Get Ready for Growth

April 1, 2006
Increase inventories to be ready for a very busy second half of the year.

U.S. industrial production growth has slowed to 3.1 percent, down from the high water mark of 4.4 percent established in March 2005. The economy is tracking as forecasted with a slower rate of growth in the first part of 2006 and reacceleration projected for the second half of this year. 2007 will be even more robust. This is the time for readers to fine-tune market programs, production capabilities and delivery/distribution efficiencies to take full advantage of the rising trend through 2007.

The upbeat forecast for the latter half of 2006 and 2007 is driven by the rising trends evident in the U.S. Leading Indicator, the Purchasing Managers Index, the ITR Leading Indicator and Corporate Bond Prices. Additionally, retail sales are a solid 5 percent ahead of this time last year with consumer spending establishing record highs. Conditions are even stronger away from the consumer trends. Business-to-business expenditures, as measured by Nondefense Capital Goods New Orders, are up 19.1 percent over one year ago. Capital Goods New Orders without aircraft is seeing a more modest pace, but it is still an impressive 9.5 percent above last year.

The underlying trend for Industrial Machinery New Orders (NAICS 3332) is positive with accelerating growth ahead. The raw data in January shot up 57.4 percent over December, up 63.2 percent above one year ago. The impact of this boost is reflected in a steeper-than-normal 3-month moving total (3MMT)seasonal rising trend that is currently 22.4 percent higher than the same quarter last year. The 12-month moving total (12MMT) is 10.2 percent below year ago levels, but on the rise. Encouraging input is provided by the fact that economic pressure curves are moving higher, signaling more upside business cycle strength in the months ahead. Expect the rate of rise to improve in the latter half of 2006, with the year as a whole coming in 2.6 percent ahead of 2005. A 22.7 percent year-over-year increase is likely for 2007. Key input for planning at this point in the business cycle includes training employees and hiring quality sales people. Increase inventories as you go forward to be ready for a very busy second half of the year.

Another great year

The business cycle trend for Metalworking Machinery New Orders (NAICS 3335) is positive, with decelerating growth likely in the coming months. The annual growth rate is an impressive 20 percent and the 12MMT has set a record high for the 13th consecutive month. Our analysis suggests that the rate of growth will slow to 3.2 percent by the end of this year, making for a very high level of activity in dollar potential to readers working in this market. The danger comes in straight lining the current rate of growth into the future. This would lead to misallocation of resources and excess inventory build up. 2007 is expected to be another great year for this industry, with New Orders ending 2007 about 13.6 percent ahead of 2006. You may want to consider raising prices, given the current trend status and the two-year outlook.

Looking further down the road, two factors that will likely impact overall U.S. consumer and business spending going forward are increasing energy costs and interest rates. Accelerating global demand, political instability in many oil rich regions and natural disasters mean higher energy prices will be the norm as we move through the next few years. These are two of the factors that will lead us into the recession anticipated for later in the decade. In the meantime, plan on resurgent strength in the U.S. and global economies in the second half 2006 and in 2007 with increased export potential likely in 2007.

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