Solid outlook for 2006
While forecasters say expansion will be a big part of '06, the new year also brings some concerns
By Kimberly Griffiths, Associate Editor -- Industrial Distribution, 1/1/2006
The economy in the United States will expand by 3.8 percent in 2006, the third consecutive year of above-average growth in the 3.5 percent to 4 percent range. Manufacturers, contractors and their distributors also will have more pricing power this year, according to Jim Haughey, director of economics for the Reed Research Group.
The long economic expansion is progressively absorbing the unused labor and unused factory capacity created in the 2001–02 recession, Haughey said. At the beginning of 2006, the unemployment rate will be slightly under 5 percent, and the capacity utilization rate at manufacturing plants will be slightly more than 80 percent.
"This is the threshold for a more rapid rise in inflation, and, as a result, credit costs," said Haughey. "It is also the kickoff to a period of strong investment in both manufacturing and in non-residential buildings and structures."
The last part of 2005 had softer economic growth, primarily due to: weak auto sales after the summer's aggressive discounting; the nearly 250,000 people out of work due to the hurricanes; and the shock to consumer spending when fuel prices soared in September.
But all these negatives are temporary, said Haughey.
"Gasoline pump prices fell by a third from early September to early December, and the Consumer Confidence Index was nearly back to the pre-hurricane level by Thanksgiving," said Haughey. "Early reports suggest that Christmas shoppers will spend 6 percent to 7 percent more than last year."
Because of these factors, economic growth will bounce back to 4 percent-plus in the first half of '06, before the impact of slightly higher credit rates slow economic growth to about 3.5 percent in the second half of the year.
The expected rise in inflation and credit rates is small from a historical perspective. Excluding energy and food, the pace has increased from -1 percent several years ago, to 1 percent to 1.5 percent by the end of 2005. It will rise further, to 2 percent to 2.5 percent by the end of 2006.
The largest increase will be 10 percent-plus for cement, gypsum, non-ferrous metals, petrochemicals and plastics, and a 6 percent to 7 percent rise in truck freight rates, said Haughey. And while averaging far higher in 2006 than '05, energy prices are expected to be steady to slightly declining over the course of the New Year.
Some concerns for 2006At the Reed Construction Data's Building Team Summit held in October last year, Haughey; Brett Wilkerson, CEO of Property and Portfolio Research; and architect Tom Maier, listed their economic concerns for the coming year, which include: a rough winter and the effect it could have on pricing; the retirement of Federal Reserve Board chairman Alan Greenspan; wage increases and attracting people to the industry; shortage of skilled labor; no time for mentoring; and U.S. consumers and the debt they are carrying versus their consumption.
"Inflation is the biggest problem facing this country," said Wilkerson. "It is running at 4.7 percent (in October). A lot of it is driven by increases in oil prices."
Other trends, issues and concerns that Wilkerson said the economy would have to face include: a boom in housing where the Baby Boomers will retire; declining office vacancies; people spending more money at the pump than at the mall; and discounters such as Target dominating the retail sales market.
Also of note, said Wilkerson, is the growth in the market behind industrial warehouses. The flow of goods suggests continued demand for warehouses, and the market is showing strong growth, he said. Investors and tenants want bigger boxes and huge distribution centers.
Interest rates will creep upCarrying accounts receivables and inventory—and the short-term interest rates accrued as a result—while up 70 basis points in 2005, will creep up by 40 basis points during 2006, said Haughey. Long-term interest rates from investment loans have fluctuated between 4 percent and 4.5 percent for the last two-and-a-half years.
"Expect these rates to rise 50 basis points, to about 5 percent by the end of 2006," said Haughey. "Long-term rates are primarily set by expectations for inflation. Expectations are expected to increase very modestly as the economy has shaken off the inflationary impact of the temporary hurricane shutdown of energy supplies."
Distributors and manufacturers squeezed their inventory/sales ratios by about 2 percent to a record low level in '05, and they are expected to remain about the same level throughout 2006.
"A several-quarter period of inventory rebuilding appears to have begun at the tail end of 2005," said Haughey. "This is partly a response to the scrambling for supplies that many buyers had to undertake immediately after Hurricane Katrina.
In the manufacturing sector, Haughey said that the strongest growth in 2006 will be in electronic components and systems, and aerospace industries. Industrial machinery, off-road vehicles, and the industrial supplies needed for these manufacturers will expand slower than in '05 because of capacity restraints.
| 2003 | 2004 | 2005 | 2006* | Source | |
| GDP | 2.7 | 4.2 | 3.7 | 3.8 | Dept of Commerce |
| Mfg. Production | 0.7 | 5.0 | 3.6 | 4.1 | Federal Reserve Board |
| Motor Vehicle Shipments | 3.5 | 4.1 | -1.9 | 1.0 | Census Bureau |
| Aerospace Shipments | 8.3 | 10.1 | 2.1 | 12.7 | Census Bureau |
| Industrial/Off-road Machinery | 0.3 | 13.4 | 8.0 | 3.5 | Census Bureau |
| IT Shipments | -7.6 | 12.1 | 15.3 | 9.3 | Census Bureau |
| Instrument Shipments | 2.3 | 16.7 | 3.1 | 2.4 | Census Bureau |
| Electrical Shipments | -2.6 | 5.0 | 7.5 | 7.1 | Census Bureau |
| Fabricated Metal Shipments | -0.8 | 10.9 | 6.0 | 5.4 | Census Bureau |
| Chemical Shipments | 3.9 | 8.7 | 4.4 | 4.6 | Census Bureau |
| NR Construction Spending | 0.6 | 5.5 | 6.4 | 10.7 | Census Bureau |
| Heavy Construc. spending | -0.6 | -1.3 | 6.4 | 8.5 | Census Bureau |
| *All forecast: Reed Research Group | |||||
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