Forecast for '99: Rain or Shine?
ID economic survey reveals optimism spiced by caution for the New Year
By John R Johnson -- Industrial Distribution, 1/1/1999
Like a hurricane whose path is unpredictable, the economy is on similar stormy ground as we head into 1999. After two years of solid growth, tempered somewhat by the overseas crisis that marred much of 1998, distributors and economists alike are unsure what to expect for the final year of the century.An exclusive poll conducted by Industrial Distribution produced some optimism for 1999 and beyond, although the results also leave the door open for a slowdown. Of the distributors responding to the survey, 73 percent expect revenues to top those of 1998. However, more than half (52 percent) believe the uncertain overseas economy will hurt sales this year, by an average of 10 percent.
With nearly three-quarters of distributors predicting an increase in sales, the general feeling moving into 1999 might be one of optimism. However, the poll was taken just days before Boeing announced another round of major layoffs on Dec. 1, opening more concerns about the plight of the economy. Boeing announced it was laying off another 20,000 employees, and indicated the Asian crisis could affect its business for five years. That same week, Johnson & Johnson handed out over 4,000 pink slips.
That partly explains why 61 percent of distributors don't believe the Asian crisis has bottomed out. Respondents from the Power Transmission Distributors Assn. were most pessimistic, as 80 percent expect the crisis to get worse.
"It's not a gloom and doom scenario being painted here, but certainly one of concern about the economy and one that would seem to indicate some possibility of a recession, indicating that businesses are being pretty cautious," says Daryl Delano, director of Cahners Economics.
That's certainly the case at Donald F. Shutty, Inc., where company president Don Shutty says business was down nearly 40 percent in 1998 as a result of the Asian flu. He expects similar numbers for 1999, and predicts that there is a fair chance of a recession in 2000.
"From the feedback I'm getting from my customers, I don't see a turnaround for two or three years," says Shutty, whose firm specializes in motion control and power transmission products. "The people supplying equipment to the automotive industry are going to be down, there's no doubt about it. From my standpoint, we have to look at going after the non-auto and non-tire business, and try to build that segment.
"I've got to look at industries like food processing and paper converting that are more related to the retail market than the industrial market, although I don't see that making up for the shortfalls I see in the next two years."
Barbara Gordon Cohen, an industry analyst at Schroders & Co. in New York, says her firm predicts that industrial production will be flat for at least the first half of 1999, even if the overall economy performs reasonably well. However, Cohen says Schroder's predictions aren't as dire as last fall.
"We still think industrial production will slow in 1999, at least slightly from current levels," she says. "In September we thought the sky was falling. Distributors as a whole had a huge drop in revenue growth in September. In October some continued to drop, and others just remained at lower levels, and we found the same thing in November."
Respondents to the ID study have mixed feelings regarding the economy. Overall, on a scale of one to 10 -- with 10 representing excellent conditions -- distributors' confidence in the economy registers just a bit higher than average, at 6.7. Construction distributors clearly are the most confident, given that for the most part, they have been insulated from the overseas crisis. Housing starts have remained healthy, and members of the Specialty Tools & Fasteners Distributors Assn. give the economy a grade of seven. PTDA members had the lowest rating, at 6.5.
Distributors' near-term expectations are a mixed bag. Fifty-six percent expect the economy to stay the same over the next six months, while 28 percent expect it to deteriorate. Only 17 percent expect an improvement. Looking out one year, 41 percent expect business to improve, 29 percent look for a decline, and 30 percent expect the economy to remain the same.
The official prediction for 1999 shows a gross domestic product of 2.2 percent, which would qualify as a "growth recession," meaning the economy is still growing, but much slower than the 3.5 to four percent we've seen over the last three years.
The Conference Board forecasts the most optimistic numbers for 1999, predicting 3.4 percent growth in the economy. Although there are no predictions for a recession in 1999, economists from J.P Morgan are the least optimistic, calling for 0.3 percent growth. That would imply a quarter or two of negative growth in 1999. Ford Motor Co.'s economists see 1.6 percent growth.
As for new spending for capital equipment, J.P. Morgan is forecasting a 2.9 percent decline, with Prudential's forecasters predicting a 9.1 percent gain. The consensus is a 5.3 percent gain.
"In some cases, MRO distribution will go up even in a downturn, as customers would rather repair machinery than replace it," notes Gordon Cohen.
The trend certainly has been toward a slowdown. For the sixth consecutive month, economic activity in the manufacturing sector slowed in November, according to the latest Manufacturing Report on Business from the National Assn. of Purchasing Management.
The Purchasing Managers' Index slipped 1.5 points to a year-low 46.8 percent, indicating an even faster rate of decline than in October. "Most economists were expecting a reading of about 48 percent," says Delano. "This is an unusually weak report, by any standards." Despite the ailing condition of the manufacturing economy, however, the overall economy continued to grow for the 91st month in a row.
Acknowledging the downward trend, Norbert J. Ore, chair of the NAPM's Manufacturing Business Survey Committee says, "Imports joined production and new orders in the decline, prompting concerns with regard to demand for products from the manufacturing sector."
Leading November's decline was the production Index, falling four full points to 48.6 percent, indicating contraction after three consecutive months of growth. In light of October's weak new orders, Delano expected some decline in November production, but not this dramatic. "Production had been the single crutch holding up last month's report," said Delano, "but the bottom really fell out this month."
Registering the lowest reading since January 1996, the new orders index fell to 45.5 percent.
"There are many elements of a recession in the manufacturing sector," says Delano. "And the fact that the Employment Index continues to drop indicates that manufacturers are not preparing for any imminent rebound."
Delano considers the employment index as somewhat of a confidence indicator. And it is clear that manufacturers are not confident that domestic demand will offset weakening exports any time soon.
Even with lower prices, as indicated by the index of 35 percent, imports dropped below 50 percent. These two series are usually inversely proportional. "Every indicator broke the wrong way this month (November)," says Delano. "It's just very unusual."
When asked what he sees happening in the new year, Delano says the PMI shouldn't drop any lower. "But I wouldn't put any money on it."
Talkback
Related Content
Related Content
Sponsored Links
View All Blogs
