, present significant short-term challenges to the U.S. economy, according to a new report.


The Manufacturers Alliance/MAPI Quarterly Economic Forecast predicts that inflation-adjusted GDP growth will slow to 1.3 percent in 2008 before improving to 2.5 percent in 2009. GDP growth will be down an average of 0.6 percent in the first two quarters before returning to growth in the second half of 2008.

By supplying major assumptions for the economy and running simulations through the Global Insight Macroeconomic Model, the Alliance generates macroeconomic and industry forecasts.

Recessions are caused by severe shocks," said Daniel J. Meckstroth, Manufacturers Alliance/MAPI Chief Economist. "The housing collapse, severe decline in housing prices, record high oil prices, and the subprime mortgage-induced credit crunch have already caused consumer confidence to plummet and employment to fall, and economic conditions will get worse before they improve. A tax rebate and aggressive monetary policy easing will help stimulate a recovery later this year."

Manufacturing production growth will show a significant decline from an already low 1.9 percent growth in 2007 to an estimated 0.5 percent in 2008, preceding a solid upswing to 3.4 percent in 2009. Still, these figures represent a slight degree of improvement from the previously anticipated flat and 2.6 percent growth, respectively, in the November 2007 MAPI forecast. Production in non-high-tech industries is anticipated to decline 1.2 percent this year and to grow by 2.6 percent in 2009.

There is some positive news in the computers and electronics products sector, as high-tech industrial production is expected to rise 14.3 percent in 2008 and 10.1 percent in 2009.  

The GDP account for inflation-adjusted investment in equipment and software should increase by 1.2 percent in 2008 and by 4.0 percent in 2009. The largest percentage gains in capital equipment spending will come in the high-tech sectors. Inflation-adjusted expenditures for information processing equipment are expected to rise 5.6 percent in 2008 and 2.9 percent in 2009.

The forecast calls for industrial equipment expenditures to decline by 7.1 percent this year before rebounding to 1.0 percent growth in 2009. The outlook for spending on transportation equipment calls for a 4.4 percent decline in 2008 followed by a robust recovery to 11.7 percent growth in 2009.

Spending on non-residential structures is expected to plummet over the next two years. While spending in this area increased by 13.2 percent in 2007, it is presumed to rise by just 2.1 percent in 2008 and to decline by 9.3 percent in 2009. 

Two other factors, exports and imports, buttress MAPI’s sentiment that this current soft patch will be followed by some strengthening in the economy. Export growth should outpace that of imports by a wide margin by the end of 2009. Inflation-adjusted exports should rise 8.1 percent in 2008 and 9.9 percent in 2009, while imports are only expected to increase 0.5 percent this year and 3.4 percent next year.

"The U.S. trade imbalance with the rest of the world is beginning to unwind and the additional foreign demand for U.S. products and services will particularly benefit the manufacturing industry," Meckstroth said. 

The forecast envisions the unemployment rate to rise to 5.4 percent in 2008 and to 5.5 percent in 2009.