2008 forecast

Several question marks loom over 2008 — productivity, raw materials costs, exports and the falling dollar, the housing slump, trading partner economies and consumer confidence

by Tom Hammel

What’s a manufacturer to do? The risk factors currently swirling inside economists’ crystal balls cloud every projection. And, like the ephemeral things they are, those risks appear, disappear, blend and shift at whim.

Sometimes all we can do is look at the general color of things — is the inky murk green or red? According to our prognosticators, it is mainly green. But, they add, it’s a queasy green that could easily turn a deep, sickly red.

Okay, so they are more scientific than that, but in every annual forecast there is a fair amount of “reading the tea leaves,” as one economist we know puts it. And, like the stock market, national economies are notoriously skittish.

What’s going on with ours? Here are a few risk factors our economists are watching.

Housing
Most experts agree that 2008 will be another tough year for housing. Few predict any noticeable recovery until 2009. However, they also agree that the government will not let the housing crisis deepen much more before it takes legislative action to address the issue.

“We began this housing expansion cycle in 1992 and it ended at the end of 2005, so we have a 13-year cycle to unwind from,” says Cliff Waldman, economist for MAPI, the Manufacturers Alliance.

“Policy makers here in Washington are paying attention to it as pretty much the key economic priority, which may cause the Fed to ease policy again or make some other response.”

Waldman believes policymakers will step in rather than let the housing slump drag on for years. However, he cautions, he still expects the housing slump will remain a major economic factor throughout 2008.

(Editor’s note: Waldman appears to be right. On October 31, a few days after our interview, the Fed cut the interest rate by another quarter point.)

Demand for goods
There are three sources of demand for any business or economy: consumer spending, business investment and export. How these interact with each other determines the overall health of the system, but for manufacturing, business investment and export are key.

Consumer spending, although highly resilient and surprisingly resistant to downturns, has been slowing. Some retail analysts are now beginning to warn of a potentially flat holiday selling season ahead. Consumer confidence has also been falling, hitting a two-year low in October. However, as has been seen in the past, American consumers love to spend and retailers are counting on them to come through again this year.

Business investment has been weak. In fact, business investment during the last five quarters was weaker than it was in the five quarters preceding them, Waldman notes.

One reason for this is uncertainty over the housing crisis. Other reasons include tightening profits and credit.

“Credit conditions are tightening, which is raising the cost of buying capital. Weakening profits are decreasing the benefits of investment, and there is a general fear about the economic outlook, so it’s pretty safe to say business investment is not going to make much of a contribution to manufacturing growth,” Waldman says.

Dollars down
What will? Cheap dollars will help some. The falling dollar makes American-made products more attractive exports. The same trend that makes a vacation to Europe or England increasingly expensive also makes U.S. goods more affordable on the global market.

Norbert Ore, C.P.M., group director of strategic sourcing and procurement for Georgia-Pacific and chairperson of The Institute for Supply Management’s (ISM) manufacturing business survey committee, agrees with this view.

“The weaker dollar helps offset our manufacturing costs structures, which makes American-made machinery very competitive on the world market,” Ore explains.

However, the problem with this simple formula is that it’s not that simple. For one thing, a falling dollar raises the specter of inflation. The Fed is sleeping with one eye open on this; more rate cuts will follow if the dollar’s rate of decline becomes too steep.

If our exports are to be strong, trading partners like Canada, Germany and Japan have to make enough money from their exports to be able to buy ours. It’s a delicate international balancing act. If the dollar falls too fast and foreign currencies rise too quickly, an imbalance is created that topples our trading partners’ economies, then ours.

Raw deal
However, a falling dollar does not help us when raw materials prices keep rising. Will they drop any time soon? In his work with ISM, Ore analyzes global raw materials prices.

“We have seen tremendous inflation in the cost of raw materials, and to a lesser extent in intermediate goods as well,” Ore says. “The issue is, as our business cycle softens, is this new global demand and competition for metals going to be great enough to maintain commodity pricing? I think so.

“We’re competing globally for these things and demand is such that we’re not going to see the drop-off that we have traditionally seen as the U.S. economy slowed.”

Outsourcing our future
We are also competing globally for jobs. The seemingly inescapable logic dictates that to compete in a global market, manufacturers must chase the lowest cost labor. But is the sky really and finally falling on manufacturing in America and the Western world? Might there be things we don’t know yet?

“Our understanding of outsourcing is in an embryonic stage — what it even means is still being worked on,” Waldman says. “This is misunderstood because people tend to think about it as a pure negative, as losing jobs, which is often not the case.”

There is also evidence, he notes, that as emerging market giants like China, India and Brazil take their places in the global system, they see the U.S. as an attractive place to do business. As a result, the U.S. may gain some jobs from globalization.

“Global systems have a way of creating both inflows and outflows, and people often forget about the jobs that Nissan may create in South Carolina,” he observes.

“And there’s another thing people often forget: Like politics, all the real meaningful economics is local. This means Tennessee has probably lost many more jobs to West Virginia than it has to China.”

New jobs for old
“The answer to the outsourcing issue is not to stop the jobs from leaving, it’s to create new jobs to take their place,” Ore says. “It’s a phenomenon we can’t stop — manufacturing and services are going to follow cheap labor.”

However, he adds, there are offsets to labor cost, namely productivity.

“In manufacturing, we’ve gotten the labor content in our products down to a very low number. The lower the percentage of labor cost in any product, the more likely it is that transportation, time to market and other factors will take over, and you don’t necessarily move it to the area of lowest cost labor because there’s not a great benefit.”

The plus side
In addition to a weaker dollar which makes American-made goods more globally competitive, U.S. manufacturers have two other strong playing cards: innovation and productivity.

“Manufacturing productivity has been much stronger than productivity in the economy as a whole for years,” Waldman says. “But there is also evidence that this high productivity is narrowly confined to a certain group of industries and is not as widespread across the manufacturing sector as we would like to see it.”

Waldman credits process innovation and Lean manufacturing principles for this productivity growth.

“Manufacturers have been remarkably innovative with productivity responses to global competition,” Waldman says. “We can’t compete on labor costs with China, India and other emerging global players, so our response is productivity because that lowers the total cost of production.

“We’re at the beginning of a real wave of change, from mass production to Lean production systems, and a lot of benefits are starting to show up,” he adds. “Productivity growth, along with a more competitive dollar and a better trade balance is the long-term good news for U.S. manufacturing.”

Ore agrees.

“ISM manufacturing data shows great strength in export orders for American-made machinery,” he observes. “And while we equate MRO with maintenance, it also has an OEM component because manufacturers who support MRO are also OEMs in many cases. American-made machinery is very competitive on the world market and that will help support demand going forward.”

As seen in the chart above, MAPI projections indicate total U.S. goods and services exports are expected to climb from an estimated final 6.8 percent in 2007 to 9.1 percent in 2008.

Up, up and up
Another important point is where manufacturers see themselves on the ladder of productivity. In recent years the ISM worked with former Fed chairman Alan Greenspan to poll U.S. manufacturers on productivity.

“What we’ve found year after year is that manufacturers don’t see themselves at the end of a productivity cycle — they see themselves still at the beginning,” Ore says. “Yes, they have added technology and improved productivity, but they still see the opportunity to improve as being just as great as it was the year before.”

Based on the consistency of those numbers year over year, Ore shares that optimism, and extends it to the supply chain.

“When I look at supply chains, the opportunity for manufacturers — MRO manufacturers in particular — to improve their supply chains, distribution and efficiency is as good today and for the next 10 years as it was 10 years ago.”

The year ahead
So, have you got a clear picture of what to expect in 2008? Neither does anyone, really. Too many “ifs” could sour and turn the whole picture dark.

But the consensus of both economists interviewed is that if the dollar doesn’t plummet, if consumers regain some of their recently lost confidence, if the housing market begins to show signs of easing, if the Fed’s responses to the crisis work, if U.S. automakers begin to find themselves, and of course, if the Middle East doesn’t implode, then, just maybe, we’ll have a pretty good year.

“It is going to be difficult to dramatically increase growth in 2008,” Ore says. “We’re probably looking at 2.5 to 3.5 percent growth, but that won’t make 2008 a bad year by any means.”

“My outlook for the rest of this year and next year is that manufacturing growth will be more in line with the economy as a whole,” says Dave Huether, chief economist for the National Association of Manufacturers. “I think you’re looking at growth in the manufacturing sector near 3 percent. It’s an improvement of what we’ve seen in the last six months, but not as strong as what we saw a couple of years ago.”

For detailed reports by industry, please visit the Freedonia Group at www.freedoniagroup.com.

This article appeared in the December 2007/January 2008 issue of MRO Today magazine. Copyright 2007.

Back to top

Back to Procurement archives