Prospects for Next Year's Recovery in U.S. Industrial Production Are Bleak

With our revised expectation that residential housing will see two consecutive yearly declines of more than 16.0% (in both 2007 and 2008), the building materials sector will be hit hard. Lumber and wood products, as well as clay, lime, and gypsum should see output drop 12–15% next year. In the home consumer products sector, hefty debt levels, housing-related credit worries, and the recent volatility in the stock market are expected to take some additional wind out of the consumer's ability and willingness to spend. Household furniture, appliances, and carpets and rugs should also see double-digit declines in output next year. At the same time, some of the machinery industries, which have been holding their own, should expect to lose a bit of their luster. Energy-related equipment and electrical machinery in general are doing well this year; next year, only the mining and drilling equipment sector is expected to continue its strong growth.

Looking at transportation equipment, the demand for trucks and trailers has been under considerable pressure—too many trucks and trailers chasing too little freight. A weaker housing market and slower growth in consumer spending suggest even less freight to be moved than we had been forecasting just a couple of months ago, as well as slower growth in vocational market activities. The situation with rail equipment is similar. The demand for equipment used to transport consumer goods and building materials will remain lackluster through most of 2008. The bright spot in transportation equipment remains in aircraft, where July year-to-date commercial orders were 44.6% above the levels for the same period in 2006. We continue to forecast aircraft manufacturing output growth in the double-digit range through 2010.

Overall, therefore, the prospects for next year's recovery in U.S. industrial production are bleak. The revised housing and subprime fallout forecast will have a significant impact on total industrial production and manufacturing output in the United States. Next year, total industrial production is only expected to increase 1.5%, a weaker pace than this year's anticipated 1.9% growth. Manufacturing output is likely to increase only 2.3% in 2008, just slightly ahead of this year's 2.1% growth.