Manufacturing outlook dips

Weakness in the global economy has finally hit our manufacturing sector. Despite the near-term pressures we still believe that industrial production should continue to remain above GDP growth for the next several years. Growth for the next 3 quarters has been reduced with the most dramatic impact occurring during the current quarter. We pulled our annualized growth rated down from 6.2% to 3.3% for Q2. While much lower than the 5%+ rate that we have seen over the last three quarters it is still above the GDP forecast my about one full percentage point (Q2 GDP is expected to be just 2.2%).

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 last summer but then stabilized and has just now taken a modest hit to 2012 and 2013. Still, it 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, 3.4% in 2013, and 3.4% 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.

Analysis
May was a relatively weak month for manufacturing and the near-term prospects don’t indicate a quick reversal of that trend. Much of the manufacturing growth had been in the automotive sector. It looks like automotive production has finally caught up with demand and will likely take a small breather before needing to ramp back up again.

Despite the downgrade 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 remain much more pessimistic and see manufacturing growth slowing significantly by next year. The ISM data, however, indicates that overall manufacturing continues to grow – just not as robustly. Our thoughts haven’t changed: Autos are doing good, exports have slowed but haven’t gone away, 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 continues to be if exports falter further. 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.

Changes
A few key sectors saw notable changes in the forecast this month. Chemicals activity was significantly reduced as our chemical markets continue to remain subpar – despite a large advantage coming from our low natural gas prices. Exports are partly to blame, but chemicals production has been nearly flat since the start of 2010. Whether this activity ever returns to normal is starting to become a worry.

Metals production is also looking to slow. This is mainly a slowdown in the growth rate of automotive production combined with some slowing of export markets for industrial machinery and raw metals. The other main segment that was reduced was Stone, Clay & Glass Products. Weak infrastructure investment and slowing business construction have held back further growth in this sector.