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NORTH AMERICA: "Trucks: January Data Support Our Midcycle View of NA Truck Market" 2015 report

NORTH AMERICA: "Trucks: January Data Support Our Midcycle View of NA Truck Market" 2015 report. 7-page report by BAIRD.

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back to index backAMERItalk July,  2005

The two sides of US manufacturing

After moving at a fast pace through much of 2004, there are signs that the US industrial sector is starting to cool. First, the recent Federal Reserve reports on industrial production have shown that manufacturing output has not grown for two consecutive months. It declined by 0.3% in March from February, and held steady in April. The last time we saw two consecutive months of no growth was March and April 2003. Unlike two years ago, however, when materials and machinery slowed output down, the culprit this time is light vehicles. This could be a special concern because consumer spending is the foundation behind economic growth.

Second, the Institute for Supply Management (ISM) reported that its purchasing managers' index (PMI) for manufacturing was 51.4% in May. This is down 1.9 points from April, 6.2 points from six months earlier, and more than 11.0 points from May 2004. A reading above 50 still signals expansion, and this is currently the 24th consecutive month above that threshold. But it is also the sixth consecutive month in which the index has declined.

Third, the most recent ISM report gives additional news for concern. Indicators such as new orders, production, supplier deliveries, backlog of orders, imports, and customer inventories all indicate slowing activity in manufacturing. Moreover, most of these indicators have been trending downward for a number of months.

Fourth, April's new orders for durable goods, excluding transportation, as reported by the Census Bureau, declined 0.2% in April. Primary metals, computers, and electronic products led the decline. Granted, one month does not set a precedent, but since the beginning of the year, new orders on a monthly basis have shown quite a few declines. Metals, fabricated metal products, machinery, high-tech equipment, and transportation equipment orders have all declined on a frequent basis. This indicates a waning in the consistent manufacturing uptrend experienced a year ago.

Finally, the steady price increases in materials are starting to wear thin. Prices for most grades of steel have been declining since last fall. In particular, sheet steel prices are 25% lower than they were last September. Copper and aluminum prices have peaked. The prices for paper materials, especially linerboard and bleached board used in boxes and containers, have remained flat this year. Most grades of paper prices have also not increased this year. In 2004, the producers of paper-based materials easily raised prices on numerous occasions, averaging 10–20% increases for the year. Now, however, demand is not strong enough to support an attempted price rise during the spring. Chemical producers, especially of feedstocks and resins, are also seeing resistance to announced price increases. Materials are the leading edge of the industrial sector, so if intermediate materials demand is softening, then look for this slowdown to occur in finished products as well.

Despite the recent string of worrisome news, it is highly unlikely that this 18-month recovery in manufacturing will abruptly end. Too much momentum is in place for the sector to suddenly change direction. Consumer spending for goods—which remains the foundation of economic growth—is expected to slow from 5.2% last year to 4.2% in 2005, but this year's pace is still considered quite healthy from a historical perspective. A large part of the slowdown comes from the auto sector.

Investment for traditional industrial equipment is on track to increase more than 6.0% this year, an acceleration from 5.1% growth last year and the strongest rate of growth since 2000. While machinery orders slipped in the beginning of the year, they were still above 2004 levels by 11% year to date though April. Year-to-date new orders for primary metals are up 13% from a year earlier. New orders for computers and electronic products through April were up 24% from a year earlier. Only new orders for transportation equipment, particularly motor vehicles, were down sharply year to date. Orders are a leading indicator for future output. Therefore, we still expect the capital equipment side of the manufacturing sector to do well for the remainder of this year and most of 2006.

At 7.0%, machinery production growth will be slower this year than the 11.6% increase seen in 2004. But before this recovery, 1994 was the last time machinery exceeded 7.0% growth. Electrical equipment and appliances are also seeing growth slow, slipping from more than 6.0% in 2004 to between 2.5–3.0% this year. However, this year's increase is still much stronger than the 0.5% average annual rate of growth for the industry over the last 10 years. Transportation equipment is struggling, but excluding the consumer light-vehicle part, provides a better perspective. Medium/heavy truck production increased almost 50% last year and is anticipated to increase another 25% in 2005 and 5% in 2006. The ship and boat building industry experienced 9% growth last year and should see close to a 10% increase in 2005. Railroad equipment also continues to do extremely well. Finally, the aerospace industry has apparently bottomed out and should see output growth of 5–10% this year and next.

Reconciling recent disappointing news with positive economic trends can be difficult. But it does show that the United States is entering a new phase in manufacturing. Last year was a recovery period, and manufacturing increased nearly 5.0% after being flat for three consecutive years. This year, manufacturing growth will downshift to a more mature phase, slowing to 3.7% growth. In 2006, further maturation is anticipated, with growth closer to 3.0%. We consider the risk for a major downturn in manufacturing to be very small.

Source: Global Insight - GAI

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