Manufacturing Growth Likely to Mirror GDP in Next 2 Years - Modern Distribution Management

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Manufacturing Growth Likely to Mirror GDP in Next 2 Years


The following is an analysis from Meckstroth on the November 2006 Institute for Supply Management Index, which indicated that manufacturing did not grow in November:

“The November ISM index fell below the 50 percent mark, the dividing line between growth and decline, in November ‘ the lowest level in 42 months. The signal of declining production should not come as a surprise given that the Federal Reserve’s industrial production index for manufacturing fell in both September and October. Two major manufacturing markets are declining (motor vehicles and housing) and many other industries are trying to adjust inventories to adjust for a period of much slower growth ahead in 2007.”

Industrial Production Analysis
On October’s industrial production report, Meckstroth said: “Manufacturing production slipped by 0.2 percent, while overall industrial production increased 0.2 percent in October due to gains in mining and utilities. It is clear that the decline in big-ticket consumer purchases of motor vehicles and housing depressed manufacturing activity.

“Motor vehicle production fell 3.9 percent in October, leading to declines in primary metals and plastics and rubber. Through year-end, domestic automakers plan further reductions to cut inventories of unsold vehicles. The housing collapse reduced wood products production. Manufacturing will not have a merry holiday season this year.”

The latest Manufacturers Alliance/MAPI economic forecast shows that manufacturing will decelerate to 2.6 percent in 2007. But MAPI forecasts industrial production to increase at a higher rate, 3.4 percent.

After remaining ahead of overall gross domestic product growth in 2006, manufacturing production growth will likely mirror GDP in the next two years, according to a new report.

The Manufacturers Alliance/MAPI Quarterly Economic Forecast forecasts that inflation-adjusted GDP growth will slow to 2.5 percent in 2007 before rebounding to 3.3 percent in 2008, matching the current outlook for 2006. 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 mid-cycle correction, or a soft landing,’ is playing out about the way we expected,” said Daniel J. Meckstroth, Manufacturers Alliance/MAPI chief economist. “Big ticket items, particularly housing and motor vehicles, and business inventory swings play a large part in the current deceleration of economic activity.”

Manufacturing production growth will show a fairly significant retrenchment from 4.8 percent growth in 2006 to 2.6 percent in 2007. As with the overall GDP, however, the MAPI forecast envisions industrial production to increase 3.4 percent in 2008. Inflation-adjusted spending for computers and electronic products is forecast to rise 12.5 percent in 2007 and 10.6 percent in 2007. Production in non-high-tech industries will grow a far more modest 1.7 percent next year and 2.5 percent in 2008.

“High-tech industrial production (as defined by the Federal Reserve) is only 5 percent of manufacturing value added, but large price declines and quality upgrades in the industry lead to very strong growth in physical volume,” Meckstroth added. “Non-high-tech production growth is a better reflection of the pace of manufacturing activity.”

Real investment in equipment and software should increase 6.5 percent in 2007 and 6.1 percent in 2008. Large percentage gains in spending will come in the high-tech sectors. Inflation-adjusted expenditures for information processing equipment are expected to rise 9.0 percent in 2007 and 8.3 percent in 2007, growing several times faster than the general economy.

Interestingly, spending on non-residential structures is forecast to rise a robust 9.1 percent in 2007 but remain flat in 2008. The forecast calls for industrial equipment expenditures to increase 3.8 percent before declining by 0.1 percent, respectively, in the same years. There remains a more optimistic outlook for spending for transportation equipment, which is likely to show a 5.0 percent gain in 2007 and 7.8 percent growth in 2008.

Export growth should outpace that of imports by a fairly wide margin by the end of 2008. Inflation-adjusted exports should rise 8.6 percent in 2007 and 9.7 percent in 2008, while imports are expected to increase 4.2 percent in 2007 and 5.2 percent the following year.

The forecast for the unemployment rate is 4.8 percent in 2007 and 4.7 percent in 2008.

Included in the November report is the second annual five-year forecast. Average annual GDP growth from 2006-2011 is expected to be 3.1 percent, including a brief deceleration (2.2 percent) expected in 2010.

Meckstroth said the immediate risk to the short-term forecast is the current housing price declines. Economists estimate that a change in housing wealth has only a small impact on current overall consumer spending. If the heavily indebted U.S. consumer suddenly decides to appreciably increase savings next year, he explained, a recession would be more likely than a soft landing. Over-tightening by the Federal Reserve, energy supply disruptions, and the excessive dependency in the United States on foreign savings are other risks.

Manufacturing Report

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