Industrial Sector Seen at Tipping Point of a Recession

Manufacturers Alliance/MAPI Quarterly Industrial Outlook: Challenges in 2008 should precede recovery in 2009; aerospace continues its strength

Arlington, VA — December 20, 2007 — The U.S. manufacturing sector will face turbulent times next year due in large part to the continuing housing collapse, and, as a result, the economic landscape will remain highly volatile in 2008 before rebounding in 2009, according to the latest "Quarterly Industrial Outlook" report from the Manufacturers Alliance/MAPI.

Housing starts were down 24 percent in the third quarter of 2007, and they are expected to plummet another 28 percent in 2008, foreshadowing the worst housing market in the post-World War II period, according to Daniel J. Meckstroth, chief economist for the Manufacturers Alliance/MAPI and author of the analysis. The good news is that the trend is likely to reverse itself, and then some, in 2009, when housing starts are expected to see 34 percent growth to 1.3 million units.

On an annual basis, MAPI forecasts a mild manufacturing recession next year. Manufacturing production is expected to increase 1.9 percent in 2007. The Alliance predicts no growth in 2008 — including a slight decline in non-high tech industries — before rebounding to 2.6 percent growth in 2009.

Economic Shocks

"Five economic shocks are contributing to halt industrial growth," Meckstroth said. "The shocks are: a significantly worse housing start outlook; the negative impacts of falling housing prices on consumer spending; the credit crunch; high gasoline and record high fuel oil prices, and if we have an exceptionally cold winter, natural gas prices could also spike; and, finally, the economy is generating less job growth."

Prevailing weakness in the industrial sector was evident in the 2007 third quarter figures. Thirteen of the 27 industries tracked in the report had inflation-adjusted new orders or production above the level of one year ago, down from 14 in the previous quarter. Twelve industries had production below the level of one year ago, and two remained flat.

Four industries enjoyed strong, double-digit year-over-year growth in the third quarter, including communications equipment at 15 percent; electrical equipment at 12 percent; aerospace products and parts with 11 percent; and private non-residential construction at 10 percent.

The largest drop came in equipment industries, where six of the seven sub-sectors declined year-over-year in the third quarter. Ventilation, heating, air conditioning and commercial refrigeration experienced the most retrenchment, declining by 12 percent.

Meckstroth concludes that four industries are in the accelerating growth (recovery) phase of the business cycle; 10 are in the decelerating growth (expansion) phase; nine 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.

Forecast for '08 and '09

The report also offers economic forecasts for 24 of the 27 industries for 2008 and 2009. Next year could be particularly difficult for the manufacturing sector, with MAPI forecasting only 10 of 24 industries to show growth, led by mining and oil and gas field machinery at 14 percent growth, and aerospace products and parts improving by 12 percent.

In 2009, however, a solid turnaround should occur, with 19 of 24 industries expecting growth, and one industry remaining flat. While the next 12 months should provide a formidable challenge, housing starts should improve significantly in 2009. The aerospace products and parts sector is expected to continue its strong showing, with expectations of 14 percent growth in 2009.

Three industries are forecast to have negative change in both 2008 and in 2009. Electric lighting equipment is forecast to decline by 5 percent in 2008 and by 7 percent in 2009; electrical equipment will show negative growth by 7 percent and 3 percent, respectively; and industrial machinery will decline by 5 percent in 2008 and by 1 percent in 2009.

"The decline in the value of the U.S. dollar will act as a stabilizer to manufacturing," Meckstroth concluded. "U.S. exports will increase at a rapid pace while import growth decelerates. The trade situation will cushion the industrial decline next year and boost growth in 2009."