MAPI Economic Forecast: early gains in 2012 subside as momentum wanes

According to the latest quarterly economic forecast from the Manufacturers Alliance for Productivity and Innovation (MAPI), deceleration in the U.S. manufacturing recovery in the second quarter of 2012 foretells slow economic growth in coming months.

The report includes significant downward revisions of a number of forecasts from the organization’s May report. For instance, although manufacturing is expected to see a net increase in hiring, with the sector forecast to add 208,000 jobs in 2012 and 231,000 jobs in 2013, these figures are well below the May forecast of 312,000 jobs in 2012 and 361,000 jobs in 2013.

“We had expected equipment investment to steadily increase,” said MAPI chief economist Daniel J. Meckstroth, Ph.D., in a recent interview. “It is very worrisome that orders for non-durable goods have been declining, and it says the pipeline for long-term capital projects is declining as well. If you believe the fundamentals haven’t changed, you don’t change the forecast. But I believe the fundamentals have changed.”

Meckstroth said uncertainty is the key factor underlying the sluggish recovery, citing declining business activity in Europe, worries about a hard landing in China, and the domestic “fiscal cliff” when federal programs and tax cuts are set to expire next year. “If you were a business man, would you invest with all that hanging over your head?” Meckstroth asked. “We badly need investment in the U.S. and it’s just not happening.”

However, Meckstroth predicts the country will not go over the fiscal cliff, and that instead Congress will vote to extend key programs and tax cuts. After the tourniquet is applied, Meckstroth said, “we will have to look at look at a long-term solution that will address government spending, particularly with regard to entitlement programs.”

Other projections from MAPI’s quarterly forecast noted that inflation-adjusted gross domestic product (GDP) will expand by 2.0 percent in 2012 and by 1.7 percent in 2013, down from the 2.2 percent anticipated for each year in MAPI’s May report.

“The annual growth rate will decelerate as the pace of business equipment spending slows,” noted Meckstroth. “While there is pent-up demand for replacing worn equipment, productivity-improving investment, and capacity expansion, it is the uncertainty about the ‘fiscal cliff,’ that are holding back longer-term commitments.”

Manufacturing production is expected to show growth of 4.5 percent in 2012 and 2.3 percent in 2013. The 2012 figure is down from 5.2 percent and the 2013 estimate is down from 3.3 percent from the May forecast.

Manufacturing exceeded GDP growth in the first quarter of 2012, increasing at a healthy 10.0 percent annual rate compared to 2.0 percent for GDP, with the unseasonably mild winter and inventory rebuilding explaining some of the surge, according to Meckstroth. In the second quarter, manufacturing production grew at only a 1.0 percent rate compared to 1.7 percent for GDP.

“We forecast that the pace of manufacturing growth will simply match the slow growth rate in the overall economy during the next three quarters,” Meckstroth said. “However, a faster growth rate in business equipment spending starting in the spring of 2013 should eventually propel manufacturing growth above the rate of expansion in the general economy.”

Production in non-high-tech industries is expected to increase by 4.7 percent in 2012 and by 2.4 percent in 2013. High-tech manufacturing production, which accounts for approximately 10 percent of all manufacturing, is anticipated to grow at a 4.9 percent rate in 2012 and 5.8 percent in 2013.

The forecast for inflation-adjusted investment in equipment and software is for growth of 8.0 percent in 2012 and 7.1 percent in 2013. Capital equipment spending in high-tech sectors will also rise. Inflation-adjusted expenditures for information processing equipment are anticipated to increase by 5.6 percent in 2012 and by 8.5 percent in 2013.

MAPI expects industrial equipment expenditures to advance by 8.9 percent in 2012 and by 10.1 percent in 2013. The outlook for spending on transportation equipment is for growth of 18.3 percent in 2012 and 6.6 percent in 2013. Spending on nonresidential structures will improve by 9.8 percent in 2012 before decelerating to 3.6 percent in 2013.

Inflation-adjusted exports are anticipated to improve by 3.8 percent in 2012 and by 3.7 percent in 2013. Imports are expected to grow by 3.7 percent in 2012 and by 4.1 percent in 2013. MAPI forecasts overall unemployment to average 8.2 percent in 2012 and 8.1 percent in 2013.

The price per barrel of imported crude oil is expected to average $99.60 per barrel in 2012 and $92.50 in 2013.