Industrial Outlook: Manufacturing Rebound 'Hard-Pressed' to Maintain Pace

The manufacturing sector enjoyed a resurgence in the third quarter of 2009 – increasing production at an 8 percent annual rate – but the general economic and industrial recovery will be hard-pressed to maintain that pace of growth, according to the latest Manufacturers Alliance/MAPI U.S. Industrial Outlook: No V-Shaped Recovery, a quarterly report that analyzes 27 major industries.

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

"Certainly the huge fiscal and monetary stimulus is compensating for the deleveraging of the American consumer and has helped some of the most depressed industries in the economy, like autos and housing, but the most important reason may be that the worst of the inventory destocking is ending," said Daniel J. Meckstroth, Ph.D., chief economist for the Manufacturers Alliance/MAPI and author of the analysis. "There are, however, cautionary flags that may dampen the recovery. For instance, job losses will continue through mid-2010; there is relatively little, if any, wage growth; credit is difficult to obtain without stellar credit scores; housing prices may fall further; and consumers are repaying debt and building a cash cushion."

On an annual basis, MAPI forecasts manufacturing production to fall 11% in 2009, before recovering to 5% growth in 2010 and to 6% growth in 2011. Manufacturing industrial production, measured on a quarter-to-quarter basis, rebounded to the aforementioned 8% annual rate in the third quarter of 2009 after falling at a 9% annual rate in the second quarter.

Production in non-high-tech manufacturing mirrored overall production, dropping by an 8% annual rate in the third quarter of 2009. According to MAPI's quarterly economic forecast, non-high-tech manufacturing production is expected to decline 11% this year before increasing 2% in 2010 and 6% in 2011. High-tech industrial production rose at a 5% annual rate in the third quarter of 2009. MAPI predicts it will decline 9% in 2009 before posting 16% growth in 2010 and 18% growth in 2011.

Five of the 27 industries tracked in the report had inflation-adjusted new orders or production above the level of one year ago, four more than reported in the second quarter of 2009. Leaders were medical equipment and supplies, aerospace products and parts, and public construction, which each grew by 3%. The largest drop came in drilling activity which declined 51%, while housing starts fell by 41%.

The manufacturing sector should begin to rebound in 2010, with MAPI forecasting 18 of 24 industries to show gains, led by housing starts with a 56% rebound from historically low levels, and two will remain flat. The turnaround should continue in 2011 with growth likely in 23 of 24 industries, including seven by double digits, led by housing starts at 44% and engines, turbines and power transmission equipment at 24%.