Outlook: Manufacturing Expansion Will Slow Through 2007

The manufacturing expansion should continue but decelerate through 2007, according to the Manufacturers Alliance/MAPI Quarterly Industrial Outlook, a report that analyzes 27 major industries.

Third quarter 2005 figures show that 20 of the 27 industries tracked in the report had inflation-adjusted new orders or production above the level of one year ago, unchanged from the second quarter of 2005. While down slightly from 22 industries experiencing growth in the first quarter of 2005, the data nonetheless show broad-based growth in the manufacturing sector.

Top industry performers in the third quarter, recording year-over-year double-digit growth, were electronic computers (30 percent); communications equipment (23 percent); mining and oil and gas field machinery (18 percent); navigational, measuring, electromedical, and control instruments (16 percent); oil and gas well drilling (12 percent); material handling equipment (11 percent); and medical equipment and supplies (10 percent).

Study author Daniel J. Meckstroth writes that 11 industries are in the recovery phase of the business cycle; 10 are in the expansion phase; three — industrial machinery, paper, and alumina and aluminum industries — appear to be in the accelerating early recession phase; and one — private nonresidential construction — is in the late recession or very mild recession phase of the cycle.

"Energy, medical, and high-tech industries are leading growth this year," Meckstroth says. "The capital equipment markets are generally strong but decelerating."

The report also offers economic forecasts for 24 of the 27 industries for 2006 and 2007, and a longer term forecast through 2010 for these same industries.

Two industries are expected to enjoy double-digit growth in both 2006 and 2007: mining and oil and gas field machinery should rise by a robust 49 percent and 22 percent, respectively, with a profit incentive to expand due in part to the high levels of petroleum and metal prices; and computer equipment (13 percent/12 percent), which also should experience sustained growth.

In addition, two other industries should see double-digit growth in at least one of the next two years, communications equipment (15 percent/8 percent) and private nonresidential construction (16 percent in 2006, but flat in 2007). Two industries are forecast to have negative change in both 2006 and 2007: housing (-9 percent/-2 percent) and motor vehicles and parts (-2 percent/-2 percent). One other, alumina and aluminum production, is expected to suffer a 1 percent decline in 2006 but rebound with a 2 percent increase in 2007.

The Alliance expects some deceleration in manufacturing industrial production, retrenching somewhat from recent solid growth, 4.8 percent in 2004 and an anticipated 3.4 percent in 2005. The forecast indicates that manufacturing industrial production will increase 2.5 percent in 2006 before moderating to 2.2 percent growth in 2007. However, the outlook still envisions that 20 of the 24 industries for which a forecast is provided will experience growth in 2006 and that 21 of 24 will see growth in 2007. Manufacturing is expected to grow by an average of 3.42 percent during the 2006-2010 period.

"A high level of energy and commodity prices increases costs in the industrial sector and hurts U.S. competitiveness. The rising trade deficit and less inventory building also restrain the pace of overall manufacturing growth," Meckstroth says. "Furthermore, rising long-term interest rates will limit consumers' ability to tap their home equity and continue driving growth in big-ticket consumer items like houses and motor vehicles. Most industries — consumer, equipment, materials and construction—will experience slower growth but the weight of these factors are not enough to slow growth, only the pace of growth."