U.S. Economy Enters 'Slow Growth Mode'

The U.S. economy has decelerated to a "slow growth mode," primarily driven by consumers continuing to deleverage and rediscovering the need for thrift, according to the Manufacturers Alliance/MAPI Quarterly Economic Forecast. The report predicts that inflation-adjusted gross domestic product will expand by 2.9 percent in 2010, followed by 2.6 percent growth in 2011.

The forecast is down slightly from the previously estimated 3.3 percent and 2.9 percent, respectively, in the May 2010 quarterly report. 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.

"There is a somewhat bleaker outlook amid weaker economic data and it clearly indicates a slow growth mode," said Daniel J. Meckstroth, Manufacturers Alliance/MAPI chief economist. "For instance, the numbers for June retail trade, inventories, and foreign trade have all come in weaker than the Bureau of Economic Analysis had estimated in the preliminary estimate of second quarter GDP growth. The homeowners' tax credit has expired. Consumers are not spending as much. They are saving more and repaying debt, which is good for the long run but not the near term. The inventory swing is over and the benefits of the stimulus have basically run their course."

There remain, however, positive economic signs, and the manufacturing sector should continue to hold its own. "Expenditures are rapidly growing for business equipment, as are exports," Meckstroth added. "Manufacturing will grow faster than the general economy as it relies less on consumer spending while disproportionately benefitting from strong demand for business equipment, exports, and basic materials."

Manufacturing production growth is expected to show 5.7 percent growth in 2010 and an additional 4.7 percent growth in 2011.

Production in non-high-tech industries is expected to increase by 5.1 percent in 2010 and by 4.3 percent in 2011. High-tech manufacturing production is anticipated to improve at a much higher rate, with impressive 14.5 percent growth in 2010 followed by solid 13 percent growth in 2011.

The forecast for inflation-adjusted investment in equipment and software is for 14.2 percent growth in 2010 and for 11.6 percent growth in 2011. Capital equipment spending in high-tech sectors will also continue to improve. Inflation-adjusted expenditures for information processing equipment are anticipated to increase by 12.7 percent in 2010 and by 7 percent in 2011.

MAPI expects industrial equipment expenditures to advance by 7.3 percent in 2010 before surging by 18.8 percent in 2011. The outlook for spending on transportation equipment is for a robust 54.6 percent increase in 2010 and 25.5 percent growth in 2011. These figures should compensate for the 51.5 percent decline in 2009.

Spending on non-residential structures is the lone GDP expenditure category expected to decline in each of the next two years, falling by 14.3 percent in 2010 and decreasing by 3.2 percent in 2011.

Exports and imports will both see gains. Inflation-adjusted exports are anticipated to improve by 12.5 percent in 2010 and by 8.1 percent in 2011. Imports are expected to grow by 11.8 percent in 2010 and by 6.7 percent in 2011. MAPI forecasts overall unemployment to remain high, averaging 9.6 percent in 2010 and 9.4 percent in 2011. Manufacturing is expected to see a hiring increase, albeit less than previously anticipated. The sector is forecast to add 277,000 jobs in 2010 and 373,000 jobs in 2011, although the numbers are down from 400,000 and 500,000, respectively, in MAPI's May report.