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What's Next for U.S. Manufacturing?12 Jan 07U.S. manufacturing is moving into a growth slowdown this year, rather than a downturn. Healthy backlogs in most durable industries have spilled over into 2007, but producers of consumer goods are in for a rough patch, as a weak housing market and high energy prices take a bite out of consumer confidence. The view that the current business investment cycle should support U.S. manufacturing this year is not a bold one. Even though investment growth in industrial equipment is expected to downshift from 6.3% last year to 2.6% in 2007, that in information processing equipment should ease only from 9.0% to 7.1%. Corporate profits, which drive capital spending, will likely remain near record levels. Furthermore, the international competitive environment places constant pressure on domestic manufacturers to improve productivity and efficiency. Expectations that high energy costs are here to stay is also a powerful incentive to keep investing in state-of-the-art machinery and equipment. Nonetheless, as we move through 2007 and into 2008, the enthusiasm to invest will likely cool. This year will mark the third consecutive year for investment growth in traditional equipment, and the spending spree is starting to get a little long in the tooth. Look for major programs to wind down during the second half of 2007. This year's drag on manufacturing will come from industries tied to consumers and housing. Consumer spending for durable goods is expected to advance only 1.4% in 2007, down from 5.2% growth in 2006. The housing sector continues to be battered with news of declining permits, weak starts and sales, and even falling prices. It now looks like investment declines in residential structures will exceed 15% this year. This will place pressure on the residential building materials market, lumber, wood products, gypsum, and wallboard, but also on home-related consumer goods like furniture, appliances, and carpets/rugs. Moreover, declining home prices will limit the use of the home as a source of cash for other major purchases such as autos. Indications are now that U.S. production of traditional manufactured goods (total excluding computers, communications equipment, and semiconductors) will see growth slow from 3.3% in 2006 to 1.0% this year. Total manufacturing output growth should slow from 4.7% in 2006 to 2.0%. Beyond 2007, the U.S. consumer should return to the fold and exports could build momentum. With this as a backdrop, we anticipate production growth in traditional manufacturing to once again exceed 2.0% in 2008.
Notable Risks to the Forecast. If the downturn in the housing sector is worse than the anticipated 15% this year, it could drag down both consumer and business confidence. This would hurt employment growth and other consumer areas. The wealth effect should not be underestimated when it comes to spending. Notable Issues with History. On December 11, the Federal Reserve published its annual historical revisions to industrial production. While all data from January 1972 were affected, most of the revisions start in 2003. And there were significant changes for a number of sectors. For example, the Fed previously had pegged 2004 growth for total industrial production at 4.1% and for manufacturing at 4.8%; those were revised down to 2.5% for the total and 2.9% for manufacturing. Additionally, for some sectors like organic chemicals, engine, turbines and power transmission equipment, medium and heavy trucks, and computer and peripheral equipment, the production indexes were revised by magnitudes of 13% to 30%—some up, some down. by Tom Runiewicz
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