MAPI: Manufacturing production growth will slow to 1.9%

A confluence of challenges, including the recent housing collapse and credit crunch, rising oil prices, slowing employment growth, and lack of consumer confidence have conspired to signal a significant near-term economic slowdown, according to a new report.

The Manufacturers Alliance/MAPI Quarterly Economic Forecast predicts that inflation-adjusted gross domestic product growth will slow to 2.1 percent in 2007 and to 1.3 percent in 2008. By supplying major assumptions for the economy and running simulations through the Global Insight Macroeconomic Model, the Alliance generates unique macroeconomic and industry forecasts.

“The U.S. economy in the past has experienced a recession from fewer shocks than we are now experiencing,” said Daniel J. Meckstroth, Manufacturers Alliance/MAPI chief economist. “By itself, the housing collapse would probably not cause a recession, but when combined with a credit crunch, falling housing prices, record oil prices, falling corporate profits, low consumer confidence and decelerating employment growth, the risk of recession has climbed to at least 50 percent.”

Manufacturing production growth will show a significant decline from 4.7 percent growth in 2006 to an estimated 1.9 percent in 2007, and is forecast to remain flat in 2008. These figures are down from the previously expected 2 percent and 2.9 percent growth, respectively, in the alliance’s August forecast. Production in non-high-tech industries is forecast to grow only 0.9 percent this year and to decline by 1.2 percent in 2008.

There is, however, some positive news, as inflation-adjusted spending for computers and electronic products is expected to rise 11.5 percent in 2007 and 10 percent in 2008.

Large percentage gains in spending will come in the high-tech sectors. Inflation-adjusted expenditures for information processing equipment are expected to rise 7.7 percent in 2007 and 5.3 percent in 2007, growing several times faster than the general economy. Real investment in equipment and software, though, should increase by only 1.4 percent in 2007 and 2.0 percent in 2008. 

Interestingly, spending on non-residential structures is forecast to rise a robust 12.1 percent in 2007 but by only 0.8 percent in 2008. The forecast calls for industrial equipment expenditures to increase 2.5 percent before declining by 3.4 percent, respectively, in the same years. The outlook for spending on transportation equipment calls for a 10.3 percent decline in 2007 followed by a further 2 percent decline in 2008. However, aerospace equipment should grow by 11.8 percent in 2007 and by 12.1 percent in 2008.

There are other pockets of optimism. Export growth should outpace that of imports by a wide margin by the end of 2008. Inflation-adjusted exports should rise 7.7 percent in 2007 and 8.7 percent in 2008, while imports are expected to increase 2.1 percent in 2007 and 1.5 percent the following year.

“If the U.S. economy is able to avoid a recession next year, it will be due primarily to the declining value of the dollar and strong global growth, which shows up as substantial growth contribution from net exports,” Meckstroth said. “In addition, government spending growth should contribute positive momentum.”

The forecast for the unemployment rate is 4.6 percent in 2007, rising to 5.3 percent in 2008.

Included in the November report is the third annual five-year forecast. Average annual GDP growth from 2007 to 2012 is expected to be 2.5 percent, including a low of 1.3 percent in 2008 and a high of 3.1 percent in 2010 and in 2011.

The alliance expects long-term oil prices to remain relatively high throughout the forecast period but will not consistently exceed $100 per barrel for West Texas Intermediate. Additionally, the forecast predicts housing starts and automobile sales will rebound once credit conditions and economic growth return to normalcy in 2009 and 2010. Also, slowing labor force growth due to the Baby Boom generation exiting the work force and the associated deceleration in productivity growth will keep unemployment relatively low even in an economic slowdown, he added.

To view the economic forecast tables click here.