As we try to navigate the gloomy winter of 2008, we see increasing evidence of economic recession. We won't know definitively until well into the summer, but the Manufacturers Alliance/MAPI and many other forecasters believe a recession started late in 2007 or in early 2008. Manufacturing industrial production did fall by 1.9% at an annual rate in the fourth quarter of 2007, and by 2.9% when hard-to-measure high-tech production is excluded. Unemployment is rising, and there is strong evidence of a consumer slowdown. Business investment is subdued.
The weak Alliance forecast for 2008 is for double-digit declines in industries such as housing, appliances, construction machinery and HVAC equipment, and significant declines in aluminum, electrical products, metalworking machinery and motor vehicles. The bad news is cushioned by strong growth in resource extraction machinery, aerospace, computers, communication equipment, and equipment and supplies related to medical care.
The Alliance forecast is for a short and shallow downturn, with growth returning to normal rates in 2009. What are the early signs of recovery which would give us confidence of renewed growth?
There are many anecdotal rules of thumb used by generations of manufacturing executives: a bounce in heavy truck sales, rail car loadings, or sales of recreational vehicles, and a rise in commodity prices are among the most common. Each of these indicators, however, is subject to complex forces in today's economy, which makes them unreliable for this purpose. Commodity prices, for example, are now subject more than ever to speculative purchases, growth in China and swings in the value of the dollar that are not always caused by fundamental economic factors.
Some of the indicators we will look for to allow us to change our uncomfortable outlook include:
- A bottom followed by a turn upwards in building permits and housing starts, which we see occurring in the second half of 2008, would be an obvious signal in the current environment, as would solid increases in sales for the anemic auto sector.
- A reversal of the credit crunch, now affecting primarily the consumer sector but becoming more broadspread, would be clearly flagged by the Federal Reserve Board's quarterly survey of credit tightening and easing among senior lending officers at banks, and in a turnaround in loan delinquencies and defaults.
- Positive changes in the consumer sentiment surveys are always important, especially if corroborated by more indirect sentiment indicators such as voluntary job separations and growth in consumer spending on durable goods.
- An increase in the inventory/sales ratio would be a good sign, as would a solid uptick in the three-month moving average of business investment, especially in nondefense capital goods.
- Stronger growth in imports would likely indicate a pickup in U.S. consumer spending.
- A slowdown in the Institute for Supply Management's sub-index for supplier deliveries would be a good early signal of a recovery.
- A bottom or sustained recovery in the value of the dollar would probably also be a good sign of a return to growth.
At this writing (in mid-January), strong signals of a federal fiscal stimulus package and further interest rate reductions are dominating the economic news in Washington. Such measures will make a contribution to steadying the ship, but the hard signs of recovery listed here will do much more to revive the competitive and entrepreneurial spirit of Americans and put the current recession behind us, just as they have for the 11 others since 1945.
Dr. Duesterberg is president and CEO of the Manufacturers Alliance/MAPI, an executive education and business research organization in Arlington, Va.