Manufacturing has slowed, but still growing

Production weakened considerably during Q2 but saw a solid rebound in July. Whether or not this can be sustained is an ongoing question. After growing at a 5% clip for the prior 3 quarters, industrial production grow at just a 2.5% rate in Q2. Growth is looking to improve only slightly in Q3 and we don’t anticipate getting back to a 5% rate during this recovery. The reduction in export activity is definitely hurting manufacturing and is unlikely to rebound significantly in the near-term. We still believe that industrial production should remain modestly above GDP growth.

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 expected to show reasonably strong growth for 2012 before we start showing weaker growth after that. Still, it remains above the GDP forecast, although we expect that premium to slowly dissipate over the next year or so. Industrial production is forecast to increase 4.3% in 2012, 3.1% in 2013, and 3.4% in 2014.

Despite the recent pullback in the forecast, we expect the manufacturing portion of the economy to remain a stronger force in the economic recovery than it has been during recent history. This is good news for the truck sector since a single manufactured product has a huge multiplier effect on freight movements.

Analysis
July production showed a strong increase and gives us confidence that manufacturing will not drop significantly in the near-term. Heavy-haul items (i.e. stone/clay/glass products and primary metals) are looking to be weaker in the near-term but housing-related items should continue to grow and food saw a noticeable uptick in July.

The ISM remained in negative territory in July, but just barely. It remains a worry but most other indicators are showing that manufacturing is holding up relatively well – just not as strong as the prior couple of years. As we said last month: If the ISM remains in negative territory for more than a month or two then we are likely overstating the industrial sectors output for the rest of this year. It is worth keeping an eye on it for the next 2 months. 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.

We continue to remain optimistic about continued growth in the industrial sector over the next year or two. During this upturn it has been significantly above GDP growth for most of the time. That difference is narrowing but is still there. Other forecasters remain more pessimistic than us about manufacturing growth next year – it has certainly slowed but not to such a substantial degree.

Changes
There were only modest changes to our forecast this month. Most of it was concentrated in Q3 as we have July data to help clarify where growth is occurring (or not). Stone/Clay/Glass Products and Primary Metals are modestly weaker – Food and Chemicals are modestly better.

Risks
The risks to the economy have moved significantly higher over the last few months and are worth keeping a close eye on for the next 3-6 months. Europe, Oil, China, and our own political standoff are all potential catalysts for a worse economic environment. We have now pegged the potential for a recession at 25% – the highest level since we emerged from the Great Recession back in 2009.