Forecast: Manufacturing Growth Will Trail GDP

Arlington VA, February 21, 2007--The Manufacturers Alliance/MAPI Quarterly Economic Forecast predicts that inflation-adjusted GDP growth, 3.4 percent in 2006, will slow to 2.8 percent in 2007 before rebounding to 3.2 percent in 2008.  By supplying major assumptions for the economy and running simulations through the Global Insight Macroeconomic Model, the Alliance generates unique macroeconomic and industry forecasts.

“The U.S. economy is facing the significant headwinds of a retrenchment of consumer spending for big ticket purchases of homes and motor vehicles,” said Daniel J. Meckstroth, Manufacturers Alliance/MAPI Chief Economist.  “The relatively high interest rates and energy prices are also having the predicted lagged effect of slowing economic growth.”

Manufacturing production growth will show a fairly significant pullback from the 4.7 percent growth in 2006 to 2.5 percent in 2007.  As with the overall GDP, however, the MAPI forecast then envisions industrial production to increase in 2008, to 3.1 percent.  Inflation-adjusted spending for computers and electronic products is forecast to rise a robust 16.3 percent in 2007 and 10.5 percent in 2008.  Production in non-high-tech industries will grow by a far more modest 1.2 percent this year and 2.5 percent in 2008.

“High-tech industries (as defined by the Federal Reserve) account for about 5 percent of manufacturing and have high unit growth rates, in part, due to hedonic price adjustments,” Meckstroth explained.  “With major consumer markets in decline (housing and motor vehicles) and deceleration in business machinery and equipment spending growth, there is not much momentum in the manufacturing sector this year.”

Large percentage gains in spending will come in the high-tech sectors.  Inflation-adjusted expenditures for information processing equipment are expected to rise 7.5 percent in 2007 and 9.0 percent in 2008, continuing to grow several times faster than the general economy.  Nevertheless, inflation-adjusted investment in equipment and software should decelerate to 5.0 percent growth in 2007 before posting 6.8 percent growth in 2008. 

Spending on non-residential structures is forecast to fluctuate markedly, rising 8.4 percent in 2007 before decelerating to only 1.7 percent in 2008.  The forecast calls for industrial equipment expenditures to increase 2.3 percent and 2.0 percent, respectively, in the same years.  There is a long-term optimistic outlook regarding spending for transportation equipment, driven primarily by the aerospace rebound, which is likely to show a 2.2 percent gain in 2007 and 7.7 percent growth in 2008.

Export growth should outpace that of imports by a wide margin in 2008.  Inflation-adjusted exports should rise 8.6 percent in 2007 and 9.1 percent in 2008, while imports are expected to increase 3.7 percent in 2007 and 5.3 percent the following year.

The forecast for the unemployment rate is 4.7 percent in 2007 and 4.6 percent in 2008.

Meckstroth said that the primary risk to the forecast is the unknown reaction of consumers to the current housing price declines.