Looming Downturns in U.S. Industrial and Manufacturing Output

Other indicators showing signs of trouble are the ISM-manufacturing index and the manufacturers' new orders report. After being above the 50% threshold for most of 2007, the ISM purchasing managers' index finally dropped to 48.4% in December, indicating a contraction in the manufacturing sector. The index did rebound to 50.7% in January, but that is a precarious perch, and we would not be surprised to see it drop below 50 again. The new orders numbers indicate that the sector is still holding up, but running out of steam fast. Totals for 2007 show new orders for manufactured goods actually up 1.4% from 2006, but exports may have supported a fair part of that growth. Furthermore, orders for machinery (excluding oilfield) and computers were just barely positive. Do not be surprised if the orders numbers start to drop also.

We foresee a mild recession during the first half of 2008. From the perspective of total industrial production, total manufacturing, durable goods manufacturing, or even nondurable goods manufacturing, output should decline for at least two or three quarters. In many industries related to housing and construction—such as wood products, nonmetallic mineral products, furniture, and appliances—we expect output to decline through most or all of 2008.

Of even greater concern, though, is the effect of the fading consumer and traditional investment sectors on industrial production. The full impact of high energy prices and slowing employment growth on American consumers is beginning to be felt. In 2008, consumer spending on goods is likely to grow only 0.8% (up 1.3% for nondurables, down 0.1% for durables), the slowest increase in 17 years. This will lead to output gains of only 1.4% in food processing and 1.5% in pharmaceuticals, along with a 5.6% decline in beverage and tobacco production. The automotive industry will continue to shrink, with its fourth consecutive yearly decline in 2008, projected at 6.0%.

The anticipated weakness in investment, especially traditional capital equipment, is also coming. New orders for machinery were slightly positive last year, but this year investment in traditional industrial machinery is likely to decline 6.7%. This should lead to production declines of 1.5% for machinery and 2.2% for electronic equipment (non-high tech and non-appliance).

The combination of a weak consumer sector, depressed housing markets, and a decline in traditional equipment investment should cause manufacturing output to increase just 0.7% in 2008, much slower than last year's 2.0% growth.