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January 30, 2019 01:00 AM

Manufacturing to recover to pre-recession levels in 2019

Bill Wood
Economics Editor
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    Jessica Jordan
    Bill Wood

    Total production for the U.S. manufacturing sector registered a solid gain in 2018. American factories expanded overall output by 2.6 percent last year. That is the fastest rate of increase since 2012, and it was substantially better than the 1.5 percent gain posted in 2017. What's more, the monthly increases were slowly gaining momentum in the fourth quarter of 2018; the December number was up 3.2 percent when compared with the same month a year earlier.

    If we use this trend as a starting point, we can build a solid case for a favorable manufacturing outlook for 2019. We will not sustain growth of 2.6 percent this year, but I expect the pace to stay just above 2 percent. The economic expansion will turn 10 years old this spring, and if this forecast is right, that will be about the time total production from U.S. manufacturers gets back to pre-recession levels. That's right — it has taken 10 long years, but we are almost back to where we were before the housing bubble burst.

    Now, I am fully aware of the geopolitical vicissitudes currently affecting our future economic expectations — e.g. the trade negotiations with China. But right at this moment, I think there is as much upside risk to this situation as there is downside risk. In other words, it is still possible we will come out of this with a trade agreement that greatly benefits American businesses for decades to come.

    So for the time being, I will continue to base my forecasts on the actual trends in the data. I will adjust them after a trade deal is announced, or the negotiations are aborted, if necessary.

    As we all know for sure, the manufacturing sector last year benefited from low interest rates, rising employment and income levels, strong business and consumer confidence, and a large tax break. These conditions mostly still prevail as we start 2019, but they are just not quite as strong as they were. Interest rates are a little higher (though still low by historical standards), confidence levels have backed off a bit from record highs, and the impact of the tax break will be less pronounced as time progresses.

    The good news is the data measuring both wage gains and household income levels in the U.S. continue to rise. Since consumer spending accounts for at least two-thirds of the American economy, this should provide a strong tailwind for the U.S. manufacturing sector this year.

    The manufacturing data from the Federal Reserve is broken down into a large number of categories, and many of these categories are major end markets for plastics products. The first major breakdown is durable goods and nondurable goods. The table shows a further breakdown of the significant categories along with their performance of the past two years and my forecasts for 2019.

    Total output of durable goods in 2018 escalated 3.3 percent. This was the strongest growth in the past six years, and it was significantly stronger than the 1.5 percent gain the previous year. This year I expect the trend to revert to a level that is comparable to overall economic growth in the United States, so my forecast is for a gain of 2.3 percent. The durable goods data includes products that are higher-priced and therefore more sensitive to fluctuations in the trends in interest rates and economic growth.

    It is worth noting that the increase in total manufacturing production in December was led by a 4.7 percent surge in output of motor vehicles and parts. For the year of 2018, this category was up 3.6 percent, which followed a decline of about 1 percent in 2017.

    The motor vehicles industry was one of the fastest-growing manufacturing segments for most of the past 10 years, but it appeared to hit a peak in 2016. This prompted many analysts, including me, to label 2016 as "peak auto." This data indicates we were a bit early with our prediction of the peak. For 2019, my forecast calls for an increase of 1 percent in the U.S. output of motor vehicles and parts.

    In this column two weeks ago, I forecasted a decline of 4 percent in both the total number of motor vehicles assembled in the U.S. and the total for vehicles sold in the United States. But the data indicates the trend in the volume of vehicle parts manufactured in the U.S., either for original equipment or aftermarket, is stronger than the trend for either sales or assemblies. Therefore, I expect the volume of parts produced this year to enjoy a small gain while the volume of vehicles assembled or sold will experience a moderate decrease.

    The outlook for nondurable goods, the category with most of the end markets for plastic packaging products, calls for another gain of 2 percent. This is a bit stronger than the long-term average. Demand for these products will be pushed by continued gradual acceleration in wage growth. The trend in nondurable goods is much less volatile than the trend in durable goods. Nondurables are mostly consumer staples, and the trends are therefore dependent on changes in population and incomes.

    If you are not already intimately familiar with the industrial production data that is gathered and reported on a monthly basis by the Fed, I encourage you to check it out. This data set is comprehensive and reliable, and it provides much-needed insight into the activity levels of our country's industrial base.

    This data stream is so reliable that it continues to be reported even during government shutdowns. Regardless of your opinion of the Fed's recent decisions to raise the fed funds rate or reduce the amount of government debt it purchases each month, their value as a source of useful economic data is beyond debate. Without this information, our ability to monitor, assess and forecast our industry's progress would be greatly diminished.

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