As we enter the second full year of economic recovery, all indications are that the leading economic measures will continue to move ahead in 2005. That's according to Jim Haughey, Reed Research Group director of economics.

"We started out 2004 with Gross Domestic Product charging ahead at 6%. But by the end of the year, that had slowed to 4%. And by the time we finish with this new year, it will have slowed to 3%, which is average growth," says Haughey.

At the same time, inflation and wage growth as well as credit costs will all rise a bit more in 2005 than they did in 2004. Similarly, the cost of imports will continue to rise in 2005 if the dollar continues to decline.

When it comes to U.S. industry, the outlook for the new year, says Haughey, is strong. Manufacturing capacity utilization will start the year at 78% and hit 82% by year end, he notes. As soon as it crosses the 80% threshold, companies will evaluate adding capacity.

In fact, Haughey projects 6% growth in factory production in 2005, compared to 5% last year. It's worth noting that total U.S. manufacturing output already exceeds the peak levels at the height of the last economic cycle. In 2000, the industrial production index peaked at 119. Today, it is at 122 and will likely climb to 129 before this year is completed.

Haughey expects similar pressure on the warehousing/distribution side too. Last year, the volume of goods flowing through the economy rose 7.5%. In 2005, that number will continue to grow but at a 5% rate.

"So, the pressure on distribution that jumped up in 2004 will not be growing as fast going forward," he adds. However, "it will be another full year for warehouses. It will take time but there will be a move to more new warehouse construction as the year moves along."

All of this bodes well for sales of materials handling equipment and related software in the new year. Haughey calls this "the best investment environment in years." Companies are "sitting on mounds of cash with internal cash flow up 50% from 2002," he adds. This will mean less borrowing to buy new equipment, sidestepping the rise in interest rates.

He projects that overall materials handling shipments will rise 7.5% in 2005 after rising 10.9% last year. Prices are likely to climb but at a slower rate, probably in the 3 to 4% range compared to nearly 5% in 2004.

The Modern Materials Handling Index of Orders will also rise this year, but is still some distance from recovering to the peak levels of four years ago. In January 2001, the Index hit 121.9 with 1998 levels equaling 100. The bottom of the trough was in August 2003 when the index hit 78.1. The latest reading available at press time was 100.2. Haughey expects it to rise to 106.5 by the end of 2005.

Leading the charge will be orders for lift trucks and conveyors. The former is likely to advance 12% while all conveyors will be up 6.6%, with bulk conveyors accounting for the majority of that gain.