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Flirting with, but Avoiding, a Recession

By: Brad Kuvin

Saturday, March 01, 2008
 
In 2005, 17 million cars and light trucks were sold in the United States. Those sales likely will drop to around 15.7 million in 2008, according to Paul Taylor, the chief economist of the National Automobile Dealers Association (NADA). However, toward the middle to end of this year manufacturers would do well to prepare to react to improved demand for durable goods.

At the NADA annual convention held last month in San Francisco, Taylor predicted that while 2008 U.S. car and light-truck sales will likely suffer significantly during the first quarter and into the second, he expects that gasoline prices will drop later in the year, perhaps to as low as $2.50/gal. And, Taylor predicts just a modest rise in unemployment. Together, these two trends should spur auto sales, he says.

So are we headed for a recession? I don’t believe so, even though it undoubtedly feels like a recession to many manufacturers right now.

Most economists define a recession as two consecutive quarters with a declining GDP. Using that definition, a recession seems unlikely, even as housing starts, auto sales and fuel prices restrict sales of durable goods—bread and butter products for metalformers.

On the favorable side of the scale: consumer confidence is well above levels of previous prerecessionary times; interest rates are trending downward; and the unemployment rate has been remarkably stable. And, in a rare example of bipartisanship, the government managed to quickly move forward with the giant two-year, $168-billion economic-stimulus package.

The U.S. Consumer Confidence Index (CCI), which denotes the degree of optimism on the state of the economy, has dropped consistently since July of last year (except for a slight uptick in December). However, in January, the CCI revealed that 20.7 percent of consumers believed that business conditions were “good,” while 20 percent claimed business conditions were “bad.”

The CCI also shows a decent job-market outlook—one reason I believe that the downturn will be short-lived and a recession averted.

Another reason I don’t foresee a recession: One of the primary predictors of a looming recession historically has been dropping durable-goods orders and backlogs. Says Carl Steidtmann, chief economist and director, consumer business, Deloitte Research, “When a recession approaches, consumer demand falls off, inventories pile up…and manufacturers have to cut production.”

Well, the U.S. Census Bureau’s report, Manufacturers’ Shipments, Inventories and Orders, issued February 4, 2008, shows that new orders for manufactured goods in December, up six of the previous seven months, increased $10.1 billion or 2.3 percent. And, new orders for manufactured durable goods in December, up two consecutive months, increased $10.9 billion or 5.0 percent. This followed a 0.5-percent November increase, and coincides with a rise in unfilled orders for manufactured durable goods, up 31 of the last 32 months.

The Institute for Supply Management also issued positive news early in February. Its monthly Report on Business showed that the overall economy in January grew for the 75th consecutive month, and, more importantly to us, showed that the manufacturing sector expanded by 6.6 percentage points from December.

So a recession? No. So sit tight and plan accordingly for a mid- to late-year rally in durable-goods manufacturing. What better to prepare than by attending our industry’s major tradeshow, Regional METALFORM, the star attraction in this month’s issue of MetalForming. METALFORM takes place April 1-3 in Birmingham, AL.

Yes, the economy has looked better on paper than it has felt for most manufacturers. But I believe that the storm we are experiencing is fast moving, and that bluer skies lie immediately ahead.

 


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