Manufacturing takes a breather
April 20, 2012
There were big historical revisions to the IP data this month; however, the topline figure was relatively unchanged, as is our forecast. Because industrial production is such a large input into our freight data there will certainly be some changes to the historical loadings data. We will highlight those changes as the data is released.
Other economic forecasters are much more pessimistic about the trajectory for growth in the industrial sector. We don’t buy into it. Autos are doing great, exports may have eased but are still very strong, Chinese demand isn’t going away any time soon, and the U.S. consumer is still doing their part (just not as strongly as in the past). There are still big risks for our economy, but they are above the entire economy and will impact all sectors of the economy if they do happen.
Manufacturing remains an important source of freight-movements. The industrial sector led the recovery during 2010 and 2011 (5.4% and 4.1%, 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 5.0% in 2012, 4.2% in 2013, and 3.8% in 2014.
Manufacturing took a small breather during March, but it was relatively strong during the prior months. As stated above, we remain quite optimistic about the industrial sector. Note that if our forecast holds true this would only be the second time since at least 1965 that the industrial sector had 4 straight years of 4% or better growth. The other time? During the heyday of the 1990’s boom (it actually was above 4% for 7 straight years back then).
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.
While there were sizable revisions to several of the IP components, it generally had very little impact on our outlook. The one caveat to that statement is the Food category. It had very big changes, enough to change our 2012 forecast from no growth to +2.5%. The biggest change occurred in 2010 when, the IP index now fell for four straight quarters. Previously, it showed strong growth through most of 2010.
The other segments that saw sizable revisions were Chemicals and Fabricated Metals. The Fab Metals output increased at a substantially faster pace at the beginning of 2010. Chemicals, meanwhile, weakened considerably towards the latter half of 2011. We don’t anticipate a strong rebound in Chemicals to start occurring until the latter portion of 2012.
FOOD: Food output was off in March after three months of good growth. Most of this growth seems to be driven by dairy products and specialty foods. Grain mill products have been declining for three years due to declining export demand and a substandard harvest in 2011. Q4 and Q1 saw better than average growth, but we do not expect this trend to continue. Growth should slow in Q2 and return to a more normal rate under 2% in the long term.
STONE, CLAY & GLASS PRODUCTS: This segment has grown moderately well after reaching bottom in December of 2009. Growth has slowed over the last year or so. A large decline in March reversed strong February growth and the index has been essentially constant since last August. The February peak contributed to strong Q1 growth, and we expect to see growth in the near term of 5%+, especially if construction continues to recover. Long term growth in the neighborhood of 4% is expected.
CHEMICALS: Output declined about 17% during the recession. After a decent beginning of a recovery in the second half of 2009, growth slowed appreciably during the last two years. Output has grown about 3% in the last ten months in spite of large declines in October and November; however, growth has slowed to a crawl in the last three months. We expect slower growth in Q2 before settling in to a long term growth rate of a little under 5% in the long term.
PRIMARY METALS: Production ticked downward in March after four months of strong growth. For the first eight months of 2011, output had been stagnant. After a nearly 40% decline in late 2008 and early 2009, output grew very quickly in the latter half of 2009 and more slowly in 2010. We expect growth to decelerate over the next few quarters and reach a long term growth rate of around 4.5%.
LUMBER & WOOD: From the beginning of 2006 through the middle of 2009, production of wood products declined by nearly 50%. Output has generally been growing since then, although very slowly. Only about 20% of the declines have been made up. Production grew well during the second half of 2011, with double-digit annualized growth rates in Q4 and A1. Output was flat in February and March, although a strong January performance accounted for good growth for Q1. We don’t expect this pace to continue, especially as construction may be showing signs of slowing, but 4.5% – 5.0% growth over the next couple of years is not unreasonable.
PETROLEUM PRODUCTS: Refinery output ticked downward in March, cancelling a brief rise in February. Output has been generally declining since last September. Refineries have been underperforming the overall category of Petroleum and Coal Products, which includes paving and roofing materials. After a long period of slow decline or no growth, refinery output grew strongly from April through September before beginning to decline. We expect output to return to near-zero growth next quarter.
COAL: Since the end of the year, coal production has declined by more than 10%. Coal production was essentially flat in 2011, declining in the first half as a result of flooding and growing in the second half as stockpiles were rebuilt. Mild weather, increasing competition with natural gas at electrical utilities and declining export demand have impacted production negatively. We expect declines to continue into Q2 before production rebounds, settling eventually to a long term rate of a little over 1% annually.
OIL & GAS EXTRACTION: Output has been off for the last three months, with declines in both crude oil and natural gas. This is a sharp contrast to the overall trend which has seen rapid and accelerating growth since 2006. Oil production has only been growing since the end of the recession, but natural gas has been up throughout the period. We expect production to grow substantially in Q2, before returning to slightly less than 2% annual growth in the long term.
FABRICATED METAL PRODUCTS: Production stalled in March after five months of brisk growth. Even with slow growth in March, Q1 was the strongest quarter since 2010Q3. Except for a flat spot in 2011Q3, output has grown very strongly since the end of 2009. A main driver for this growth has been the resurgence of the auto industry. We expect growth to slow over the next few quarters, reaching a long term growth rate of around 4% early next year.
METAL ORE MINING: This sector suffered some of the greatest losses during the recession, principally concentrated in the iron ore mining sector. The iron ore sector dominates metal mining by weight, but the value of the nonferrous metals distorts the average. Production was off for the last two months, but this sector is highly volatile and these declines may not be significant. Iron ore mining has been growing very strongly over the last four months after being dormant through most of 2011. Long term growth for this sector is expected to be under 3%.
STONE & EARTH MINING: There has been very little recovery from the recession. Output grew fairly well through the last three quarters of 2011, but this was from very low levels reached after the recession. March production was about 3% higher than the low reached in December of 2009. Output spiked in December, but Q1 production declined sharply. We expect near term growth of around 4%, declining to around 2.5% in the long term.
UTILITIES: After growing steadily for several years, utilities output leveled off in 2007 and dipped during the recession. After recovering in the second half of 2009, output remained level through mid-2011. Output has been declining since July of last year, although the declines seem to have been arrested in the last three months. After recovery in Q2, we expect to see trend growth of around 1.5% in the long term.
MINING: (Sum of: metal ore, stone & earth, coal, oil & gas) After a setback during the recession, mining output has grown strongly for the last two years, although there has been a sharp downtick for the last two months. Our forecast calls for a return to trend growth of around 1.5% in the next couple of quarters.
DURABLES: (Sum of: primary metals, fabricated metal, lumber & wood, stone clay & glass) After a fairly steep drop during the recession, durables manufacturing has grown well over the last three years. Growth slowed in 2010 and the first part of 2011, but finished the year strongly. Output ticked downward in March. Although the housing industry has been a damper on lumber production, the metals sectors have grown phenomenally during the recovery. We expect growth to slow over the next few quarters to a long term trend of a little over 5%.
NONDURABLES: (Sum of: food processing, chemicals, petroleum products) Although nondurables manufacturing did not decline as far as durables during the recession, it has grown more slowly during the recovery. Growth has been smooth, slowing slightly after the middle of 2010. Growth appears to have picked up in the last three months. We expect fairly good growth over the next few quarters, led by increases in chemicals output. Long term growth is expected to be over 2% annually.
TOTAL IP (Sum of: mining, durables, nondurables, utilities): Manufacturing grew strongly from the bottom in mid-2009 through the middle of 2010. Growth slowed through the middle of 2011 and then slowed even further in the second half. Since the beginning of 2012, the pace has picked up, although there was a corrective downtick in March. Both durables and nondurables followed the same basic pattern, although growth has been more pronounced in durables. Total IP has followed the same path except that strong mining growth, balancing weakness in utilities, made for a less pronounced deceleration in 2011.
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