Manufacturing rebounds in April

There were no major changes to our Total IP forecast; however, several key truck sectors are expected to see somewhat slower growth over the next couple of years. 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. April saw a return to good growth after a downtick in March. Much of the manufacturing growth has been in the automotive sector, yet other industries are also growing, just not as quickly.

We continue to remain quite optimistic about growth in the industrial sector over the next year or two. After that we expect it to start settling back into a more normal relationship to the U.S. economy. During this upturn it has been significantly above GDP growth for most of the time. Other forecasters are much less pessimistic and see manufacturing growth slowing significantly by next year. Our thoughts: Autos are doing great, exports 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). The biggest concern is if the dollar appreciates significantly and exports falter. Another minor concern is if the energy markets have a boom/bust cycle and drop precipitously. There are also big risks for our economy, but they are above the entire economy and will impact all sectors of the economy if they do happen.

Outlook
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 5.1% in 2012, 4.0% in 2013, and 3.7% in 2014.

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.

Changes
Luckily, we don’t have to contend with large historical revisions like we saw last month. However, there were still changes to the outlook for several key sectors that are worth pointing out. You have to understand this sectoral data in order to fully utilize the IP forecast.

Several sectors have been reduced in the near-term with no major changes to the longer-term outlook: Food Products, Primary Metals, Lumber & Wood Products, Petroleum Products, and Coal. Chemical output was reduced all the way into 2013. Stone & Earth Mining will be weaker than anticipated in Q2 and also during the first half of 2013.

The outlook for Stone, Clay, & Glass Products improved for the current quarter (Q2). Oil & Gas extraction had a significant upward revision to February and April came in stronger than anticipated. Utility output surged back to life in April following several months of weak demand due to a mild winter. That pulled our Q2 number higher but did not affect the rest of the year.

Sector Analysis
FOOD: Food output was off for the second consecutive month in April. March output was revised downward. Output grew strongly in the last three months of 2011. 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. Q3 and Q4 saw better than average growth, but we do not expect this trend to continue. Output declined in Q1, but should return to a more normal rate of around 1% in the long term.

STONE, CLAY & GLASS PRODUCTS: Has grown moderately well after reaching bottom in December of 2009. Growth has slowed over the last two years. A large decline in March reversed strong February growth but output was up again in April. The index has been trending upward since November after falling off in Q3. The February peak contributed to strong Q1 growth, but we expect to see growth in the near term around 5%, especially if construction continues to recover. Long term growth in the neighborhood of 3% 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 four 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: April production was about the same as March, which saw a large decline after growing for several months. 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 3.5%

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 2011Q4 and 2012Q1. April production was off for the third consecutive month, although a strong January performance accounted for good growth in Q1. We don’t expect this pace to continue, especially as construction may be showing signs of slowing, and Q2 will likely be very slow. But 5% growth over the next couple of years is not unreasonable.

PETROLEUM PRODUCTS: Refinery output declined again in April. This is the second monthly decline after 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 further declined in Q2 before a return to near-zero growth in the long term.

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. 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 was up sharply in April after two months of decline. The overall trend 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. Growth was negative in Q1, but we expect a return to a long term rate of slightly less than 2% annual growth in the long term.

FABRICATED METAL PRODUCTS: Production was up in April after a brief stall in March. Before the March setback, output had grown briskly for five months. Even with slow growth in March, Q1 was the strongest quarter since 2010Q3. 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 3% by 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 ticked upward in April after two months of decline. Production has been trending upward since December.. 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. Production has been essentially constant for the last three months at a level about 3% higher than the low reached in December of 2009. Output spiked in December, but Q1 production declined. We expect further decline in Q2, with growth 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. Output was up sharply in April, and had been growing slowly for the previous two 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. April output was up after two months of decline.  Our forecast calls for a return to trend growth of around 1.5% within 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 but returned to the strong growth trend in April. 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 around 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. Output ticked downward in April after a significant decline in March. Before that, production had grown fairly well for three months. We expect growth to slow in Q2 before returning to better than normal growth for the rest of the year.  Long term growth is expected to be a little under 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. April saw a return to good growth after a 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.