The 2020 Mid-Year Economic Update_long

Manufacturing Outpaces GDP in 2006

The economy is showing the lagged effects of higher interest rates, skyrocketing energy prices and slower employment gains. Gross domestic product growth should experience below-trend growth over the next 18 months, and manufacturing activity in the U.S., which has been on a roll lately, will slow appreciably in 2007, according to a new report.

The Manufacturers Alliance/MAPI Quarterly Economic Forecast predicts inflation-adjusted GDP growth will be 3.3 percent in 2006 and 2.5 percent in 2007, nearly consistent with the May 2006 projections of 3.3 percent and 2.7 percent, respectively. Overall U.S. GDP growth in 2005 was 3.2 percent.

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

“Spending can exceed income for only so long before consumer and business budgets are brought back into line,” said Daniel J. Meckstroth, chief economist for the Manufacturers Alliance/MAPI. “Higher interest rates and slower income growth are slowing the housing market and putting an end to home equity financing of big ticket purchases. Slower consumer spending growth ripples through the rest of the economy.”

Manufacturing production growth will significantly outpace the general economy in 2006 and equal it in 2007. The MAPI forecast envisions manufacturing industrial production to increase a robust 5.0 percent in 2006, before returning to a more modest 2.5 percent increase in 2007. Manufacturing activity increased 3.9 percent in 2005. Inflation-adjusted spending for computers and electronic products is forecast to rise 17.1 percent in 2006 and 12.1 percent in 2007. Production in non-high-tech industries will grow 4 percent this year and 1.5 percent in 2007.

“The hurricanes and commodity supply disruptions in 2005 set off a scramble for manufacturing inventory in 2006,” Meckstroth said. “The manufacturing sector has also benefited from its high concentration in capital goods industries and electronics which have outperformed other sectors of the economy this year.”

Real investment in equipment and software should increase 8 percent in 2006 and 6.1 percent in 2007, growing several times faster than the general economy. The largest percentage gains in spending will come in the high-tech sectors. Inflation-adjusted expenditures for information processing equipment are expected to rise 9.2 percent in 2006 and 8.4 percent in 2007.

Spending on non-residential structures is forecast to rise 8.3 percent this year and 9.4 percent in 2007. The forecast calls for industrial equipment expenditures to increase 8.4 percent and 4.7 percent, respectively. Spending for transportation equipment is likely to show 4 percent growth in 2006 and a 2.2 percent increase in 2007.

Exports should outpace imports by a fairly wide margin by the end of 2007. Inflation-adjusted exports should rise 8.6 percent this year and 8.5 percent in 2007, while imports are expected to increase 6.2 percent in 2006 before decelerating to 4.3 percent growth in 2007.

MAPI sees the unemployment rate at 4.7 percent in 2006 and 4.9 percent in 2007. Energy challenges will continue to loom for the U.S. economy. The refiners’ acquisition price for imported crude oil is expected to average $65 per barrel in 2006 and $64.30 per barrel in 2007, a significant increase from the actual $48.90 per barrel price in 2005.

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