Manufacturing starts 2012 strongly

Despite a seemingly weak month of industrial activity to start 2012, the top-line figure did not show the whole picture. The sub-components that are critical to trucking continue to show strong activity. In fact, our outlook for the next 2 quarters moved slightly higher versus last month. As we stated in our recent post on the economic outlook, the upside possibilities are becoming more pronounced. Unfortunately, they are still not enough to outweigh the risks and move our base forecast significantly higher.

One of the key drivers to the strong gains in manufacturing continues to be autos. They are contributing significant amounts of growth to this recovery and are most notable in the metals categories. We remain bullish on having a strong industrial sector for the foreseeable future, and believe that there are now chances for seeing a one or two quarter surge of activity in the service markets that could help translate into additional activity in the industrial sector.

Outlook
Our forecast for the current quarter (Q1) is virtually unchanged from last month. The next two quarters have moved up modestly on expectations of slightly better results in the construction and metal products sectors. Utilities output was weak once more as we had another relatively mild winter month in January. Weather looks to have been more normal in February so we would expect to see an uptick. Surprisingly, natural gas drilling was down in January. With additional wells still on deck to be started up we don’t see that remaining down for long. See below for a quick look at each of the main sectors that we track.

Manufacturing remains an important source of freight-movements. The industrial sector led the recovery during 2010 and 2011 (5.3% and 4.2%, respectively) and is looking to remain reasonably strong for the next couple of years. The outlook came down during the summer but has now stabilized and still remains high relative to the GDP forecast. We expect that premium to slowly dissipate over the next year or two. Industrial production is forecast to increase 4.4% in 2012, 3.7% in 2013, and 3.3% in 2014.

Unless the economy has a full blown recession we expect the manufacturing portion of the economy to remain a stronger force than it has been during recent history. This is very good news for the truck sector since a single manufactured product has a huge multiplier effect on freight movements. Bad signs would be a free-fall in the European market or a drastic slowdown in China. Obviously, the situation in Iran bears close watching but would likely be only a 6 month drag on the economy, as long as the responses stayed away from the ‘nuclear’ option.

Changes
Once again, there were no major changes to our outlook. There was some near-term improvement that moved the 2012 forecast slightly higher.

Sector Analysis
FOOD: Food production was off sharply in January, mostly due to steep declines in the poultry slaughter. Production surged in Q4, although November was not as strong as October or December. This surge does NOT reflect Grain and Oilseed Milling – the harvest was off in 2011. All other categories did well in Q4. This is mostly a case of recovering from three fairly poor quarters and is not a trend that is expected to persist. Specialty foods grew significantly from the middle of 2010 through the early months of 2011. This is a high-value, low-volume commodity that tends to distort the total food production value.

STONE, CLAY & GLASS PRODUCTS: Peaked in August after a long period of growth and has been steadily declining since then. Expect to see it stabilize in the next few months and resume “normal” growth – at least until housing really begins to pick up. Growth over the last couple of years has been anemic by pre-recession standards and output levels are still only about two-thirds of peak values.

CHEMICALS: Has actually been growing well since May, despite a sharp drop in October and November. Those losses were made up in December. Production ticked upward in January but is still shy of the recent peak reached in March of last year.

PRIMARY METALS: Production ticked downward in January but output has been growing well since June and really well in Q4. This pattern seems to be related to growing auto production. The Q4 results are probably just catchup for the stallout in the middle quarters and don’t represent a new trend. We expect to settle down to trend growth within the next couple of quarters.

LUMBER & WOOD: We have seen modest growth in the second half, although it would seem to be concentrated in big jumps in September and December. Production was off slightly in January. Forecast is for growth to return to trend in the near term. Given the horrible performance for the last five years or so, it isn’t easy to say what trend growth might be, exactly. As with Stone, Clay & Glass Products, we are still waiting for housing to pick up.

PETROLEUM PRODUCTS: January output returned to about the same leval as August, in spite of a sharp spike in December. Output grew well in the middle quarters. In the long run, we expect little or no growth.

COAL: January production was about the same as for the last three months. Production stalled in Q4 after growing briskly in Q3. The chief driver for growth is probably rebuilding of stockpiles at utilities. December weather was mild and there seems to be increasing competition with natural gas for electricity production. Additionally, economic troubles in Europe are dampening the market for export coal. As and if the European situation gets sorted out, demand for export coal should grow. We expect little growth in the near term.

OIL & GAS EXTRACTION: Production declined sharply in January, returning to values last seen in August. Except for a readjustment in 2011Q1, Oil & Gas Extraction has been growing very well for a year and a half. Over this period, natural gas production has grown much faster than crude oil production. We are forecasting growth declining to long term trend over the next two or three quarters

FABRICATED METAL PRODUCTS: With the manufacturing recovery, this sector has grown very well over the last two years. Growth slowed in Q3, but has resumed for the last four or five months with the return of auto production. Auto production had been severely impacted by supply problems as Japan recovered from the tsunami. We expect continuing strong growth, although not as strong as has been seen in the last two years.

METAL MINING: Primary Metals and Metal Mining were the hardest hit sectors during the crash and through the early months of 2011 they were still coming back from a long way down. Reported production is highly volatile, probably more due to statistical artifact than actual results, but it would appear that output has stabilized and begun to decline in the last year. Fairly decent growth could be expected for the immediate future, with a slow decline to trend.

STONE & EARTH MINING: Production was sharply off in January, negating a spike in December production. Despite considerable thrashing during the course of 2011, production for January was just about at the same level as two years ago. We anticipate a return to trend growth by Q2.

UTILITIES: Output has been slumping since midyear, but January saw the biggest decline in nearly a year. Natural gas distribution peaked in October and has been off sharply for the last three months. Electrical generation peaked in July and has been declining nearly as fast as Natural Gas.

MINING: (Sum of: metal ores, stone & earth, coal, oil & gas) Mining declined slightly in January, mostly on drop-offs in Oil & Gas Extraction and Stone & Earth Mining. Mining has been strong on all fronts for the past two years except for a brief setback in 2011Q1. Our forecast calls for growth to slow over the next two quarters.

DURABLES: (Sum of: primary metals, fabricated metal, lumber & wood, stone clay & glass) After a pause in October, Durables Manufacturing has been growing explosively for the last three months. Although the housing industry has been a damper on lumber production, the metals sectors have grown phenomenally during the recovery and the overall output of durables has been healthy. We expect continued strong growth through the forecast horizon.

NONDURABLES: (Sum of: food processing, chemicals, petroleum products) Surged coming out of the recession but growth has been slow for nearly two years. We think things will pick up a little in the immediate future, but growth will not be as strong as for durables.