Recession Seen Tightening Grip on Major Manufacturing Industries

Arlington, VA — May 30, 2008 — While the current U.S. industrial slowdown shows few signs of abating, a trio of positive factors should highlight at least some production growth in the second half of 2008, according to the "Manufacturers Alliance/MAPI Quarterly Industrial Outlook — First Quarter 2008," a report that analyzes 27 major industries.

"The manufacturing sector is in a recession, whether a recession is officially declared for the general economy or not," said Daniel J. Meckstroth, chief economist for the Manufacturers Alliance/MAPI and author of the analysis. "Yet as the housing collapse worsens and drags with it related industries, the Federal Reserve's actions to dramatically lower interest rates, robust rebate checks now being sent to American consumers and continued strong net exports will lead to production growth in the second half of 2008."

Exports Providing "Lifeline"

On an annual basis, MAPI forecasts slight growth in the industrial sector this year. Manufacturing production is expected to increase 0.4 percent in 2008 before improving to 3.1 percent growth in 2009.

Manufacturing industrial production, measured on a quarter-to-quarter basis, declined at 0.6 percent annual rate in fourth quarter 2007, fell by 1.4 percent in first quarter 2008, and is further expected to decline at a 2.5 percent annual rate in second quarter 2008 before resuming growth.

Exports, though, could provide a bit of a lifeline. According to MAPI's previously released quarterly economic forecast, inflation adjusted exports are expected to expand by 8.3 percent in 2008 and by 9.7 percent in 2009, partially offsetting some of the negative effects of the housing crisis.

"High tech industries such as computers, communications equipment and semiconductors continue to post double-digit volume growth and thus mitigate the more severe downturn that is occurring in non-high tech manufacturing," Meckstroth said.

Housing Continues to Drag

Non-high-tech manufacturing production declined at a 2.3 percent annual rate in first quarter 2008 and is on pace to fall at a 4 percent annual rate in the second quarter.

There was some minimal improvement in the 2008 first quarter figures for manufacturing. Fifteen of the 27 industries tracked in the report had inflation-adjusted new orders or production above the level of one year ago, two more than reported in the first quarter. Eleven industries had production below the level of one year ago, and one remained flat.

Four industries enjoyed strong, double-digit year-over-year growth in the first quarter, led by communications equipment at 23 percent; aluminum and alumina, as well as material handling equipment, each improved by 13 percent; and private non-residential construction enjoyed 12 percent growth.

The largest drop came in housing, with a 29 percent decline in housing starts, while ventilation, heating, air conditioning and commercial refrigeration equipment production fell by 15 percent.

Continued Challenges

Meckstroth concludes that three industries are in the accelerating growth (recovery) phase of the business cycle; 13 are in the decelerating growth (expansion) phase; seven industries appear to be in the accelerating decline (either early recession or mid-recession) phase; and four are in the decelerating decline (late recession or very mild recession) phase of the cycle.

The report also offers economic forecasts for 24 of the 27 industries for 2008 and 2009. This year will continue to pose challenges for the manufacturing sector, with MAPI forecasting only 11 of 24 industries to show gains, led by mining and oil and gas field machinery at 21 percent growth, and communications equipment improving by 18 percent. In 2009 an upswing should occur with 16 of 24 industries expecting growth.

For example, after suffering through an anticipated 34 percent decline in 2008, housing starts should improve by a much improved 25 percent in this volatile sector in 2009. In addition, the aerospace products and parts segment is expected to maintain its positive trend with a forecast of 7 percent growth in 2008, followed by 15 percent growth in 2009.

Four industries are expected to experience negative change in both 2008 and in 2009, with appliances and electric lighting equipment being hit the hardest. Appliance production is expected to decline by 15 percent in 2008 and by 2 percent in 2009, while electric lighting equipment production is anticipated to drop by 12 percent and by 3 percent, respectively.

Other industries include construction machinery, with a 4 percent decline in 2008 followed by a 1 percent drop in 2009, and fabricated metal products, expected to fall by 1 percent both this year and next year.

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