January 1, 2009


Demand will be down for just about every end user of steel.

The economy was in trouble before the credit crisis. But the absence of credit and the failure of financial institutions dragged the industrial sector into a full-fledged recession. The result will be that virtually every end user of metals will see lower demand in 2009.

That the U.S. economy was going to slow significantly was not a surprise. Through the initial six months of 2008, trade was the key contributor to economic growth, with exceptionally strong exports making up for most of the weakness of the domestic economy. Modest growth from consumer spending, increased government expenditures and higher investment spending enabled the U.S. gross domestic product numbers to remain solidly positive in the first half of 2008, despite the significant economic headwinds from the ongoing decline in residential construction and inventory liquidation.

By fall, however, the U.S. economy was weakening, dampened by several factors: consumer spending began to wane, the housing market continued to deteriorate, the dollar began to strengthen, manufacturing activity started to fall and economic growth outside the United States began to slow, particularly in Europe. The hope that the U.S. industrial economy would muddle through this downturn was shattered with the meltdown of the financial sector and the spasm that gripped financial markets, virtually shutting down the credit sector domestically, a crisis that quickly spread around the world, curtailing global manufacturing activity.

Domestic manufacturing activity plummeted as industrial production turned negative, manufacturing capacity utilization dipped toward recessionary percentages in the low to mid-70s, and the Institute for Supply Management’s Purchasing Managers Index (PMI) fell sharply to levels of clear contraction at 43.5 in September, 38.9 in October and 36.2 in November.

More importantly, the export outlook has deteriorated as the Eurozone PMI plummeted from 45 in September to 41.1 in October and a preliminary 36.2 in November. The dollar strengthened about 20% versus the euro and 16% on a trade-weighted basis.

With credit remaining tight globally, manufacturing activity will soften well into 2009 as companies curtail production and employment to liquidate inventories and match activity to the reduced levels of demand.

Clear Threat

The current credit/liquidity crisis is a clear threat to the welfare of consumers and businesses globally. The cancer of subprime lending and other types of difficult-to-value financial instruments as well as the destruction of numerous financial institutions heightened the dramatic need for a capital infusion into the global financial market. The massive capital being made available by the Fed, treasury and the central banks around the world to refinance the banking system, the injection of liquidity, the guaranty of financial paper and debt of all types, and the coordinated global move to cut interest rates are all focused to free the financial sector from the current spasm that threatened to halt global economic growth.

The important issue is whether our perception is correct that this massive undertaking eventually will stabilize and begin to free up the financial markets over the next two to four quarters to allow the normal seeds of recovery to take hold. Economic recovery is born in a combination of government policy efforts, such as stimulus packages, and the economies’ built-in recuperative powers, such as lower gasoline prices. (The United States uses about 140 billion gallons per year, suggesting the lower fuel prices may provide a huge stimulus.)

The bottom line is that the next four quarters will be very dicey for industrial America. Domestic economic growth will be weak or negative at least through the first half if not all of 2009, most European economies will be in recession and economic growth in developing regions such as South America (particularly Brazil) and Asia (particularly China) will slow. The strengthening of the dollar will curtail American exports, and corporate profits will be under significant pressure from falling demand and negative foreign currency impact. The only relief in sight is the plummeting of commodity prices, which ultimately will reduce manufacturing input costs.

If we are correct in our perception that the financial markets will stabilize, then we can look forward to some modest economic growth beginning in the second half of 2009 and/or in 2010. However, for the near-term, virtually every end user of metals is facing or will face lower demand in 2009.


  • Housing, which will fall another 30% or more to about 935,000 construction starts in 2008, is still looking for a bottom. Current best guess is another 20% or more decline in 2009 to about 750,000 or fewer, with hopefully some stabilization becoming visible over the next two to four quarters.
  • The auto outlook remains ugly, with 2008 North American production now at about 12.6 million cars and light trucks at best, with further declines likely, given the potential and need for bankruptcy or bailout of the Detroit Three. We’re hoping that production in 2009 can hold in the 10.5 million to 11 million range, but even lower levels are possible because of the unfolding auto financial situation.
  • Construction equipment sales and production in 2008 were likely down 20% to 25% or more, with 2009 now down at least another 10% to 15%, as export sales wane and non-residential construction spending falls about 5% to 15% in 2009 and likely a similar amount in 2010. Markets to worry about are those related to the rental sector and material handling.
  • The heavy-truck sector now faces a modest 4.5% decline in production to about 205,000 in 2008 compared to 212,000 North American Free Trade Agreement shipments in 2007. The decline in medium-truck (class 5 to 7) production is now estimated at approaching 25%, going from 206,000 to 155,000 units. The lack of credit, the unfolding domestic recession and favorable fuel economy reviews for the 2010 engines have all but eliminated the need for any emissions-related prebuy, with 2009 heavy truck production now likely to fall at least another 15% to about 175,000 or fewer, with perhaps another 10% production decline in the medium trucks sector.

Even sectors that were expected to hold up in the weaker economic environment find themselves under pressure from the credit crisis:

  • Farm machinery sales should see a 15% to 25%-plus rise, driven by larger equipment demand in 2008. However, the recessionary environment has taken its toll on commodity prices (down 50% plus), and the credit crunch has translated into a flat or down outlook at best for 2009 farm equipment sales in every global region except for North American large equipment.
  • Mining and oilfield machinery demand should hold up fairly well near-term, but several 2009 mining projects have been postponed, and weakening demand is now developing in the Middle East and among basic material producers.
  • The electrical equipment market shows signs of weakening, as it’s hurt by the credit crunch and the double-digit decline under way in new nonresidential construction starts.

The next several quarters will be a difficult period for most industrial manufacturing companies. The linchpin of how much pain will be endured by industrial America rests on the success of unfreezing and stabilizing the credit markets during the next several quarters.

Eli S. Lustgarten is president of ESL Consultants in St. Louis and senior vice president and senior analyst with Longbow Research in Cleveland.