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May 1, 2007

MANUFACTURING GROWTH AHEAD AFTER SLOW START

 

The manufacturing sector will continue to grow, but at a slower rate in the next 18 months, in line with softening in the overall economy. Specifically, manufacturing growth is expected to slow to 2.5% in 2007, a significant decline from a strong 4.7% growth rate in 2006, predicts Manufacturer’s Alliance/MAPI, a non-profit research organization in Arlington, Virginia.

“It’s a period of slower growth, but there will not be a recession,” says Cliff Waldman, economist at Manufacturer’s Alliance/MAPI. “The slowdown was going to happen sooner or later. Manufacturing runs in pronounced cycles.”

Eli Lustgarten, president of St. Louis-based ESL Consultants and senior vice president of Cleveland-based Longbow Research, says manufacturing growth will mirror the U.S. gross domestic product (GDP). Both manufacturing growth and GDP growth are expected to register at 2.7% for 2007 and 2.8% for 2008, down from last year’s GDP growth of 3.3%. The Manufacturer’s Alliance/MAPI’s forecast predicts 3.1% manufacturing growth and 3.2% GDP growth in 2008.

The recent weakness was typical of a mid-business cycle pause, Lustgarten noted in a presentation at an MSCI conference earlier this year. Economic growth is expected to improve in the second half of the year and beyond, he says.

One measure of the manufacturing sector is the Institute for Supply Management’s (ISM) manufacturing Purchasing Managers’ Index (PMI), which measures the relative strength of the nation’s factories. The March PMI registered at 50.9%, a slight improvement from a sluggish start in January when it contracted to 49.3%, the lowest level since April 2003, the ISM says in its monthly Manufacturing Report on Business. A reading above 50% indicates the manufacturing economy generally is expanding; a reading below that means it is generally contracting.

Although it is a trusted indicator, each month’s PMI reading isn’t a “magic number,” says William Strauss, senior economist and economic advisor in the research department at the Federal Reserve Bank of Chicago. He notes that most economists see manufacturing roughly in line with overall economic activity, which grew for the 65th consecutive month, ISM data shows.

Waldman agrees that the PMI tends to bounce around, but the average PMI of the past few months is an indication of slower manufacturing growth, which parallels the soft economy.

“Manufacturing seems to slip a little bit below the GDP when it weakens and be a little stronger when GDP is strong,” Waldman says. “It’s more volatile than the economy with higher highs and lower lows.”

Strauss attributes the year’s sluggish start to the housing sector’s decline, U.S. auto industry struggles and adjustments to excess inventories. Defaults in the subprime mortgage market could slow a recovery of the housing market this year. However, global demand is strong, and the heavy machinery, aviation and high-tech sectors are enjoying growth, he says.