2008 Manufacturing Outlook: Buyers will have a busy year
The 2008 economic outlook remains bleak. The housing market will fall into a deeper hole; consumers will continue tightening their belts; factories will limp along—requiring export orders to stay busy—and buyers will be scrambling.
By Tom Stundza -- Purchasing, 1/17/2008 2:00:00 AM
Buyers at manufacturing companies, big and small, better be in good shape, because they will be running harder than ever this year as they try to react to the constantly changing business conditions. They will be operating in an industrial economy undermined by anemic housing construction, uncertain nonresidential building and weakening motor vehicle assembly. Production of numerous building products, home appliances, machinery, high-tech equipment and, possibly, consumer electronics will be down. But, both the energy and agriculture markets will surge.
The probable weaker demand for raw materials won't necessarily result in lower prices. Energy costs will keep raw materials prices high, and the weak dollar will keep cheaper imports out of North America. So, buyers may have no choice but to pay higher prices until at least mid-year.
Upshot: Purchasing professionals will have to exercise their analytical, negotiations and supplier-management skills even harder than in recent months to get the cost savings that will keep their companies competitive.
Here is the background:
In the last Beige Book report of 2007, the regional Federal Reserve bankers reported that the following business sectors were in difficulty going into 2008: housing (new single family, apartments and condos and co-ops), commercial real estate (especially offices), automotive, corrugated boxes, consumer durables, high-tech equipment, metalworking machinery, trucking, software of all stripes and information technology. Areas of strength were steel production (due to reduced imports), energy drilling, commercial aircraft, aerospace and defense, agriculture, chemicals and plastics manufacturing (due to reduced imports) and paper products.
Production of myriad durable and nondurable goods will be lethargic, agrees economist Ryan Sweet at Moody's Economy.com since "consumer confidence is sagging beneath rising energy prices, a weakening housing market, slower job growth and talk of recession in the media." Consumer spending is important since it makes up 70% of the U.S. economy and, lately, consumers have been feeling gloomy. Most gauges of consumer confidence have been plunging and Sweet doesn't foresee a renaissance in consumer spending in 2008. In fact, his views mesh with the Blue Chip Economic Forecast's panel of economists, who say consumer expenditures will slide for a fifth straight year to a 2.2% expansion rate from 2.9% growth in 2007.
The U.S. economy grew by just about 2.1% last year, compared with the 2.9% in 2006. Growth in the manufacturing sector was 2.2% after 5% growth in 2006. Looking at 2008, the growth outlook is a fragile 2% increase for gross domestic product (GDP). Manufacturing and construction growth is uncertain due to record-high crude oil prices and volatile downstream gasoline, diesel and fuel oil prices—which are making consumers jittery and factory planners anxious.
"The U.S. economy in the past has experienced a recession from fewer shocks than we are now experiencing," says chief economist Daniel Meckstroth for the Manufacturers Alliance/MAPI business group. "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%."
And that's why there's such uncertainty about the overall economic growth rate for this year, after the sluggish 2.1% expansion in gross domestic product (GDP) in 2007. The Federal Reserve has reduced its growth forecast to 2.15%. Global Insight's Runiewicz sees a 2% increase in 2008 while the economists who participate in the Blue Chip Economic Indicators survey project a 1.8% growth rate.
The Fed expects slower economic growth and a slight bump up in unemployment next year due to the housing slump and the credit crunch. However, the Fed thinks inflation will remain moderate. In this environment, the consensus view among economists is that manufacturing output will grow around 2.2% in 2008, says Runiewicz, who believes durable-goods production will increase by 2.9% but nondurable goods should show only grow 1.3%.
Jacqui Douglas, economics strategist at TD Securities in Toronto, says "the major depreciation in the U.S. dollar should help to boost demand for U.S. manufactured goods, and will likely keep the manufacturing sector from falling too much further" than 2% growth. But, the Manufacturers Alliance/MAPI isn't so sure about export sales and sees only a 1.9% manufacturing expansion.
According to several economists, any projected durable goods expansion this year will be based on aircraft and parts manufacturing showing double-digit annual growth due to the long pipeline of orders booked over the past 18 months. Upshot: Since new orders have been skyrocketing, aircraft assembly lines have been busy. Not only is Boeing gearing up for a production start of its 787 Dreamliner super jet, there are older commercial jetliner models still under construction.
Construction activity slipped 11% in 2007. Slow growth in nonresidential buildings (+3%) and nonbuilding construction (+5%) was more than offset by the collapse in residential construction (-24%). Economists expect decelerating growth in commercial and public works construction activity in 2008, which will soften overall nonresidential building throughout the year.
Looking at the battered housing sector, University of Michigan economists say home sales will decrease from 4.94 million sales in 2007 to 4.14 in 2008. Upshot: "Weak housing and consumer spending could weaken overall industrial production during the fist half of 2008," says economist Runiewicz at Global Insight. "Some big-ticket consumer sectors, such as motor vehicles or appliances, will be especially hurt, indirectly impacted by the fallen housing prices."
In the transportation sector, this year will be a continuation of low light-vehicle sales and stalled production. Domestic motor vehicle sales were about 16.1 million units in 2007, down from 16.5 million in 2006 and 17 million units in 2005. Industrial economist Sophia Koropeckyj at Moody's Economy.com says the weakest pace of sales since 1997 has affected the Detroit Three and some of the transplants, which will lead to cutbacks in 2008 production. She adds that the fact that many Japanese-owned auto plants here are scaling back 2008 assembly underscores the industry's deteriorating macro environment.
Forecaster Andrew King at DesRosiers Automotive Consultants in Richmond Hill, Ontario, predicts that North American motor vehicle sales will show the same 2.4% rate of decline in 2008 that was registered in 2007 and 2006. So, he believes U.S. and Canadian production could drop by as much as 4% this year. King says "automotive isn't going to crash but sales and production activity are deep into a cyclical downturn that will last into 2009."
"The auto industry is under pressure from a number of channels," says Koropeckyj, pointing to high gasoline/diesel prices reducing sales of large sports utility vehicles and pickup trucks while soft housing construction activity is weighing on pickup truck sales. Koropeckyj adds that weaker employment trends, especially for housing-related industries, are dampening demand for light vehicles. Also, the U.S. automakers have been reducing their low-margin sales to fleets.
"These detractors from vehicle sales will continue to weigh on sales in coming months of 2008," she says. "Then there is the weakening ability to extract home equity to pay for big ticket items due to house-price erosion, which is affecting consumer demand for vehicles, appliances and other big-ticket items," Koropeckyj adds. Heavy truck production was down 40% in 2007, and any rebound in 2008 will likely be minor.
The credit crunch has both made it more costly and more difficult for companies to borrow money. In fact, less available credit to a wide swath of corporate borrowers is another reason the economists see slower overall GDP growth ahead. Studies have shown that tighter loan standards tend to precede economic slowdowns. Between July and October, banks tightened lending criteria significantly for a variety of business and consumer loans, according to the Fed's latest survey of senior loan officers—which found bankers expressing an uncertain economic outlook.
What is certain is the view that machinery and equipment buying is throttling down—reducing assembly at least until autumn. The machinery sector barely showed any growth in 2007 after two consecutive years of 6% increases. Analysts believe the overall machinery sector will be flat or decline somewhat in 2008.
In all these areas, buyers will be racing to find savings. Get your track shoes on.
| 2004 | 2005 | 2006 | 2007 | 2008 | |
| Source: Blue Chip Forecast, Scotiabank | |||||
| Gross domestic product | 3.6 | 3.1 | 2.9 | 2.0 | 2.4 |
| GDP price index | 2.9 | 3.2 | 3.2 | 2.6 | 2.0 |
| Consumer price index | 2.7 | 3.4 | 3.2 | 2.8 | 2.6 |
| Consumer spending | 3.6 | 3.2 | 3.1 | 2.9 | 2.2 |
| Capital spending | 5.8 | 7.1 | 6.6 | 4.2 | 4.5 |
| Industrial production | 2.5 | 3.2 | 3.9 | 2.2 | 2.7 |
| Residential starts | 4.9 | 4.6 | -13.0 | -24.4 | -12.5 |
| Motor vehicle sales | 1.8 | 0.0 | -2.4 | -2.4 | -2.4 |
| Employment | 1.1 | 1.7 | 1.9 | 1.3 | 0.9 |
Also read:
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