We have all heard how the recession was a short, mild one that ended in November of 2001. If nothing else, that is little more than confirmation that such big picture statistics tell only part of the current economic story. The rest of the tale as lived by the industrial sector has been much more negative until most recently.

As we discovered by talking to Dr. James Haughey, Director of Economics of the Reed Business Research Group and staff economist for Modern Materials Handling, the industrial sector will most likely proceed with its recovery in atypical fashion. In fact, the two segments of manufacturing and distribution are poised to recover in reverse of what is usually the case. That, in turn, will have an impact on who buys materials handling equipment, systems and related software in 2004, how much gets bought and how it is put to use. Here's what Haughey has to say about the year ahead.

MODERN: How would you describe where we are as 2004 begins?

HAUGHEY: It's pretty clear that we've turned the corner. In the general economy, we're coming off an outstanding 8.2% increase in GDP [Gross Domestic Product] in last year's third quarter. And even though the fourth quarter won't come in nearly that strong, I'm looking for a 3.1% increase in GDP for all of 2003.

More importantly, for the first time in three years, we've also turned the corner in the industrial sector, too. Inventory levels have been drawn down substantially. In fact, the GDP in the third quarter would have been 0.7% higher if inventories had not dropped as they did. Inventories overall actually fell 11.9% in the third quarter. Quite simply, that can't go on, and it bodes well for increasing demand for manufactured goods as the new year begins.

MODERN: What is this going to mean as we go forward?

HAUGHEY: I see this as the beginning of a multi-year period of strong growth. We should get a nice pop in GDP this year. I'm looking for it to hit 4.5%. And that's significant because it's equal to the largest annual gain in GDP during the last expansion.

That strength is going to translate into gains for capital goods expenditures and materials handling in particular. I'm actually looking for four good years here for capital expenditures, and I think materials handling will track that general path.

MODERN: Just to benchmark here, how far have capital expenditures fallen and what are you looking for now?

HAUGHEY: Business investment has not had a good run lately. Since 2001, we have not had many quarterly numbers in the black. But that started to change last year. The first big number was the second quarter when business investment was up 7.1%. That number doubled in the third quarter, and will probably come in just under 13% for the fourth quarter. Those strong gains will have pushed the year-over-year change for 2003 to 4.6%. And I pretty much expect a steady upward trajectory this year with an 8.7% increase.

MODERN: Now materials handling has had it even rougher. Since 2000, Modern's proprietary equipment orders index is off 36%.

HAUGHEY: You're right. It has been tough in this sector. Not only is the orders number off that much but in 2002 there was actually a bit of a recovery in materials handling before it went into a double dip recession early in 2003. But we're past that now. The downturn in materials handling equipment is over.

You should look at Modern's orders index as a leading indicator. And for '03 it will come in up 1.2% as shipments actually dropped 0.3%. For this year, both will be in the black. Shipments should move ahead 8.6% while orders will advance by just about 10%. While demand is stronger, it's not going to be as strong as overall capital expenditures, however.

MODERN: That said, how would you characterize market conditions for materials handling equipment in '04?

HAUGHEY: It's a buyers' market. There's plenty of capacity out there. Prices are low and I have little expectation that there will be much upward pressure. They may move ahead 1.5% in 2004, but that's about it. Lead times are short. And it's likely to be this way for the foreseeable future. Sure, suppliers are going to find their general lot improves as the year moves along, but it's still going to be a buyers' market a year from now.

MODERN: So who's going to be buying materials handling equipment this year?

HAUGHEY: Surprisingly, it's not who economists would generally expect. Traditionally, a recovery in the manufacturing sector precedes a comeback in materials handling by a year. That's not going to be the case this time around.

As the general economy comes back strongly, there's going to be a surge of goods through the economy. And a lot of it's going to be imports. That's going to suck up what excess warehousing and distribution capacity there is pretty quickly. I'm looking for a 6% growth in throughput at DCs this year, and it's already started. That's where initial demand for materials handling will come from.

And it will just get stronger as new DCs are built to accommodate all these goods. In fact, this sector is going to be sufficiently strong that the number for "goods" GDP will actually outpace overall GDP growth.

MODERN: When will manufacturing come into the picture?

HAUGHEY: That's going to take more time to develop. Capacity utilization rates that are at 74% now will probably be 79% by the end of the year. So look for discrete parts manufacturers to be making selective materials handling expenditures. Then as rates get into the low 80% range in '05, effective capacities will be pushed. That's when demand for materials handling equipment will really pick up in the manufacturing sector. That's also when the current buyers' market is most likely to shift to being more of a sellers' market.

MODERN: Do you expect packets of strength across the board for materials handling equipment, or will it be uniform across the board?

HAUGHEY: Looking at my numbers and ones from the Material Handling Industry of America, the largest growth will come from lift trucks, conveyors and racks. All should be double digit. Cranes, hoists and monorails will lag a bit with only a 5% increase this year.

As to software, I've seen some numbers from AMR Research that call for supply chain management software purchases accounting for an increasing percentage of IT spending in 2004. In fact, AMR is calling for it to jump from 13.6% of IT spending to 16.3%.

MODERN: When people talk down the strength of this recovery, they generally come back to weak numbers like employment. Taking that in reverse, is the current strength in productivity likely to curtail demand for materials handling?

HAUGHEY: I don't think so. Manufacturing productivity is having a great run. I expect it to advance even more in 2004 than it did last year. And while strong productivity throughout the past three years runs counter to what generally happens in slower economic times, there comes a time when demand is just stronger than whatever gains there are. And we're getting to that point. Going forward, materials handling will be a major contributor to increased productivity as it has been in the past.

MODERN: Another factor that has direct impact on materials handling requirements is the amount of inventory that needs to be managed. What's the impact of lower inventory to sales ratios likely to be on demand for materials handling?

HAUGHEY: It's true that the overall ratio continues to drop. The biggest decline has been in manufacturing inventories with wholesale ratios not far beyond. Retail, on the other hand, is still on the high side.

But inventory levels, as I said earlier, are too low at this point and will be rebuilt. That means these new lower levels are going to rise and will require more materials handling equipment to manage them.

MODERN: By all indications, then, we have turned the corner. And while demand for materials handling equipment is going to increase noticeably this year, it's not going to be a huge gain either. Instead, there is going to be steady recovery over the next four years.

HAUGHEY: You got it.