The long road back: Manufacturing still recovering
“Manufacturing industrial production has to grow another 3.4% in order to reach the pre-recession production level achieved in December 2007—that’s at least another year of manufacturing industrial production growth.” — U.S. Industrial Outlook
We thought that manufacturing had fully recovered from the 2008-2009 recession last year. Unfortunately, manufacturing growth since 2010 has been 4.5% slower than last reported, averaging about 0.9% less growth each year. The MAPI Foundation forecasts annual growth of 2.1% in 2015, 3.4% in 2016, and 3.1% in 2917.
The MAPI Foundation forecasts indicate:
- New housing starts will grow at a rapid pace from a very low level. The 2015-2017 growth rates will favor single-family starts, as multi-family starts will grow at a slower pace after many years of leading the housing recovery. The housing supply chain (wood products, nonmetallic mineral products, HVAC, household appliances, furniture, and construction machinery) is ramping up.
- Motor vehicles and parts production growth is surprisingly strong and low gas prices encourage the purchase of large, expensive vehicles—favoring the domestic industry. We expect production growth to remain strong this year and next but flatten out in 2017.
- The commercial, industrial, and amusement/recreation construction segments are leading nonresidential construction activity. Public works construction picked up recently but should grow slower than the overall economy. Public utilities and mining and drilling construction will post large declines this year.
- A rebound in pharmaceutical production is coming from new blockbuster patent-protected products.
- Mining and drilling equipment production will decline 14% in 2015 and fall 17% in 2016.
- Total machinery production will be flat this year. Agricultural equipment and drilling equipment will suffer declines this year and next. Construction and industrial machinery will have moderate growth but commercial and service equipment should post little growth in 2015. Commercial and service equipment should rebound in 2016 and 2017.
- Steel production will post a double-digit decline this year. Modest manufacturing growth, the strong dollar, excess capacity in China’s manufacturing sector, and falling commodity prices will significantly hurt the primary metals industry.
Motor vehicles and parts production
- Motor vehicles and parts production is expected to increase 9% in 2015, rise 7% in 2016, and remain flat in 2017.
- Household appliance production
- The forecast for household appliance production is for growth of 5% in 2015, 6% in 2016, and 4% in 2017.
- Pharmaceutical and medicine production
- Pharmaceutical and medicine production should increase 3% in 2015, 4% in 2016, and 5% in 2017.
- Employment in pharmaceuticals and medicine was up 2% in the second quarter of 2015 compared with the same period one year earlier. There was a 2% gain in pharmaceuticals and 1% growth in miscellaneous medicinal and biologicals employment.
Iron and steel products production
- Iron and steel production is forecast to decline 11% in 2015, increase 3% in 2016, and post no growth in 2017.
- Capacity utilization in the U.S. steel industry was 74% in the week of August 15, 2015 (lower than the 80% in the same week one year earlier). The steel industry has a much lower factory utilization rate than overall manufacturing.
- The large difference between demand and supply suggest that trade, prices, and inventory explain the decline in steel production.
Fabricated metal products production
- Fabricated metals production should post moderate gains of 1% in 2015 and 3% in both 2016 and 2017.
- The types of fabricated metal products saw mixed production activity relative to one year ago. Forging and stamping was up 7%, architectural and structural metals rose 3%, and coating, engraving, and heat treating rose 3% in the three months ending July 2015 relative to the same period one year ago. Machine shop turned products and fasteners fell 3%, however.
Basic chemicals production
- Basic chemicals production should increase 2% in 2015, 3% in 2016, and 4% in 2017.
- Paper production should be unchanged in 2015, increase 1% in 2016, and post no growth in 2017.
- In a related sector, industrial production of food products was up 2% in the three months ending July 2015 compared with year-ago levels.
- A report from the American Trucking Association indicated that truck tonnage increased 4% in July 2015 from one year ago.
Construction machinery production
- Construction machinery production should increase 7% in 2015, 1% in 2016, and 3% in 2017.
- Private nonresidential construction activity expanded 11% and public works construction grew 5% in the three months ending June 2015 compared with the same period one year ago.
- Mining and quarrying production fell 7% in the three months ending July 2015 compared with the same period one year ago. There was growth in quarrying and nonferrous metal mining but production declines in precious metals and coal mining.
- Caterpillar reports that their worldwide machine deliveries to users for retail sales, adjusted for inflation, were down 11% in the three months ending July 2015 versus the same period one year earlier. Construction industries’ sales were down 14% and resources industries’ equipment fell 6%.
Mining and oil and gas field machinery production
- Mining and oil and gas field machinery production is predicted to decline 14% in 2015, fall 17% in 2016, and then grow 14% in 2017.
- Production fell 15% in the three months ending July 2015 compared with one year earlier and the quarter-to-quarter momentum was very negative.
- WTI oil prices were $42 in mid-August, which is down from $60 in mid-June. A price of $50 is thought to be the approximate breakeven point for shale oil drilling, so production in the supply chain will decline.
- The Energy Information Administration projects that coal production will fall 8% in 2015 and grow 1% in 2016.
- Oil and gas well drilling production fell 53% in the three months ending July 2015 compared with one year earlier. Recent momentum in the drilling market is very negative.
Industrial machinery production
- Industrial machinery is capital equipment for specific nonmetallic manufacturing industries such as woodworking, plastics, paper, textiles, printing, food products, and semiconductors.
- Industrial machinery production should grow 4% in 2015, 9% in 2016, and 6% in 2017.
- In related sectors, wood products production fell 2%, paper production fell 1%, textile mill production rose 5%, food production increased 2%, and plastic products production expanded 3% from May to July 2015 compared with the previous year.
- Construction of new manufacturing plants increased 62% (in inflation-adjusted dollars) in the three months ending June 2015 from one year ago.
Metalworking machinery production
- Metalworking machinery consists of industrial molds; metal cutting and forming machine tools; special tools, dies, jigs, and fixtures; and miscellaneous metalworking machinery (cutting tools and rolling mill machinery).
- We predict that metalworking machinery production will increase 1% in 2015, 5% in 2016, and 4% in 2017.
- Electrical equipment production
- This sector consists of transformers, motors and generators, switchgear, relays, and industrial controls.
- Electrical equipment production is forecast to grow 4% in 2015, 3% in 2016, and 2% in 2017.
- The factory operating rate was 76.2% in July 2015, up from 75.9% one year ago, but below the long-term average of 78.5%.
- Transformers and power distribution equipment tend to follow electric utility construction, the creation of new communities, and a replacement cycle; housing starts were up 16% in the three months ending July 2015. Electric power construction, however, declined sharply. Nevertheless, employment in the transformer industry was up a little over 1% in the second quarter of 2015 compared with one year earlier.
Medical equipment and supplies production
- This category encompasses surgical and medical instruments, surgical appliances and supplies, and dental laboratories.
- Medical equipment production is forecast to increase 2% in 2015, 3% in 2016, and 3% in 2017.
- Production increased 1% in the three months ending July 2015 compared with year-ago levels.
- Safety equipment and supplies and the “all other” group that includes lab equipment and hospital furniture, dental equipment and supplies, and vision care goods saw a moderate 2% decline in employment in the second quarter—suggesting little if any production growth.
Oil and gas well drilling production
- The MAPI Foundation does not forecast drilling production; however, it is clear that drilling activity will decline substantially this year as a result of the recent collapse in oil prices.
- Drilling activity declined 53% in the three months ending July 2015 relative to one year ago and has sizable negative momentum.
- Brent oil plummeted from $113 in June 2014 to $48 per barrel in mid-August 2015. Henry Hub natural gas declined from $4.60 in June 2014 to $2.79 per million cubic feet in mid-August 2015. The EIA predicts that U.S. oil and gas production will increase 7% in 2015 and fall 4% in 2016.
- Natural gas production is forecast to increase 5% this year and 2% next year. U.S. hydrocarbon production is the major reason for lower prices.
- On the global market, Iran is ramping up production in anticipation of selling oil again and the Saudis are increasing production.
- Baker Hughes reported that the North American rig count fell 54% in August 2015 versus the same month one year ago.
- 76% of operating U.S. rigs looked for oil in late August. The U.S. rig count for oil drilling was down 58% in August 2015 versus the same four-week period one year ago. The U.S. rig count for natural gas drilling was down 34% in the same period.
Private nonresidential construction
- We predict that inflation-adjusted nonresidential spending will increase 11% in 2015, 7% in 2016, and 4% in 2017.
- Nonresidential construction was up 11% in the three months ending June 2015 versus year-ago levels.
- There was very strong construction growth in lodging (hotels), office buildings, commercial, transportation, manufacturing plants, amusement and recreation, communications and medical structures in the three months ending June 2015. The industry experienced small declines in activity in private education construction and large declines in electric utility construction.
- We forecast that industrial construction will grow 52% in 2015, rise 2% in 2016, and decline 11% in 2017.
- Private electric power construction is falling at a fast pace because of overcapacity and greenhouse gas emissions regulations.
- Construction spending by federal, state, and local governments is primarily directed toward schools, highways, sewers, dams, waterworks, and various public buildings.
- Inflation-adjusted public construction spending should be up 3% in 2015, 3% in 2016, and 1% in 2017.
- Areas of strong growth in the last three months were amusement and recreation, sewerage and waste disposal, and conservation and development.
- Recent large declines in public construction were in healthcare, public safety, and power.