There's no shortage of economic indicators these days, ranging from surveys of corporate executives to new home sales to capacity utilization figures. The predictions that result range from rosy to rotten. The problem lies in parsing these forecasts to come up with an accurate indication of where we're headed.

To make sense of the conflicting forecasts, INDUSTRIAL DISTRIBUTION turned to Jim Haughey, chief economist for Reed Construction Data. He says distributors are entering the new year in relatively good shape, but should be prepared to weather some rising costs, continued weakness in the housing sector—especially in the Southeast and Southwest—and a declining industrial sector in the Midwest.

Looking at the big picture, Haughey says gross domestic product growth will be in the 1 percent to 2 percent range through the spring—not great, but not enough for a recession.

“Things will get somewhat better through the second half of the year, but still below average [GDP growth of about 3 percent],” Haughey predicts.

The housing, sub-prime mortgage and credit crises threatening economic growth can all be traced back to a single bad root, he adds.

“It's all one item: Overbuilding in 2005 and 2006, fueled by bad loans. Some by lenders who were not as concerned as they should have been about being paid back and some by borrowers who were less than honest about their ability to pay the loans back,” Haughey explains.

“We've had bigger housing collapses in the past, caused by recession or loss of jobs or inflation. But this time … the problem was just bad loans and overbuilding. That means you can't fix it like we did in the past. We still don't know how big the losses are—somebody has to eat a couple hundred billion. Until that happens, the housing market's going to be in a funk and that will depress everything else.”

But Haughey cautions against too much doom-and-gloom, noting that the country essentially talked itself into a recession with dire predictions during the two Persian Gulf wars. Even though the conditions those scenarios were predicated on never materialized, the recessions happened anyway.

“We run that risk again in the next six to nine months,” he notes. “There won't be a recession, but I think we'll come close.”

For distributors, the outlook is a little more positive.

“They're going into the year in reasonably good shape. They've had a number of good years and there's not a lot of inventory surpluses,” Haughey notes, adding that sales volumes will likely match the slim GDP gains he foresees.

“That means for some types of products in some parts of the country, it's going to go down a bit. This will weaken some of their pricing power, but it will also weaken some of the cost pressures they face, in terms of finding people [and] finding space,” he says. “One of their big costs is the interest cost on carrying their inventory. The outlook there is pretty good. Short-term loan rates are quite low, lower than they'll probably be for most of next year. But they will probably see interest costs rising over the course of the year, even though it's not going to get to a level they find oppressive.”

Rising fuel costs will be a bigger problem, especially when it comes to freight and heating costs, he adds.

“There seems to be plenty of warehouse space around at pretty reasonable rates, so that's not going to be an issue. To the extent distributors have to pay for it themselves, freight costs are going to continue to go up, just as they have for the past year. And they've got to heat those big [warehouse] spaces, so fuel's involved there, too.”

Haughey cites the Midwest, Southeast and Southwest as areas likely to go through a rough spot in 2008. Though the residential construction crunch that's devastating the latter two hasn't been a factor in the Midwest, he says the decline of the industrial sector will hurt that region next year.

“In the Midwest, it's lost factory jobs,” he explains. “The Southwest—California, Nevada and Arizona—and Florida are going to be the weak parts of the economy.”

As for specific product lines, the machinery and components market looks to be stable this year.

“That continues to be a growth market, though it's no longer a boom market,” Haughey says. “The construction materials [market] is going to be pretty blah. It's slipped a bit and it may slip a little more.”

The outlook for manufacturers is not quite as rosy, according to Daniel Meckstroth, chief economist of the Manufacturers Alliance/MAPI, who says the collapse of the residential construction industry, a crisis in the credit market, rising oil prices, slowing employment growth and low consumer confidence levels all indicate “a significant near-term economic slowdown.”

“The U.S. economy in the past has experienced a recession from fewer shocks than we are now experiencing,” Meckstroth writes in the group's Quarterly Economic Forecast, predicting that growth of the gross domestic product, when adjusted for inflation, will slow to 1.3 percent in 2008.

“By itself the housing collapse would probably not cause a recession, but when combined with a credit crunch, falling housing prices, record oil prices, falling corporate profits, low consumer confidence and decelerating employment growth, the risk of recession has climbed to at least 50 percent,” he writes.

That's bad news for manufacturing, which the report forecasts will see production growth stay flat at roughly 1.9 percent. The single bright spot for Meckstroth is a predicted 10 percent increase in spending on computers and electronic products in 2008.

“If the U.S. economy is able to avoid a recession next year, it will be due primarily to the declining value of the dollar and strong global growth, which shows up as substantial growth contribution from net exports,” he says. “In addition, government spending growth should contribute positive momentum.”

Meckstroth doesn't seem to be alone in his fear of a looming recession. The Federal Reserve cut short-term interest rates three times last fall in an effort to balance the competing risks of inflation and a cooling economy. The latest cut, a quarter-point reduction made Dec. 11, sent the short-term rate to 4.25 percent.

“Economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending,” according to the Fed. “Moreover, strains in financial markets have increased in recent weeks.”

Optimism of the guarded variety was on display at the Institute for Supply Management, which in last month's release of its semi-annual economic forecast predicted growth in the manufacturing sector this year.

The group's survey of about 400 purchasing and supply executives indicated that 62 percent of respondents in the manu-facturing industry expect sales to rise 6.8 percent in 2008, compared with 2.4 percent during 2007.

“Manufacturing purchasing and supply executives are mostly optimistic about their organizations' prospects for the first half of 2008 and predict additional growth during the second half,” says Norbert Ore, chairman of the ISM's Manufacturing Business Survey Committee. “While 2007 has been a good year overall, it has presented significant challenges with regard to energy costs and overall inflation in manufacturing input costs. Respondents expect cost pressures to subside somewhat in the second half of 2008, based on their overall price forecast.”

But purchasing and supply executives lack a strong track record of accurate predictions. In 2006, 72 percent of respondents to the December survey said revenues would rise, predicting a 6.2 percent increase. But they reported sales increases of only 2.4 percent in the December 2007 survey.

And compare Ore's remarks above with last year's comments:

“Manufacturing purchasing and supply executives are optimistic about their organizations' prospects for the first half of 2007 and predict additional growth during the second half,” he said then. “While 2006 has been a good year overall, it has presented challenges with regard to energy costs and overall inflation in manufacturing costs. Respondents now expect those pressures to subside in 2007, based on their overall price forecast.”

Sound familiar? Given the variety of predictions, it's easy to understand Harry Truman's plaintive cry for a one-armed economist—one who couldn't say, “On the other hand…”