Where Are We Going, Where Have We Been?

By David R. Butcher

How far will the housing-triggered credit mess go? Will it push the U.S. into recession? Or can exports buoy the economy? If 2007 was a year of questions without resolution, perhaps 2008 will be a year of answers.

Or maybe not.

“As we enter 2008, it seems that uncertainty has overtaken expectations as the industry girds against the prospects of a recession,” said Bob Parker, vice president of research at Manufacturing Insights.

There are many areas of uncertainty, not the least of which is how the present credit crunch will play out. When shaky loans to U.S. homebuyers set off the subprime crisis in August 2007, the year was already shaping up as slower than 2006. Other factors include the high oil prices and continued geopolitical instability and conflict.

In an era of rapidly escalating energy demand and tightening supplies, there is no shortage of explanations for the escalation of oil prices. An unprecedented surge in oil demand from the United States, Asian and Middle Eastern countries has driven up prices in recent years, and booming economies have led to more consumption of oil-derived products like gasoline, diesel and jet fuel. Meanwhile, new oil supplies have struggled to catch up. Political tensions in the Middle East, where more than two-thirds of the world’s proven oil reserves are located, have also fueled the rise in prices.

The price of a barrel was below $25 as recently as 2003. Prices escalated by about 60 percent over the last year alone. Oil prices in 2008 began with a volatile surge to hit the symbolic level of $100 a barrel, a long-awaited milestone.

Now concern is rife that high oil prices and the subprime crisis’ fallout in the broader U.S. economy—and tighter credit worldwide as a result of the mortgage crisis—will conspire to slow growth worldwide in 2008. To some extent, the global economy’s growth seems predicated on an expectation that the U.S. economy does not slip into recession.

So, will it slip into recession?

The U.S. economy will slow by more than previously thought this year, according to the economic forecasts of top Federal Reserve officials in November (via MarketWatch). Federal officials said growth would range between 1.8 percent and 2.5 percent in 2008, compared with growth around 2.45 percent in 2007. Some Federal officials were more pessimistic, putting growth down as low as 1.6 percent this year. Meanwhile, inflation is expected to remain tame.

Because of weaker U.S. growth, a large and persistent trade deficit and surging commodity prices, the days of the strong and overvalued dollar are over.

The Manufacturers Alliance/MAPI forecast is for continued weakening of the dollar through 2009, and then stability through 2012. “Such a sea change has important ramifications for American businesses—positive for exports and negative for U.S. investors,” Dr. Thomas J. Duesterberg, president and CEO of the business alliance, recently wrote.

Yet a growing number of U.S. manufacturers are making up for slowing domestic sales by expanding them overseas, often with sophisticated products, according to a new Washington Post report.

Manufacturing Insights recently noted that a recession in the U.S. no longer guarantees worldwide trouble.

The independent research and advisory firm claimed:

Many of the largest manufacturing firms in the U.S. now earn more than half of their revenue and profit from outside the home market. In addition, a weak dollar means that goods manufactured in the U.S. are price competitive in foreign markets.

A private survey of purchasing managers last month indicated that revenue in the U.S. manufacturing economy is expected to grow at triple the pace of the service sector in 2008. The Institute for Supply Management (ISM) (via The Associated Press) said its survey of about 400 purchasing and supply management executives showed they expect a 6.8 percent revenue increase in manufacturing this year and a 2 percent rise in service revenue. ISM said 62 percent of the manufacturers expect revenue to be higher in 2008 over 2007.

Overall, the world economy is expected to keep expanding in 2008 —albeit at a slower pace. In its latest World Economic Outlook, the International Monetary Fund (IMF) projected that the 2007 global economy would grow by 5.2 percent and moderate to 4.8 percent this year, compared with last year’s 5.4 percent growth. The 2008 forecast was downgraded by nearly one-half percentage point from the summer outlook, reflecting the turbulent conditions in financial markets.

Economic growth in the 30 industrialized economies of the Organization for Economic Cooperation and Development (OECD)—which include Canada, the U.S., Britain, Germany and France—will slow to 2.3 percent in 2008 from 2.7 percent in 2007, the IMF predicted early last month.

Much of the financial market volatility in the euro zone seems to trace back to worries about the U.S. housing market. The European Central Bank (ECB) now expects GDP growth in the euro zone—a bloc of 317 million people that accounts for more than 15 percent of the world’s GDP—of between 1.5 percent and 2.5 percent in 2008 amid “resilient” global growth. Although, inflation in the euro zone could be a threat due to higher prices for food and oil.

Latin America is particularly vulnerable to a cooler U.S. economy, which could crimp trade and drag down growth across the region this year. Yet policies aimed at lowering debt, keeping inflation in check and promoting slow but stable growth have braced Latin America against the kind of economic meltdowns of the past.

Unlike past economic upswings driven by the U.S., Japan and western Europe, the main engines of growth this time are predicted to be China, India and other emerging economies: emerging Asia is forecast to expand 8.3 percent in 2008; Africa is to grow 6.5 percent; and the Middle East, supported by high oil prices and robust domestic demand, is projected to expand 5.9 percent in 2008.

As Asia’s biggest economies grapple with emerging problems—inflation in China and appreciating currencies in India and Japan—the nation’s dynamic economic growth is expected to slow modestly in 2008. The expected slowdown in the U.S. economy—a vital export market—and higher oil prices also cloud Asia’s outlook.

Despite uncertainties, China looks set for another year of double-digit expansion, with both the World Bank and Asian Development Bank forecasting GDP growth at 10.8 percent in 2008. In India, a record surge in foreign investment has resulted in a sharp appreciation of the rupee, which is already hurting exports, especially earnings of the highly profitable outsourcing industry. The IMF is forecasting that Japan will grow 1.7 percent in 2008, down from an estimated 2 percent last year.

“We are thus entering a major transitional moment,” World Trade Magazine recently noted of the global supply chain.

But such a moment extends far beyond just the logistics sector and affects industry in its entirety.

The following is a selection from Manufacturing Insights’ recent Worldwide Manufacturing 2008 Top 10 Predictions:

• Large manufacturing firms will move toward a globally integrated business model
• Information technology (IT) organizations will accelerate spending on collaborative decision environments and incubate multi-enterprise business networks
• IT spending in the supply chain area will focus on fulfillment execution
• Product management software investments will be geared to integrating processes, not automating tasks
• Manufacturing firms will tackle the challenges of aging/emerging workforces with investment in organic knowledge management
• Machine-to-machine (M2M) technology will emerge as a key enabler to enhanced service delivery.

With so much clearly in play, and a new year of possibility, will this year resolve much of last year’s many questions? Where do you see the global economy and the world’s manufacturing going in 2008?

About the Author: David R. Butcher creates the online blog for Thomas Industries Market Trends, http://news.thomasnet.com, from which this article was adapted.