Quantitative Easing: What’s On the Horizon for Manufacturing

It may simply be time for the market to take a breather from what has been an exhilarating run up. Total manufacturing employment for the past 12 months is 0.1 percent above last year.

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Many manufacturing business leaders are wondering what will become of the economy once the extraordinary monetary support from the Federal Reserve, known as QE 2, winds down in June. More importantly, what does it mean for your business? Perhaps the best way to understand what will happen in the absence of quantitative easing is to consider the result to date: buoyant stock prices, rock-bottom treasury yields, and a weaker dollar. The reversal of these trends will have widespread consequences when they occur.

The last time the Fed turned down the monetary fire hose was the winding down of QE 1 in March 2010. Stock prices saw almost immediate stagnation with no significant rise until the Fed started stoking investors’ expectations by talking up plans for QE 2. The end of QE 2 could easily dampen those same investors’ spirits once more. Manufacturers looking to raise equity capital for your business in the second half of the year, this could make things difficult.

The discussion on raising the federal debt ceiling may also have its repercussions in the equity markets. There may be some tough wrangling over tax breaks, or the elimination of tax breaks to be precise, that the equity markets may not take kindly too. The end of QE 2 and Washington politics may make investors nervous.

Lastly, it may simply be time for the market to take a breather from what has been an exhilarating run up. Normal endogenous trend characteristics suggest that it may be time to take a more defensive position in anticipation of a stock market correction.

Employment increasing

Employment is on everyone’s mind as the economy continues to move forward. We are anticipating that the number of people working in the U.S. will increase by 3.3 percent between now and the end of 2012.

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Total manufacturing employment for the past 12 months is 0.1 percent above last year. Internal indications suggest that employment will continue to increase in the manufacturing sector. The lack of skilled labor and the lack of mobility work against many manufacturers. The demand for skilled labor will put a strain on supply, which most likely means an increase in wages in this subset, despite the large number of unemployed in America.

Information technology new orders are a healthy 10.1 percent above the year earlier, but a slower rate of growth is likely as we move through the rest of 2011. The outlook is consistent with external leading indicators and with our overall outlook for the U.S. economy.

Computers and electronics new orders are seeing overall decline. New orders for the last quarter are 2.0 percent above this time last year, but the annual moving total is moving lower off a February 2011 high. Look for 2011 to be essentially flat.

The earthquake in Japan has interrupted the supply of some products and parts, but not to the extent many feared. However, sales have slowed into Japan’s market as the nation focuses on rebuilding. Companies that can fill the need for products, parts and materials caused by supply constraints in Japan are benefitting from increased levels of activity.

Aircraft production is seeing improvement in the monthly index and in the rates-of-change. Companies selling into this industry should benefit from increased sales opportunities in 2011. The air transport association reported that passenger revenues increased for the 15th straight month in March, up 13 percent from March 2010. Increased passenger traffic bodes well for industry participants.

The construction industry is virtually even with its pre-recession level (GDP basis). Activity is 7.1 percent ahead of last year and is in Phase B.  However, construction for the recent quarter is only 4.8 percent above the same time a year ago and the industry is likely to enter Phase C (slower growth) in the near term. The data trend will continue growing. 

Alan Beaulieu, alan@itreconomics.com, is president of the Institute for Trends Research (ITR). His weekly radio show, “Make Your Move,” can be heard at www.voiceamerica.com every Monday at 4 p.m. (Eastern time). Podcasts are available through voiceamerica and through iTunes.

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