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Not a Happy New year?

By Clare Goldsberry, Associate Editor

The conflicting reports on the strength of the U.S. economy, manufacturing output, and overall health of manufacturing seem to have come to a head, and the consensus is that 2008 doesn’t look good.

When the numbers were released for December 2007, there was a big surprise. A key measure of U.S. manufacturing contracted dramatically in December, a sign that recent strength in export-related businesses is being overwhelmed by housing problems and other areas of the domestic economy.

The Institute for Supply Management released its latest monthly survey, and December’s index of factory activity fell to 47.7 from 50.8 in November.

That was a far bigger drop than economists had projected. With a baseline of 50, an index above 50 shows expanding manufacturing activity, and below 50 shows contracting manufacturing activity. The index of new orders, a gauge for future business, fell even more sharply to 45.7.

“This is an early warning signal for manufacturing. I would not expect it to be a first half [of 2008] that features significantly strong growth,” Norbert Ore, a Georgia-Pacific executive who directs the Institute for Supply Management survey of purchasing managers, said.

“The December Institute for Supply Management index (47.7) confirms our view that manufacturing activity is declining and that manufacturing industry productivity declined in the fourth quarter 2007 from its level in the previous quarter,” .Daniel J. Meckstroth, said. Meckstroth is the chief economist for the Manufacturers Alliance/MAPI, in Arlington, Va.

“A manufacturing recession has begun and we feel it is the precursor to a general business recession in the first half of 2008. The most disturbing aspect to the December Institute for Supply Management report though, is that the export index indicates much slower growth in exports.

“It is the net foreign trade (exports less imports) improvement that economists hope will cushion the economic downturn,” Meckstroth added.

On an annual basis MAPI forecasts a mild manufacturing recession next year. When the numbers are in, manufacturing production is expected to have increased 1.9 percent in 2007. The alliance predicts no growth in 2008 – including a slight decline in non-high tech industries – before rebounding to 2.6 percent growth in 2009.

“Five economic shocks are contributing to halt industrial growth,” Meckstroth said

“The shocks are:

  • A significantly worse housing start outlook.
  • The negative impacts of falling housing prices on consumer spending.
  • The credit crunch; high gasoline and record high fuel oil prices.
  • If we have an exceptionally cold winter, natural gas prices also could spike.
  • And, finally, the economy is generating less job growth.”

A number of industries are in the declining phase, including industrial machinery, which Meckstroth projects will decline 5 percent in 2008 and 1 percent in 2009.

“The decline in the value of the U.S. dollar will act as a stabilizer to manufacturing. U.S. exports will increase at a rapid pace while import growth decelerates. The trade situation will cushion the industrial decline next year and boost growth in 2009,” Meckstroth said.

The December employment report added another shock to the economy, as it was much worse than expected.

Payrolls rose just 18,000 as private payrolls declined, and the unemployment rate jumped higher, to 5 percent, led by heavy job losses in construction, manufacturing, and retail services.

Nigel Gault, an analyst with Global Insight, said December was a particularly bad month for manufacturing.

“Employment fell 31,000, hours worked dropped 0.7 percent, and overtime hours were pared back to their lowest since February 2002. Most manufacturing industries lost jobs, not just the obvious candidates tied to housing, such as wood products, nonmetallic minerals, and furniture,” Gault said in commenting on the Institute for Supply Management report.

“The employment survey corroborates the negative signal for manufacturing from the Institute for Supply Management Survey: a sharp decline in industrial production in December seems assured. And since the Institute for Supply Management survey showed not just weak production, but also weak orders, the implication is that the bad news will continue into 2008,” he added.

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