Manufacturing recovery on track, MAPI report finds
The manufacturing recovery continues on track and should be sustained through 2006, according to the Manufacturers Alliance/MAPI Quarterly Industrial Outlook, a report that analyzes 27 major industries.
Fourth-quarter 2004 figures show that 24 of the 27 industries tracked in the report had inflation-adjusted new orders or production above the level of one year ago, equal to the number of industries showing growth in the second and third quarters. In general, industries that were in the early phase of growth in the third quarter of last year accelerated in their pace of growth in the fourth quarter.
One of the most promising developments in the fourth quarter was the strong growth in all seven of the production equipment categories, a positive indicator of investment and foreshadowing a likely increase in future production. Robust growth in these important industry groups is expected to extend through 2006.
Top industry performers in the fourth quarter, recording double-digit growth, were construction machinery; electronic computers; engines, turbines, and power transmission equipment; industrial machinery; metalworking machinery; mining and oil and gas field machinery; and navigation, measuring, electromedical, and control instruments.
Daniel J. Meckstroth, chief economist for Manufacturers Alliance/MAPI and author of the analysis, said that 15 industries are in the accelerating growth (recovery) phase of the business cycle, nine industries are in the decelerating growth (expansion) phase, two industries appear to be in the accelerating decline (early recession) phase, and one industry group is in the decelerating decline (late recession or very mild recession) phase of the cycle.
“A rebound in export growth and strong investment demand for capital equipment, which was postponed during the recession, is driving rapid growth in business equipment production,” Meckstroth said.
The report also offers economic forecasts for 24 of the 27 industries and provides forecasts for 2005 and 2006.
Three industries are expected to enjoy double-digit growth in both 2005 and 2006: mining, oil field, and gas field machinery, communications equipment and metalworking machinery. Seven industries – computers; industrial machinery; engines, turbines, and power transmission equipment; heating, ventilation, air conditioning, and commercial refrigeration equipment; electronic instrument production; aerospace products and parts; and medical equipment and supplies – are predicted to enjoy growth of 6% or better in each of the next two years.
“In the fourth quarter of 2004, the manufacturing sector transitioned from recovery to expansion.” Meckstroth added. “The growth rate will likewise transition to moderate growth but at a sustainable pace.”
Each quarter the Arlington, VA-based Manufacturers Alliance/MAPI reviews the aggregate performance of the industrial sector by looking at its most important subsectors.
“We predict that manufacturing industrial production, which expanded 4.8% in 2004, will increase 3.5% in 2005 and 3.6% in 2006,” the report states. “One of the most promising developments in the fourth quarter is the strong growth in all seven of the production equipment categories. This is a strong indicator of current investment and future production growth. Such strong activity in these important industry groups is expected to extend through 2006.”
Business Materials sector
The report finds continued growth in the business materials sector, continuing the upswing that started in last year. “Business activity turned decidedly positive in the materials sector by the second quarter of 2004 and progress continued into the fourth quarter,” the report notes. “All five of the materials followed in this report posted growth when compared to one year ago. Of the three metals industries – iron and steel products, alumina and aluminum, and fabricated metal products – the steel industry exhibited the strongest growth. Steel prices surged last year as the global industrial recovery caused demand to accelerate; industry consolidation reduced domestic steel capacity; and important inputs like steel scrap, iron ore, and coke were in short supply. High steel prices have stimulated more domestic production and attracted imports.”
That growth was continuing into the new year. “In the first five weeks of 2005, raw steel production was up 5.1% from the same period in 2004 and mills were operating at 90.9% of capacity,” the report noted. “Steel imports (in dollar terms) more than doubled last year. Steel consumers probably built inventories driven by the fear of shortages. Ample steel stocks should ease the upward price pressure in the spot market. Domestic iron and steel products production increased 7% in the fourth quarter of 2004 from one year ago. Steel production is forecast to increase 8% in 2005 and 4% in 2006.”
Among the highlights:
Construction machinery: While exports of construction machinery increased 29% last year. Unfortunately, imports grew 48%. Construction machinery production rose 14% in the fourth quarter versus the same period one year ago. The surge in construction machinery production must slow this year because the pent-up demand for equipment has been satisfied. The fundamentals, though, continue to support equipment growth.
Industrial machinery: Industrial machinery production was up 14% in fourth quarter 2004 from the same period a year ago. The high-tech computer, electronic, and electrical industries increased construction spending, in current dollar terms, by 71%; construction in the plastics and rubber industry grew a robust 42%, and there were modest gains in food and beverage and nonmetallic mineral construction spending in 2004.
North American semiconductor equipment manufacturers ‘ orders were up 61% in 2004. Overall industrial machinery production is forecast to grow 10% in 2005 and expand 8% in 2006.
Metalworking machinery production activity is coming out of the doldrums. The factory utilization rate in all manufacturing rose from 75% in January 2004 to 78% in January 2005. Metal production, fabricating, and shaping industries all are increasing production. Steel industry machinery is the fastest growing segment of the market right now, thanks to the surge in steel prices. The industrial mold business and machine tools have been growing as well. Metalworking machinery production was up 12% in fourth quarter 2004.
Engine, turbines, generators, and power transmission equipment production posted strong growth in fourth quarter 2004, increasing 10% above the same period one year ago. The industrial rebound, a high level of new housing units, and a rebound in office and shopping center construction will fuel an expansion in electric power, transmission, and distribution activity this year. Engine, turbine, and power transmission equipment production is predicted to increase 10% this year.
Mining and oil field and gas field machinery production was up 11% in fourth quarter 2004 versus one year ago. Mining production increased 4% in 2004 led by coal and iron ore mining production. Nonferrous metal mining actually declined. With metal prices at record highs, there is a profit incentive to expanding mining activity. Mining and oil field and gas field machinery production is making a recovery. All told, mining and oil field and gas field machinery production is projected to increase 20% in 2005 and grow 11% in 2006.
Heating, ventilation, air conditioning, and commercial refrigeration equipment (HVAC) production was up 4% over the same period in 2003. Although new housing construction is expected to decline a little this year and next, it is coming off an exceptionally high level. The nonresidential building construction market will be making a comeback. A number of regulatory changes over the next couple of years will encourage the replacement of old equipment. There are deadlines for more energy-efficient central air-conditioners and heat pumps, new flammable vapor standards for water heaters, and the phase-out of chlorofluorocarbon in chillers. HVAC equipment production is forecast to increase 6% in 2005 and to expand 10% in 2006.
Material handling equipment business is showing moderate growth. Manufacturing industrial production is growing at a moderate pace and is driving the need to move materials around the factory floor and warehouse. Furthermore, large increases in trade flowing through the nation’s ports and trucking terminals are an indication that material movement is increasing. Fourth quarter inflation-adjusted material handling orders were 5% above order activity one year ago.