Every three months, the Manufacturers Alliance for Productivity and Innovation (MAPI) provides a detailed look at the health of the domestic manufacturing sector and reviews the performance of a selected group of its most important subsectors. This report covers the actual data available through April 2012 and provides MAPI’s forecasts, which were completed in late May and early June.

The growth rate of the overall economy was relatively weak in the first quarter of 2012. Inflation-adjusted GDP increased at only a 2.2% annual rate, slower than the 3% annual rate posted in the final quarter of 2011. MAPI predicts that GDP growth will increase at annual rates of about 2.1% over the next five quarters. These growth rates are categorized as a relatively modest pace and well below what would be considered normal for an expansion following a severe recession.

The 2012 and 2013 forecast is for a moderate pace of GDP growth. Consumers are deleveraging and are reducing debt and therefore can only increase spending commensurate with employment and wage growth. While the pace of employment growth has improved, increases to state and local taxes have eaten away at personal income gains. While there is strong growth in private construction activity and business equipment spending, the gains are offset by government spending austerity. Our base case forecast is that inflation-adjusted GDP will rise 2.2% in both 2012 and 2013.

A major problem with the slow growth outlook is that this stall speed makes the economy susceptible to little growth or even another recession, possibly induced by a major shock. The risks most likely to push the U.S. into another recession are a systemic bank lending freeze coming from the European sovereign debt crisis, the potential disruption of Middle Eastern oil transport by Iran, and political gridlock over the federal spending fiscal cliff and the debt ceiling issues that must be dealt with in early 2013.

Manufacturing will continue to grow at a faster speed than the general economy. The sector’s production increased at a 10% annual rate in the first quarter of 2012. MAPI predicts that manufacturing activity’s pace will decelerate to a moderate 3% at an annual rate in the second quarter and for the remainder of 2012.

MAPI’s forecast for industrial growth in 2013 is improved from the last report. Pent-up demand for consumer durables (particularly motor vehicles) exists, firms are profitable and have pent-up demand for replacing traditional and high-tech business equipment, and there is strong growth from emerging economies for equipment to build their infrastructure. Unfortunately, the recession in Europe will have the effect of canceling out any net benefit from trade this year.

Manufacturing production increased 4.3% in 2011, and MAPI forecasts that it will increase 5.2% in 2012 and 3.3% in 2013. High-tech production expanded 7.9% in 2011 and is forecast to increase 5.3% in 2012 and 7.7% in 2013. Non-high-tech or traditional manufacturing, which accounts for 90% of value-added in the sector, grew 4.2% in 2011. MAPI forecasts it to expand a little over 5.5% in 2012 and 3.2% in 2013.

Among the highlights of this report’s cyclical analysis of 27 industries are these findings and MAPI forecasts:

• Housing starts posted strong growth in the winter, aided by unseasonably warm weather. New starts will post large percentage gains (especially apartment units) as new housing rebounds from depression levels of activity.
• Overall consumer spending growth is relatively weak, but consumers will have to divert spending from nondurables and services to make motor vehicle purchases.
• Corporate profits remain high and factory usage rates are back to the pre-recession level. Both inside and outside manufacturing, there is a need to replace worn and technologically obsolete machinery and equipment. Spending on machinery and equipment will grow at a moderate pace in both 2012 and 2013.
• The outlook for the steel and fabricated metal industries is for moderate-to-strong growth thanks to a revival of the auto market, continued robust growth in the machinery and equipment industries, and strong gains in oil country goods. Aluminum extrusions and production will also benefit from the market improvement.
• Oil prices are starting to fall but the world price (Brent crude) is forecast to stay above $100 per barrel for several years, a price high enough to encourage more drilling. Low natural gas prices have shifted the drilling mix from gas to oil. Mineral prices have also declined, but relatively strong emerging market demand will keep a floor under commodity prices. Mining and drilling equipment production should post strong gains in 2012 and see moderate growth in 2013.
• The strong energy market, the need to replace worn-out diesel engines, acceleration in truck traffic, and tax incentives for wind turbines greatly benefit the engine, turbine, and power transmission equipment industry.
• Boeing is delivering the 787 and 747-8 aircraft. They are also successfully launching the 737 MAX. The civilian aircraft backlog is large, with production schedules showing strong growth for several more years.
• Private nonresidential construction has started to improve and will recover at a moderate pace in 2012 and 2013.
• Reductions in federal grants-in-aid to states in turn shrink budgets for infrastructure investment. Public construction activity should decline in 2012 and 2013.