MRO Magazine

Outlook for U.S. manufacturing in 2007

Toronto, ON --In a Global Insight (Canada) Ltd. prediction for U.S. manufacturing in 2007 prepared by analyst Tom R...


Industry

September 13, 2006
By MRO Magazine
MRO Magazine

Toronto, ON –In a Global Insight (Canada) Ltd. prediction for U.S. manufacturing in 2007 prepared by analyst Tom Runiewicz, the research organization expects that producers of equipment continue to enjoy healthy orders, but says that their pipeline seems to be slowing.

It says producers of consumer goods will be in for a rough patch during 2007. A weak housing market and high energy prices will take a bit out of consumer confidence, especially for big-ticket items. Below is reprinted the latest Perspectives report from Global Insight.

U.S. manufacturing has been humming for nearly three years. After a period of almost no growth in 200103, manufacturing output increased 5.0% in 2004 and another 3.0% in 2005. This year, production is on track to expand 5.2%. There are a number of reasons behind this renaissance.

First, is the resurgence of investment. From a business investment point of view, rising operating rates, increasing business occupancies, and healthy corporate profits have stimulated strong levels of spending for both high-tech and traditional equipment. Moreover, high energy prices and tough global competition have forced manufacturers to be on the leading edge of efficient and low-cost production.

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Investment in high-tech equipment was the first out of the gate. It posted increases of 10.0% and 8.5% in 2004 and 2005, respectively. This year, it is likely to see growth close to 9%. Investment in traditional industrial equipment had a later revival, but proved to be no slouch either. It grew by 8.2% last year and is likely to increase another 8.6% in 2006.

We expect the investment recovery will continue into 2007, but after nearly three years of strong growth, it is starting to mature. Total equipment and software spending is on track to expand 8.0% this year, but is expected to slow to 5.8% growth next year. As a result, production in both the traditional and high-tech equipment sectors will downshift.

High-tech equipment output growth is forecasted to slow from 18.0% this year to 13.0% next year, while traditional machinery output gains ease from 5.2% this year to less than 2.0% in 2007.

One investment sector will pick up the tempo next year, however. With many projects on the drawing boards for 2007 and 2008, spending on nonresidential buildings is expected to climb at least 5.0% in both years. This will accelerate the manufacture of materials such as structural steel, cement, glass products, and electrical lighting.

While much of the growth in manufacturing over the past few years has been headlined by investment and equipment, a big part of the increase can also be attributed to a buoyant consumer sector. In 2004 and 2005, consumer spending on nondurable goods increased 3.6% and 4.5%, respectively. This year, it is expected to grow by another 3.6%.

Spending on durable goods rose 6.4% in 2004 and 5.5% last year. This year, it should see 4.6% growth. These numbers have had a supporting role in the growth of industries such as foods, beverages, tobacco, and pharmaceuticals. However, the big boost was felt in big-ticket and housing-related industries, such as appliances, furniture, carpeting and rugs, and, especially, autos.

All this is likely to change. Higher interest rates, high energy prices, and a weaker housing market will chip away at consumer confidence, especially when it comes to big-ticket items. As a result, neat year’s consumer spending growth for nondurable goods is anticipated to slow to 2.2%, the weakest increase since 2001.

Furthermore, this year’s robust spending on durable goods will be replaced by meager performance in 2007, when only 0.3% growth is expected. This will have a profound impact on the auto market, where domestic light-vehicle production is likely to decline nearly 4% next year. In addition, we anticipate housing starts will weaken by 7% in 2007. This will hurt the household appliance and furniture industries, with output in both segments expected to fall by 2.4% next year.