Global Insight’s Top-12 Industry Picks for 2006

The office machinery and computer industry ranks first, with 11-12% growth forecasted for this year, supported by hefty volume increases worldwide. Consumers and companies alike continue to replace their computers at a rapid rate, taking advantage of state-of-the-art technology and declining prices. Companies must regularly invest in IT infrastructure to keep their productivity high, control their costs, and remain competitive over time. With the global economy on the mend, consumers have increased their purchasing power, allowing them to increase their spending on discretionary items. Consequently, the outlook for this industry remains bright. Electrical appliances and electrical apparatus and supplies are in second and third place, respectively, led by the continued global boom in construction and strong global demand for household video/sound equipment and electronic games.

For the first time in years, aircraft manufacturing has made it into the top-six industries, scoring fourth, following a prolonged period of weakness. Orders for new aircraft have rebounded very strongly in the past year, particularly those from Asia, which bodes well for aircraft manufacturing in the coming years. Ship-building and repair activity is also enjoying a comeback, ranked fifth, following the 2004 supply bottlenecks that plagued the ocean-going shipping industry worldwide. Operators are also replacing the older craft in their fleets to meet environmental regulations.

Growth for our second-tier of top-ranked industries—rated 6th to 12th—is projected to hit 5-7% in 2006. Surprisingly, leather will lead this group, getting strong worldwide support from healthy demand for shoes and other leather-based consumer products. Indeed, sales are increasing strongly in China, India, and other emerging countries. Motorcycles and bicycles (ranked seventh) continue to benefit from the overwhelming position of China as both a buyer and producer in this industry—China owns nearly 40% of global motorcycle and bicycle production, with robust volume increases expected. Computers and computer-related activities are next at eighth. Software and technical support are driven by the outstanding expansion in computer equipment, with a notable gains in outsourcing during the last few years to IT firms in India, other parts of Asia, and central Europe, all of which offer comparatively lower IT consulting costs.

Non-energy mining is ninth, as healthy demand for manufactured goods and record or near-record price levels for metals, construction materials, basic chemicals, and other staple commodities have caused mining activity to soar. Rubber products (ranked 10th) continue to enjoy the benefit of lofty global demand for passenger cars, particularly from China, and the rebound in the U.S. heavy truck market. Communications equipment ranks 11th. Asia accounts for an estimated 55% of world production of communications equipment, and is largely responsible for the robust gains in this sector. Railroad equipment rounds out the list. Traffic growth, rail service problems, and the pressure to replace older and smaller fleet units are the driving forces behind the current equipment-buying spree. These pressures will remain in play in the near term, keeping growth in railroad equipment strong for a while longer.

We count only one service industry in our best-performers list for 2006: computers and computer-related activities. One reason for this lack of representation by the service sector is that less-mature economies tend to channel their efforts toward building their manufacturing and mining infrastructures, at least in the early years of industrialization. Often this happens at the expense of developing their service industries. Services also tend to be less cyclical than goods, particularly in more-established economies. Therefore, on average, post-recession rebounds tend to be less pronounced for services than for goods-producing sectors. For example, following the economic slowdown of the early 2000s, most of the 12 fastest-growing sectors in the United States and the Eurozone were manufacturing-based until 2005. We expect this trend will be broken in 2006, with 3 of the top 12 U.S. and Eurozone industries projected to be service-oriented.

by Frantz R. Price