The growth rate of the overall economy was relatively weak in the third quarter of 2012, continuing the sluggish growth pace that is characteristic of the current expansion. Inflation-adjusted GDP increased at only a 2.0% annual rate in the first quarter, 1.3% in the second quarter and 2.7% in the third quarter. We predict that GDP growth will increase at less than a 1% annual rate in the fourth quarter of 2012. A significant amount of inventory was added in the third quarter, accounting for faster growth, but excess stocks will depress production at year-end. Furthermore, the consensus view among economists is that Hurricane Sandy caused about $30-50 billion in total damage, taking about 0.3 percentage points out of the GDP growth rate in the fourth quarter but adding that amount back into the economy in the first quarter of 2013
The outlook is for modest growth throughout 2013. Although the pace should pick up in the second half of 2013 and during 2014, it will not be until the second half of 2014 that the economy grows at what could be called a moderate pace. Consumers continue to deleverage from debt and therefore can only increase spending commensurate with after-tax income adjusted for inflation. Less unemployment insurance income and increases in state and local taxes have eaten away at personal income gains. And while credit is more available, it is not plentiful. As a result, consumer spending can increase only at a sluggish pace.
An immediate concern is that business investment in equipment will decline abruptly. Firms have record profits and strong balance sheets as well as relatively high utilization of facilities. Normally, this combination of the ability to invest and the need would trigger a capital spending boom. However, new orders for business equipment (excluding aerospace and defense equipment) were flat in the first 10 months of 2012 compared with the same period one year ago. We believe concerns over business prospects in Europe, the uncertainties about the U.S. fiscal cliff and federal deficit reduction negotiations, and an increase in worrisome regulations have encouraged businesses to sit on the sidelines and wait to see what happens.
We expect the pause in business equipment orders to end now that the elections are over and the rhetoric on resolving the fiscal cliff is more positive. The outlook is for inflation-adjusted business investment in equipment and software to increase 6.1% in 2013 and 7.4% in 2S014 – substantially faster than the 1.8% and 2.8% rate of growth, respectively, in the overall economy.
Manufacturing will grow faster than the general economy, but not by much. In 2012, manufacturing growth was all front-loaded. Manufacturing production increased at a 10% annual rate in the first quarter of 2012, grew at only a 1% annual rate in the second quarter and fell at a 1% annual rate in the third quarter. The Federal Reserve estimates that Hurricane Sandy reduced manufacturing production by 0.9% in October 2012 and accounted for the entire decline in manufacturing activity that month.
We forecast that manufacturing production will increase 2% in 2013, 3.2% in 2014 and then average 3.6% growth from 2015-2017. High-tech production is forecast to increase 3% in 2013, 8.3% in 2014 and average 10.7% growth from 2015-2017. Non-high-tech or traditional manufacturing, which accounts for 90% of value-added in manufacturing, will grow 1.8% in 2013, 3.7% in 2014 and average 3.3% growth from 2015-2017.
This report was provided through MTI’s research membership with the Manufacturers Alliance for Productivity and Innovation (MAPI).