Industrial production to slow in 1999 as deflation bottoms out
By Elizabeth Baatz -- Modern Materials Handling, 2/1/1999
U.S. manufacturing is forecast to grow factory production 2% in 1999, on the heels of an estimated 3.7% gain in 1998. Compared to the last recession when industrial production fell 2.4% in 1990, the coming slowdown in growth will be quite mild.The key driver to the manufacturing sector's ability to fend off a recession remains the durable good industries. These industries, which make products designed to last three or more years, saw factory output rise 6% in 1998. They are expected to see a 4% increase in 1999. However, computer manufacturing will see growth slow dramatically from 37% in 1998 to 22% in 1999.
For executives and planners in the materials handling industries, in the year ahead the big story will remain the pull of deflation. Falling prices, lead by plummeting commodity prices for oil and aluminum, set a price-cut mentality among buyers of industrial equipment and supplies in 1998.
Producers who tried to hike prices in order to boost margins have been met with fierce resistance. The deflationary trend will dissipate a bit in 1999, but margins will remain low. Thinking Cap Solutions' industry price forecasts show few industries will manage to hike prices much above 2%; falling or flat prices will remain the norm in many industries.
Commodity prices, however, slid to record-breaking lows in 1998 and have no where to go but up. By mid-1999, firming commodity prices will begin to create a more solid price floor.
The moving percent change charts (left) illustrate these pricing conditions. For example, in the 12 month period ending September 1998, producer prices for conveying machinery equipment rose 1.5%. In the 12 month period ending December 1998, prices rose 1.4%. This year, however, the inflation rate for conveying equipment is expected to decelerate, reaching 0.5% by December 1999, or an annual rate of half a percentage point.
Annual percent change
1997 1998 1999
Total manufacturing 5.7% 3.7% 2.0%
Durable goods 8.1 6.0 4.0
Lumber 2.8 0.5 0.0
Stone, clay & glass 5.1 0.4 0.5
Primary metals 4.7 2.6 0.7
Nonferrous metals 5.0 2.0 1.3
Fabricated metals 2.8 2.3 1.8
Industrial machinery 10.4 10.9 6.4
Computers 35.7 37.0 22.0
Electrical machinery 16.1 12.3 7.6
Transportation equip. 8.5 3.0 0.7
Nondurable goods 2.9 1.6 0.9
Food products 2.1 1.3 1.3
Paper & products 4.6 -0.5 -1.5
Chemicals 4.3 2.3 0.8
Petroleum products 2.7 2.4 0.9
Rubber & plastics 3.2 3.4 2.4
Sources: Federal Reserve Board. Forecast: Thinking Cap SolutionsU.S. industrial production outlook
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