Do Not Despair--Growth's in the Air

Dec. 11, 2007
Our general outlook, as measured by the U.S. Industrial Production Index, calls for a growth rate for 2007 of 2.0 percent above 2006, down from 2.7 percent predicted in the October Automation World.

For the record, we adjusted our expectations for 2007 long before Federal Reserve Chairman Ben Bernanke’s pronouncements on Nov. 8. 2008 is expected to come in 2.3 percent ahead of 2007, as measured by U.S. Industrial Production.

Readers who follow ITR’s phase methodology will note that we are in Phase C (slower growth), but we should soon see a brief transition into Phase B (a faster rate of growth). Do not become complacent with the return of Phase B as this will be short-lived. This is a time to improve efficiencies and to use your cash to expand into new markets. Decision makers should also maintain inventories and production capacities and work for market share gains. Be careful with any expansion plans, as a recession is looming for 2009.

Key leading-indicator trends, such as the U.S. Leading Indicator, Purchasing Managers Index, Corporate Bond Prices and EcoTrends Leading Indicator, are pointing toward a short but mild recovery after March 2008.

The housing market and the related credit crunch have certainly been generating a lot of attention over the last few months.

The extent of these problems through the near term is largely a function of who you are and where you are. Folks who are tied into an adjustable rate mortgage, or ARM, that will reset in 2008 will find themselves with less cash to spend in other areas each month. The decline in homeowners’ equity is also a painful reality that will slow down some consumer activity. Thankfully, American consumers only spent about 7 cents out of every dollar in equity in their homes, thus helping to mitigate the problem and keeping panic at bay.

Buying opportunity

 The flip side to the housing industry pain is that it represents buying opportunities for folks with cash and good credit.  Prices are moving lower in many markets, which means buying opportunities ahead. Don’t forget that these same markets will see price rises a few years from now. Look for areas with solid demographics. Multi-family properties and real estate investment trusts, or REITs, may be more to your liking; as people leave their single-family homes, they will need to get into rental units somewhere else. That means about 2 million more renters heading into that market over the next year or so.

Energy prices have been getting a lot of attention lately, and justifiably so. We are projecting that oil prices will stay sticky at about current levels through the near term. A look into 2008 shows increased demand from China and India as well as from the United States. It will be well nigh impossible to offset the projected demand with increased supply and with a finite refinery capability in the world today. Readers should budget for higher energy costs at home and for business.

Strong endogenous signals indicate that the General Purpose Equipment Production Index (NAICS 3339) is likely to move higher through 2008, but slower growth in New Orders affecting this market suggests that the rate of growth will begin to diminish early next year. Plan for activity in 2008 to be just slightly better than 2007 and raise prices if possible. New Orders for General Machinery are 5.0 percent below last year.  This is quite a contrast from one year ago when General Machinery New Orders were a 20.9 percent higher than the year before. Material Handling Equipment New Orders are 9.1 percent above last year, but gently trending lower.

Alan Beaulieu, [email protected], is Senior Analyst, an economist and a Principal with the Institute for Trend Research, in Concord, N.H.