Industry experts predict better, but not great year

First, the good news. There is a pretty stable concurrence among industry experts that while manufacturing activity in the past year has been flat, it should pick up soon.

“The next 18 months should be good for manufacturing,” Institute for Trend Research Economics President Alan Beaulieu told participants at the AMT Global Forecasting & Marketing Conference, held Oct. 19-21 in Miami. “We’ll see a strong 2017. You’ll feel it soon.”

Improvements in oil prices, gross domestic product and industrial production will fuel this uptick. Commodity price increases, manufacturing capacity utility rate growth and positive business-cycle pressure will also contribute, according to Beaulieu, who’s based in Manchester, N.H.

There was positive news about specific manufacturing industries as well. Richard Aboulafia, vice president at Teal Group Corp., Fairfax, Va., affirmed that “aerospace is still a great industry to be in.” The industry has hit a monetary high for new aircraft deliveries at approximately $181 billion, he said—part of a 12-year “super cycle” of high growth.

In the commercial jet market, there is $1 trillion worth of backlogged orders, primarily at Airbus and Boeing, and in 2017 and 2018, Aboulafia said, this market is expected to grow, but warned that, inevitably after 12 years, a correction is coming.

The automotive industry’s practices are benefiting contract manufacturers, according to Robert Kimmel, senior manager at Harbour Results Inc., Southfield, Mich. The industry “is in a continuous-launch environment,” he said. In an attempt to be increasingly competitive in a level market and meet consumer preferences, auto OEMs are increasing their number of offerings.

“We see an 18 percent increase in the number of models on the road” from 2015 to 2018, Kimmel said. And even if the total number of vehicles sold remains flat, an increase in the number of models is good news for suppliers. Newer models are also more complex. “You don’t have to be a design engineer to look at the headlamp of an Audi on the road today and see that it is a much more complex, sophisticated—and, frankly, cooler—headlamp than what you saw a few years ago,” Kimmel said, noting that more complexity is also good news for suppliers.

An increase in new vehicle launches benefits contract manufacturers. Graph courtesy Harbour Results.

Eli Lustgarten, senior vice president at Longbow Securities LLC, Independence, Ohio, also identified a few hopeful trends in the economic data. For example, the end of inventory liquidation should increase manufacturing production levels in order to maintain baseline inventories. Capacity utilization rates have hovered around 76 percent, he said, and even modest increases in production will generate order activity for manufacturing-technology products. In addition, Chinese demand for replacement parts and new equipment will drive the market up by a small margin.

In spite of the projections for better times, nobody at the conference was doing handsprings over the prospects for manufacturing in 2017. The information was leavened by each speaker’s expectation that any growth that occurs won’t really be much, historically speaking, and that the past year wasn’t exactly gangbusters to begin with.

Lustgarten, for example, said he sees no significant reason for substantial growth in manufacturing in the next 2 years. Financial markets have fallen short of expectations and business investment turned negative in the fourth quarter of 2015, with a mean of 0 percent change since then. A strong dollar, weaker-than-normal economic growth in key markets and a sharp decline in commodity prices have combined to create two consecutive years of decline in manufacturing-technology orders. He expects a sluggish growth rate in customer markets for manufacturing technology until the second half of 2017.

Why We’re Here

To get a better perspective on where the industry is, how it got here and how it can best go forward, CTE spoke with Federal Reserve Bank of Chicago Senior Economist and Economic Adviser William Strauss.

“The good news is that we’re looking at growth to continue, going now into an eighth year—and that’s pretty long, historically. This is about the fourth-longest expansion that we’ve seen,” Strauss noted. “But, that being said, we’re not exactly setting the world on fire.

“Over the past year, manufacturing has been pretty flat, maybe even inching down just slightly,” he continued, “which is disappointing. The expectation was that we would see a bit-better performance this year. I don’t disagree with the forecast groups that expect growth to come back next year, but it will be growth that is still somewhat below the trend.”

Graph courtesy Federal Reserve Bank of Chicago.

When looking at what transpired from the middle of 2009 to the third quarter of 2016, “we’ve seen a growth rate that has come in at 2.1 percent,” which is barely above the rate that the U.S. should be growing at, Strauss said. Trend growth, based on U.S. labor force growth and productivity growth, is generally regarded as being from 1.7 to 2 percent. “So when you look at the future, unless you’re expecting something dramatic one way or the other, you’re pretty much going to expect to grow at that rate,” he added.